Samsung's Q3 Earnings May Herald Rosy Days Ahead

Samsung's forecast of a record third-quarter profit attests to the success of the Korean electronics maker's aggressive growth strategy during the economic slump

By Moon Ihlwan

TVs and mobile phones helped Samsung Electronics' earnings soar earlier this year. Now, South Korea's electronics giant is riding high as prices of memory chips and liquid-crystal display (LCD) panels gain in early signs of recovery in the information technology sector. Samsung, the world's largest maker of memory chips and LCD panels, said on Oct. 6 that its operating profit almost tripled in the three months through September from a year earlier.

In earnings guidance for the third quarter, Samsung said its operating profit would be between $3.3 billion and $3.7 billion. That's up sharply from a profit of $2.2 billion from the previous quarter and $1.3 billion a year earlier. "It is likely to be the record quarterly profit," says Michael Min, technology sector specialist at fund manager Tempis Capital Management. The previous high was set in the first quarter of 2004, when its profit was $3.4 billion, excluding financial results of its subsidiaries whose earnings contributions were negligible. (Samsung has since amended its accounting method, and the latest results reflect performances of subsidiaries.)

The better-than-expected profit guidance indicates the Korean electronics company's strategy of pulling away from rivals during an industry slump is beginning to pay off. Industry watchers reckoned Samsung would be the first beneficiary of a recovery, as it had kept investing in the latest production technologies and equipment while others cut back in spending. "Payoffs will continue in coming quarters," says Min. Samsung's share price closed slightly lower, in line with a 0.5% fall of the benchmark Kospi index on the Korea Exchange. The company's stock has jumped 67% so far this year, against a 42% Kospi gain.

Samsung, which is also the largest TV maker and the No. 2 mobile-phone maker, said its third-quarter sales rose about 11%, to $31 billion, from the previous three months but gave no other details. (Samsung plans to release full details around Oct. 23.)

A Leader in Memory Chips, LCD Panels

Corporate analysts believe one major improvement came in Samsung's chip business, which is expected to report a profit of between $750 million and $850 million in the third quarter, against a profit of $205 million in the second quarter and a loss of $572 million in the first quarter. "The recovery in the demand of memory chips is not very strong yet," says Kim Soo Kyoum, semiconductor program director at researcher IDC. "But the supply side is limited, and no one can match the strength of Samsung until at least mid-next year, as the Koreans clearly outgunned their Taiwanese, Japanese, and American rivals during an industry down cycle." Kim figures Samsung is one generation ahead of the likes of Micron (MU) of the U.S., Elpida Memory (ELPDF) of Japan, and Taiwan's Nanya Technology and ProMos Technologies in the technology of printing thinner circuit lines on wafer disks.

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