Samsung profit tumbles to near 2-year low, chips to fuel rebound

By Miyoung Kim

SEOUL (Reuters) - Profits at Samsung Electronics are set to rebound on a recovery in the memory chip market after operating profit fell to its lowest level in almost two years in the first quarter on tumbling flat screen and TV prices.

While the outlook for the world's top maker of memory chips and flat screens will improve in the second quarter, the South Korean firm faces fierce competition for its smartphone and tablet PCs from the likes of Apple Inc.

"The memory chip sector will lead Samsung Electronics' earnings recovery, but we are more cautious on their finished products like handsets, tablet PCs and televisions," said Lee Min-Hee, a senior analyst at Dongbu Securities.

"Smartphone and tablet PCs are struggling due to competition from Apple, and television demand is also slow."

Samsung is the first major Asia technology firm to release quarterly earnings estimates after the March 11 earthquake and tsunami in Japan raised uncertainty about the long-term effects of the disaster on manufacturers.

Disruptions to the global supply chain threaten to create bottlenecks in some key components for Japanese factories and analysts say South Korean companies such as Samsung, Asia's most valuable technology firm with a market value of around $142 billion, may benefit as customers look for new suppliers.

"It's hard to predict whether the net effect of the quake on Samsung will be plus or minus at the moment, but with the yen under pressure, Japanese manufacturers could strongly rebound and take the momentum back as we approach the second half of the year," said Jung Kyun-sik, a fund manager at Eugene Asset Management, which owns Samsung shares.

"For Samsung, the level of risks is rising -- the won is getting stronger and all its businesses but chips are facing a negative business environment."

The won rose as high 12.66 per yen on Thursday, its highest level against the Japanese currency since May 2010.

Samsung estimated its January-March operating profit would be in a range of 2.7 trillion won to 3.1 trillion won ($2.5 billion to $2.8 billion).

That is below the 3.2 trillion won consensus by Thomson Reuters I/B/E/S. But the middle of Samsung's range is in line with StarMine SmartEstimates, which places more weight on recent forecasts by top-rated analysts and expected 2.9 trillion won.

That would be Samsung's lowest profit since the second quarter of 2009, and a fall of 34 percent from a year ago and 4 percent from the preceding quarter. It estimated sales at 37 trillion won.

Samsung shares fell about 0.7 percent on Thursday, in line with a selloff in the broader market. The stock has fallen 9 percent from a record high hit in late January, lagging a 1 percent rise in the benchmark KOSPI.

The guidance comes before detailed quarterly results in late April.

CHIP OUTLOOK BRIGHTER

A protracted suspension of flat-screen TV production in Japan after the earthquake could result in lost revenue for Samsung. It produces screens for Sony Corp, its biggest customer generating nearly 7 trillion won in sales annually.

But Samsung's bread-and-butter semiconductor unit could benefit from tighter supplies of computer chips after production lines at some Japanese companies, including Samsung rival Toshiba Corp, were shut down by the disaster.

Globally, Japan supplies more than a third of NAND-type flash memory chips, used in tablets and smartphones, and 14 percent of computer memory chips.

Samsung's chip unit is widely expected to bring in more than 60 percent of the company's earnings in the first quarter. Samsung controls nearly 40 percent of the global dynamic random access memory (DRAM) and NAND flash memory market.

Contract prices of DRAM chips have risen 3 percent since the quake and NAND chips have risen 15 percent. Global chip sales are likely to grow by 7 percent to $325 billion this year, as last month's earthquake in Japan boosted prices of computer memory chips, IHS iSuppli says.

All in, the recovery in chip prices will help push Samsung's second-quarter operating profit up to 4.0 trillion won, according to a consensus forecast by Thomson Reuters I/B/E/S.

FIERCE COMPETITION FOR PHONES, TABLETS

Profit growth in Samsung's telecoms business may slow due to weaker sales momentum for its tablets and competition from Apple, which introduced its iPad 2 with aggressive pricing plans last month, analysts said.

Samsung makes the Galaxy S smartphone and Galaxy Tab tablet and on Wednesday lowered its Wi-Fi only tablet price for U.S. customers to $349.99.

"The exchange rate may be a factor in the second-quarter earnings, while eyes are on handset profit margins," said Lee Seung-woo, an analyst at Shinyoung Securities.

Samsung is Apple's strongest competitor in the booming tablet market with models in three sizes, but is seen playing catch-up.

To better compete with Apple, Samsung redesigned within weeks its new 10.1-inch tablet, first introduced in February, to make it the thinnest in the category after Apple set the trend with its iPad 2.

Still, analysts estimate Apple sold about one million units of the iPad 2 in the first weekend of its U.S. launch last month. By comparison, Samsung may have sold a similar number of Galaxy Tabs in the past three months and sales growth is expected to be weak.

Follow-up models will be on the market in June at the earliest.

(Additional reporting by Hyunjoo Jin; Editing by Jonathan Hopfner and Dhara Ranasinghe)