Samsung Electronics Sees Sharp Decline in Semiconductor Operating Profit, Its Cash Cow
LG Electronics Faces Profitability Hit Due to Global TV and Home Appliance Demand Reduction
[Asia Economy Reporter Han Yeju] Samsung Electronics and LG Electronics both received disappointing results for the third quarter of this year. It is widely viewed that they could not escape the impact of a sharp consumption downturn and increased cost burdens. In particular, Samsung Electronics saw a decline in profitability due to the worsening semiconductor market, which had been the driving force behind its performance, while LG Electronics experienced a significant drop in profitability due to reduced global demand for TVs and home appliances.
◆Semiconductors Wept... Samsung Electronics Faces Negative Growth for the First Time in 3 Years=Samsung Electronics announced on the 7th that its preliminary consolidated results for the third quarter showed sales of 76 trillion KRW and operating profit of 10.8 trillion KRW. Compared to the same period last year, sales increased by 2.73%, but operating profit decreased by 31.73%. Compared to the second quarter, both sales and operating profit declined by 1.55% and 23.4%, respectively.
Although sales surpassed 70 trillion KRW for five consecutive quarters, the streak of record quarterly performance has been declining since the second quarter. Profitability has worsened significantly. Operating profit, which barely exceeded 14 trillion KRW in the second quarter of last year, plummeted to the 10 trillion KRW range in the third quarter of this year.
This performance was below market expectations. According to financial information provider FnGuide, the market consensus (average estimate by securities firms) was sales of 78.6 trillion KRW and operating profit of 11.75 trillion KRW.
▲The Russia-Ukraine war ▲Rising raw material and logistics costs due to inflation ▲Weakened consumer sentiment ▲Rapidly changing exchange rates ▲Intensified competition and sharp demand decline in the semiconductor market are interpreted as factors leading to the deterioration of third-quarter results amid an uncertain global business environment.
Although results by business division were not disclosed, the semiconductor division, which had been the pillar of performance, notably underperformed. The securities industry estimates that the semiconductor (DS) division’s operating profit for the third quarter was between 6 trillion and 7 trillion KRW. This represents about a 30% drop compared to the second quarter’s operating profit of 9.98 trillion KRW.
The VD (Visual Display) and home appliances divisions also appear to have suffered significant profitability declines due to weak demand for sets such as TVs and rising costs.
However, the smartphone (MX) and display divisions are estimated to have performed relatively well. The display division’s results improved due to new product launches by smartphone manufacturers and exchange rate effects, while MX is expected to benefit from strong sales of foldable phones and wearables.
◆Despite Record Quarterly Sales... LG Electronics Faces Growing Concerns Over TV and Home Appliance Profitability=LG Electronics preliminarily reported consolidated sales of 21.1714 trillion KRW and operating profit of 746.6 billion KRW for the third quarter. Compared to the same period last year, sales increased by 14.0% and operating profit by 25.1%. Compared to the second quarter, sales rose by 8.8%, but operating profit fell by 5.8%.
Despite internal and external challenges, LG Electronics set a record for the highest quarterly sales. This surpassed the previous record set in the first quarter of this year (20.969 trillion KRW), driven by increased sales of premium products. However, profitability declined significantly. Although operating profit increased compared to the same period last year, this was due to a base effect caused by a one-time provision of approximately 480 billion KRW related to the GM electric vehicle recall in the third quarter of last year.
Market expectations were also missed. The securities firms’ consensus forecast was sales of 20.1687 trillion KRW and operating profit of 868.5 billion KRW.
The decline in demand for TVs and home appliances, along with ongoing cost pressures from raw materials and logistics, appears to have been a major factor. For the Home Entertainment (HE) division, which handles the TV business, estimates vary widely among securities firms, but some interpretations suggest that losses may have widened compared to the second quarter. The HE division posted a loss of 18.9 billion KRW in the second quarter.
On a positive note, the automotive components business, considered a future growth engine, continued its operating profit black ink streak following the second quarter. A profit in the 50 billion KRW range is expected, which is encouraging.
◆Red Light for Fourth Quarter Earnings=Outlook for the fourth quarter earnings of Samsung Electronics and LG Electronics is even less optimistic. There are forecasts that Samsung Electronics’ fourth-quarter operating profit will shrink further to the 8 trillion KRW range, down from the third quarter. Achieving an annual operating profit of 50 trillion KRW now seems difficult. The key issue is the recovery of the semiconductor market, but the outlook remains bleak. Global economic slowdown is weakening final demand for IT products, and expectations for year-end seasonal demand in the second half are not high.
In response, Samsung Electronics plans to seek new opportunities by strengthening its semiconductor technology competitiveness. At a recent Silicon Valley forum, it announced a goal to mass-produce semiconductors using a 1.4-nanometer (nm; one billionth of a meter) process within five years. This is a strategic move to secure customers in the foundry market based on technological prowess amid rapidly deteriorating memory market conditions. Additionally, at 'Samsung Tech Day,' the company revealed plans to mass-produce 5th generation 10-nanometer class DRAM next year and 9th generation V-NAND in 2024.
LG Electronics is expected to focus on defending profitability by increasing the sales proportion of high value-added products in the fourth quarter. Given ongoing uncertainties such as global power struggles and supply chain risks, combined with factors dampening consumer sentiment due to inflation and interest rate hikes, the business environment is expected to remain challenging.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
