|07 October, 2019

Samsung's smoother outlook papers over deep cracks

After plunging for over a year, memory chip prices have started to stabilise

The Samsung Galaxy Fold 5G phone is presented at the hall of Samsung at the IFA consumer tech fair in Berlin, Germany, September 6, 2019. REUTERS/Hannibal Hanschke

The Samsung Galaxy Fold 5G phone is presented at the hall of Samsung at the IFA consumer tech fair in Berlin, Germany, September 6, 2019. REUTERS/Hannibal Hanschke

HONG KONG  - Samsung Electronics’ prospects look brighter, but not for long. Quarterly guidance from the world's top memory-chip maker next week could raise hopes of a recovery: prices are no longer falling. The cheer will be short-lived, however, given trade tensions and China's slowing economy. A leadership vacuum at $263 billion Samsung only makes it more vulnerable.

After plunging for over a year, memory chip prices have started to stabilise. September data from industry tracker DRAMeXchange show average contract prices for both DRAM and NAND semiconductors - used in PCs, servers, and smartphones - stayed roughly flat from a month ago. Major suppliers from SK Hynix to Micron are slashing output too. As a result, analysts expect new devices running on next generation 5G technology to power a chip boom in 2020.

That provides some much-needed relief for South Korea's Samsung, which is set to release estimated quarterly figures on Tuesday. Analysts on average are forecasting operating profit for the three months to September to fall by 60% year-on-year, to 7 trillion won ($5.8 billion), according to data from Refinitiv. Shares of Samsung, though, have rallied 9% over the past month, partly thanks to the sector's cheerier outlook.

The optimism looks pre-mature. Demand has strengthened, but, as analysts at Morgan Stanley point out, that is in part due to PC and handset-makers stockpiling components, in case global trade ructions further disrupt supply chains. Consumers, on the other hand, are buying fewer gadgets: smartphone shipments fell 5.5% in the first half this year, IDC data show. And sputtering growth in the People's Republic, the world's top purchaser of semiconductors, casts an even longer shadow.

To make matters worse, Samsung’s de facto boss Jay Y. Lee, has been embroiled in a 2017 corruption scandal that unseated South Korea's then president. The 51-year-old family scion, who denies wrongdoing, faces more jail time after a top court in August overturned an earlier, more lenient sentence. In an unusually blunt statement, Samsung admitted that it has been "constrained in efforts to focus on leading new businesses for the future". There’s no light yet at the end of this tunnel.

CONTEXT NEWS

- South Korea's Samsung Electronics is forecast to report 7 trillion won ($5.8 billion) in operating profit in the three months to September, down 60% from the same period last year, according to the average analyst forecast from Refinitiv.

- The company is due to give its third-quarter earnings guidance on Oct. 8, before publishing detailed earnings later in the month.

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(Editing by Clara Ferreira Marques and Katrina Hamlin)

© Reuters News 2019

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