Samsung Electronics' Shrinking Q3 Profitability... "Q4 Outlook More Pessimistic"

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[Asia Economy Reporters Sunmi Park, Yeju Han] Samsung Electronics' third-quarter earnings, which saw profitability shrink by more than 30%, reflect the significant impact of accelerating declines in demand for sets such as smartphones, PCs, and TVs amid growing concerns over a global economic downturn, as well as the semiconductor sector?previously a driver of profitability?also taking a hit. The problem is that improvement in the situation is unlikely in the fourth quarter. There are forecasts that maintaining an annual operating profit of 50 trillion won could become difficult.

◆ Operating profit shrinks by 31.73%... Profitability falls short of expectations = The third quarter, burdened by rising raw material prices and logistics costs combined with weak demand, put the brakes on Samsung Electronics' growth. While sales exceeded 70 trillion won for five consecutive quarters and the third quarter sales alone set a record high, operating profit fell by 31.73% and 23.4% compared to the third quarter of last year and the second quarter of this year, respectively?a dismal result. This marks the first year-on-year quarterly decline in about three years. It means that despite selling more with difficulty, the company failed to generate higher profits.

Although detailed results by business division were not disclosed this time, industry insiders estimate that all areas except MX (Mobile eXperience) and the display division suffered profitability deterioration. MX saw weak smartphone sales, but the increased proportion of foldable phones led to a rise in average selling price (ASP), which somewhat mitigated the decline in profitability. The display division likely saw a significant increase in operating profit due to reduced losses from halting LCD line operations and strong demand from Apple.

On the other hand, the semiconductor division, which had driven Samsung Electronics' profits, reportedly posted operating profit around 6 trillion won, down about 30% from the previous quarter. The home appliances division is also expected to have operating profit in the range of 300 to 400 billion won, considering weak TV sales and increased costs due to inflation, including Harman's performance.

Choi Doyeon, a researcher at Shinhan Financial Investment who closely estimated Samsung Electronics' third-quarter operating profit, projected semiconductor operating profit at 6 trillion won, down 39.8% year-on-year; CE (Consumer Electronics) at about 300 billion won, down 13.8%; and operating profits for the display and mobile divisions at 1.9 trillion won and 3 trillion won respectively, up 78.8% and 13.6%. He said, "The decline in set demand for smartphones, PCs, and TVs is very rapid, and the reduction in semiconductor orders is even faster," adding, "This year's earnings outlook may be further downgraded."

Notably, this profitability deterioration occurred despite the positive effect of the won-dollar exchange rate increase, suggesting that excluding the exchange rate effect, the actual earnings shock Samsung Electronics experienced was even greater.

◆ Lowering earnings forecasts... "The fourth quarter will be worse" = Due to seasonal declines in set demand, the MX and display divisions, which defended profitability in the third quarter, may see a slowdown in the fourth quarter, with Samsung Electronics' fourth-quarter operating profit expected to shrink further to the 8 trillion won level. If this continues, maintaining an annual operating profit of 50 trillion won will be difficult.

Samsung Electronics' third-quarter earnings consensus has steadily declined. Over the past two months, the third-quarter operating profit forecast has dropped by 11%. The rapid pace of downward revisions is mainly due to the swift deterioration in the memory semiconductor market, Samsung's core business. The expected decline in DX (Device eXperience) division earnings due to reduced sales of home appliances, smartphones, and TVs has also accelerated the downward revision.

The MX division, which sells smartphones and other devices, can expect some boost from the fourth-quarter launch of the Galaxy Z Flip4 and Fold4, but with the triple high (high inflation, high exchange rates, and high interest rates) expected to continue at least until the end of the year, consumer spending power for IT products overall is predicted to decline sharply. The semiconductor and electronics industries anticipate that set manufacturers will maintain conservative inventory management policies for the time being, leading to simultaneous declines in semiconductor prices and shipments.

Seungyeon Seo, a researcher at Shin Young Securities, said, "With the prolonged Ukraine-Russia war and rising prices expected to suppress the year-end shopping season effect, IT set demand weakness is likely to continue into the first half of next year." Following the disappointing third-quarter results, the securities industry is expected to soon revise down Samsung Electronics' operating profit estimates for this year.

This content was produced with the assistance of AI translation services.