Samsung Warns Impending End Of Chip Boom, Cuts Capex, Despite Record Q3 Profits

Samsung Electronics Co Ltd warned of an imminent end to the two-year boom in its business which was driven by an increase in demand of its memory chips, which resulted in the company reporting record profits for the third quarter.

As if to adjust to its perception of lower profits in the near future, the South Korean conglomerate gas decided to cut down on capex for 2-018 by over 25 per cent of the previously announced amount.

Of late, investors have become weary of possible slowdown of the global demand for mobile phones and other electronic devices which rocked the global tech markets this month and the downgraded forecast by Samsung – the largest chip maker and smartphone manufacturer, added on to the3 environment.

Samsung said it expects slow down in demand for its memory chips and higher costs for smartphones during the year-end holiday season which would result in a decline in the forth quarter compared to the third quarter.

“Looking further ahead to 2019, earnings are forecast to be weak for the first quarter due to seasonality, but then strengthen as business conditions, particularly in the memory market, improve,” Samsung said in a statement.

Concerns over further supply growth and price declines should be eased by the capex cut, said analysts, because global price of some of its memory chips have dropped to more than a two year low and competition from rivals set to being new production lines next year.

Compared to a record capital expenditure of 43.4 trillion won last year, Samsung said this year, its capital expenditure would be reduced by 27 per cent 31.8 trillion won. Capital expenditure for Samsung is comprised of chip-manufacturing tools of which it is the largest buyer in the world.

“NAND (flash memory) chip prices will further decline through the first half of next year … (as) Toshiba’s new production line will start and Hynix starts mass production of one of its NAND lines,” said Song Myung-sup, an analyst at HI Investment & Securities.

The company’s third quarter results however was in line with the forecast of the company and came in at a record 17.6 trillion won in operating profit for the third quarter.

According to Refinitiv data, estimates of analysts suggest that the fourth quarter profit for Samsung would get reduced by 4 per cent because of a global fall in prices of chips after years of robust growth.

But despite the decline, the fourth quarter operating profits would be 11 per cent higher compared to the same period a year ago, which would be driven by efficiency improvements and cost-cutting in the chip business/ the chip business of Samsung accounts for almost four-fifths of the operating profit of te South Korean company.

“Since Samsung continues to reduce the costs of (semiconductors), it is not very likely to witness a so-called hard-landing situation,” said Avril Wu, senior research director at DRAMeXchange.

(Adapted from ChannelNewsAsia.com)

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