Samsung Boosts Capital Spending as High-End Phone Demand Slows

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Jungah Lee for Bloomberg 2013-07-26 13:42:01 UTC

Samsung Electronics Co. will invest $18 billion in its memory-chip and display businesses this year as the world’s biggest smartphone maker tries to ward off slowing demand for high-end devices such as its Galaxy S4.

Capital spending for those divisions will increase to 19.5 trillion won as the company reported second-quarter earnings that missed analyst estimates. Net income, excluding minority interest, rose 50% to 7.58 trillion, compared with the 8.02 trillion-won average of 24 analyst projections compiled by Bloomberg.

Supplying semiconductors and panels for its own devices and those from Apple Inc. and HTC Corp. helps Samsung offset slowing growth in the most-profitable segment of the $358 billion mobile-phone market. The higher capital expenditures come amid stalling demand at its television unit, the world’s biggest, and competition from Chinese brands including Huawei Technologies Co. that sell $100 handsets.

“Samsung is trying to make its profit structure largely balanced,” said Lee Do Hoon, an analyst at CIMB Group Holdings Bhd in Seoul. “Samsung’s smartphone margin may decline in the future but the components businesses, either chips or displays, will become a major profit driver to help it sustain the overall profit.”

Suwon, South Korea-based Samsung will spend a record 24 trillion won on its businesses this year, about 1 trillion won more than last year. Shares of Samsung, which accounts for 18% of the benchmark Kospi index, fell 0.9% to 1,303,000 won today in Seoul.

Falling Prices

The stock slumped 13% in June, a $26 billion loss of market capitalization that is larger than rival Sony Corp., as analysts at JPMorgan Chase & Co. and Morgan Stanley lowered their sales and profit estimates.

“The strong growth streak for the smartphone market is expected to continue in the third quarter albeit at a slower pace,” Samsung said in an e-mailed statement.

The average price of a smartphone has plunged to $375 from $450 since the beginning of 2012, IDC estimates.

Second-quarter sales were 57.5 trillion won, compared with a preliminary estimate of about 57 trillion won given by the company July 5. Operating profit, or revenue minus the cost of goods sold and administrative expenses, rose to 9.53 trillion won in the second quarter, compared with the 9.99 trillion-won average of 34 analyst estimates compiled by Bloomberg.

‘Increasing Uncertainty’

The mobile unit, which is responsible for about two-thirds of company earnings, posted operating profit of 6.28 trillion won, up from 4.13 trillion won a year earlier. Samsung, which unveiled the S4 at New York’s Radio City Music Hall, said May 23 it sold 10 million units within the first month. The new phone features a 5-inch screen and 13-megapixel camera.

Samsung also worked with rapper Jay-Z to make his new album available via an exclusive app before its official release.

“The mobile business, the company’s biggest bread earner, has already peaked out in the first quarter,” said Lee Jae Yun, an analyst at Kiwoom Securities Co. in Seoul. “That is increasing uncertainty over the company’s overall profit growth next year.”

Samsung shipped 76 million smartphones in the quarter, giving it 33.1% of the global market, compared with 31.1% a year earlier, Boston-based Strategy Analytics said today. Apple shipped 31.2 million devices for 13.6% of the market, down from 16.6%, and the Cupertino, California-based company’s lowest share in three years.

New Note

TongYang Securities Inc. expects Samsung to sell 27 million S4 devices in the third quarter, up from 22 million units delivered in the three months ended June, the brokerage said in a July 9 report.

Samsung is planning to release its Galaxy Note 3 in the second half, is developing a handset using the Tizen operating system and is working on a wristwatch that may perform similar tasks as a smartphone.

“The Galaxy Note 3 will become the ultimate driver of sales for the company along with its to-be-released ‘smart watch,’” said Greg Roh, a Seoul-based analyst at HMC Investment Securities Co. “The company must focus more on customizing models and features for the different regions by figuring out their needs.”

Apple (AAPL) reported third-quarter profit and sales that beat analysts’ estimates July 23. Though profit shrank in the quarter and iPhone sales fell from a year earlier, the stronger results helped soothe investor concerns that toughening market competition and high-end market saturation would drag Apple into a prolonged slump.

Chip Rebound

Operating profit at Samsung’s semiconductor division surged 71% to 1.76 trillion won as chip prices rebounded on sales of mobile devices. Samsung, which supplies more than half the mobile dynamic random-access memory chips used to run smartphones, said in April it may buy the semiconductors from rival SK Hynix Inc. because of surging demand.

Operating profit from the display division, which makes flat panels for TVs and mobile devices, rose 58% to 1.12 trillion won.

The consumer-electronics unit, which oversees the TV and home-appliance businesses, posted operating profit of 430 billion won, down from 730 billion won a year earlier.

Prices for TVs were slashed as manufacturers struggled to stay profitable amid stalling demand. Samsung had 27.9% of the flat-panel market by revenue, researcher Display Search said in June. The world’s biggest TV maker started selling 55-inch, curved sets using organic light-emitting diode technology for 15 million won in South Korea.

“Growth will pick up under stronger seasonal demand although competition may intensify with launches of premium TV products,” the company said.

Worldwide shipments of liquid-crystal-display TVs may total 208.8 million units this year, less than the 215.5 million projected earlier, market research firm TrendForce said in a June 13 report.

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