Samsung, LG's earnings plunge due to economic slowdown

/By Baek Byung-yeul

Samsung Electronics and LG Electronics forecast their third quarter operating profit will be worse than expected due to the global economic downturn stoked by inflation, high interest rates and Russia's invasion of Ukraine, according to the companies Friday.

Samsung, the world's largest memory chip maker, is expected to encounter severe hardships in its semiconductor business as orders for memory chips will continue to decrease until the first quarter of 2023 due to falling semiconductor prices and weak demand for IT devices that use its memory chips, according to analysts.

Both Samsung and LG announced their earnings estimates for the July-September period. Samsung said it expects third quarter sales reached 76 trillion won ($53.8 billion), up 2.74 percent from the same period of 2021, while operating profit fell 31.73 percent year-on-year to 10.8 trillion won.

Compared to the previous quarter, Samsung saw sales and operating profit in the third quarter decrease 1.55 percent and 23.4 percent, respectively. It is the first time since the fourth quarter of 2019 that Samsung's operating profit shrank compared to the previous quarter.

Analysts saw the decline in profitability of the chip business as the main reason behind Samsung's decreased operating profit.

“The demand for IT devices, which had been booming due to the COVID-19 pandemic, has slowed down and high inventory levels caused by China's lockdown of its cities due to the pandemic has become another burden,” Eugene Investment & Securities analyst Lee Seung-woo said.

Due to the slowdown in the memory chip business, Samsung is expected to continue suffering from decreased earnings performance in the fourth quarter and until the first quarter of next year.

“We lowered the earnings estimate for Samsung for this year as well as next year because of the memory chip down cycle and also lowered our DRAM price estimate for this year and next year,” Doh Hyun-woo, an analyst at NH Investment & Securities, said. “The overall inventory level and sluggish demand for IT devices are expected to continue for the time being.”

LG was also hit by the economic downturn. The company said its estimated sales in the third quarter will be 21.17 trillion won, which is a quarterly record. But its operating profit is expected to be 746.6 billion won. Both figures are lower than market expectations. Analysts had estimated 20.16 trillion won in sales and 868.5 billion won in operating profit for the quarter.

The decline in profit is due to slow demand for TVs and home appliances coupled with rising costs of raw materials and logistics. Fortunately, LG's vehicle component business, which the company has set as its future growth engine, is forecast to post a surplus in the third quarter following the previous quarter.

Amid the easing of vehicle semiconductor supply disruptions, LG already successfully won 8 trillion won in new orders for its vehicle components in the first half of this year and the total order balance is expected to exceed 65 trillion won by the end of this year.