AI supply chain exposure splits Q3 outlook for Samsung, LG parts units

Exposure to the artificial intelligence (AI) supply chain is splitting the third-quarter earnings outlooks for LG Innotek and Samsung Electro-Mechanics.

The former faces weaker earnings prospects because of its optics-heavy sales mix and sensitivity to foreign exchange fluctuations, while the latter is offsetting currency-related pressure with a growing contribution from multilayer ceramic capacitors (MLCCs) and semiconductor substrates.

According to market tracker FnGuide on Tuesday, brokerages’ consensus estimate for LG Innotek’s third-quarter operating profit stood at 202.9 billion won ($152 million), down 32.8 percent from 302 billion won a month earlier. The revenue forecast was also lowered to 6.1 trillion won from 6.32 trillion won over the same period.

The worsening earnings outlook weighed on LG Innotek shares, which plunged 15.47 percent on Monday.

The biggest factor appears to be foreign exchange fluctuations, as raw materials and inventories purchased or produced when the won was weaker are being reflected in sales at a stronger won, hurting profit margins.

“The sharp decline in the exchange rate was the main factor, as products manufactured using raw materials purchased during the second quarter were shipped in the third quarter, when the exchange rate fell sharply,” Kiwoom Securities analyst Kwon Min-kyu said.

“The company's high exposure to foreign exchange fluctuations as an exporter and the large share of raw materials in its cost structure amplified the impact.”

Kwon forecast LG Innotek's third-quarter operating profit at 91.7 billion won, down 55 percent year-on-year.

LG Innotek operates optical solutions, semiconductor substrate and automotive components businesses, but optical solutions still account for more than 80 percent of its total revenue. This leaves the company heavily dependent on major device makers, including Apple.

The iPhone 18 Pro series features higher-resolution cameras and variable apertures, which were expected to boost the average selling price of LG Innotek's optical modules, but concerns remain that sales of the new series could fall short of those of the iPhone 17 lineup. On Friday, Nikkei reported that Apple had asked some of its suppliers to cut production of components for the iPhone 18 series, as rising chip costs forced price increases that dampened consumer demand.

In contrast, the consensus estimate for Samsung Electro-Mechanics' third-quarter operating profit rose 6.2 percent to 642.3 billion won from 605 billion won a month earlier.

Samsung Electro-Mechanics also operates businesses spanning optical solutions, electronic components including MLCCs and package solutions including semiconductor substrates. However, its revenue is more evenly distributed across these businesses, with electronic components accounting for approximately 47 percent of sales in the second quarter, semiconductor substrates 22 percent and optical communication solutions 30 percent.

This diversified sales mix appears to have limited the impact of foreign exchange fluctuations, despite the company facing the same currency environment as LG Innotek.

“Despite the unfavorable foreign exchange environment, the company is expected to beat the market consensus,” DS Securities analyst Cho Dae-hyung said. “A growing share of high-value products and price increases in both the component and package solution businesses are expected to boost earnings beyond market expectations, even amid a sharp decline in the won-dollar exchange rate.”

The expansion of long-term supply contracts is further improving the outlook. Samsung Electro-Mechanics has secured its sixth long-term agreement for MLCCs this year alone, bringing the total value of orders to 3.9 trillion won, which accounts for more than one-third of the company’s total revenue last year.

MLCCs are components that temporarily store electricity and supply it steadily to semiconductors when needed. Demand for MLCCs is surging as AI servers require increasing amounts of power.