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Samsung Electronics braces for earnings drop as China slowdown chips away at the question

SEOUL (Reuters) – Samsung Electronics Co Ltd (005930.KS) is set to post its first drop in quarterly operating profit in two years as slowing economic growth in China, an important market for the South Korean tech giant, will it affect the demand for its products.

FILE PHOTO The logo of Samsung Electronics is seen at its office in Seoul, South Korea, March 23, 2018. REUTERS/Kim Hong-Ji/Photo File

Gloomy results of the world’s top maker of semiconductors and smartphones would provide investors, who are already on the verge of after Samsung, the biggest competitor of Apple Inc (AAPL.O) this week took the rare step of cutting its sales forecast on slowing iPhone demand in China.

Samsung, because of the publication of the preliminary fourth quarter on Jan. 8, is expected to see 12% year-on-year decrease of the operating profit to 13.3 trillion won ($11.85 billion) for the period, I/B/E/S data from Refinitiv shows.

“Depressed demand in China will further drive down the Samsung chip sales. And China’s total smartphone market, has come to a halt and falling, which will affect not only Apple but Samsung,” Song Myung-sup, a senior analyst at HI Investment & Securities, told Reuters.

The turnover is expected to slipped 5 percent, hurt by lower memory-chip shipments. Samsung had in October cut its 2018 capex, calling an end to a two-year bonanza for memory chips as the global smartphone market slowed down.

This wind continued to buffet the industry in the fourth quarter, with total sales in the top of the smartphone market in China will drop 8 percent in the previous three months, according to Counterpoint Research.

CHINA IS THE KEY

Samsung is the global smartphone business has not been spared, with the profit to the unit, is expected to have slumped by a fifth in the fourth quarter, Refinitiv data shows.

“You see, Apple’s iPhones are already losing sales in China. For Samsung also, how long this weak demand from China the mobile phone market will continue is the key,” said Park Jung-hoon, a fund manager at HDC Asset Management, which owns Samsung shares.

Samsung has less than a 1 percent share of the chinese smartphone market, compared to 9 percent for Apple. But his memory and the processor chips, which are good for more than three-quarters of its revenue and approximately 38 percent of revenue, ability smartphones, including those from China’s top player Huawei [HWT.UL].

In the midst of the smartphone woes, the overall operating profit at the Samsung chip business is expected to have slipped from 3.7 percent compared to a year ago to 10.5 trillion won.

The memory-chip shipments fell 10 percent on an average in the fourth quarter, according to real estate Eugene Investment & Securities.

MORE PAIN AHEAD

Analysts say that Apple’s smart and Samsung’s are indicative of tougher times ahead for international companies, such as the gloomy growth in the world’s second largest economy, exacerbated by a long China-US trade war, takes a toll.

China’s factory activity contracted for the first time in more than two years in December. The World Bank has estimated made of the weakest GDP expansion for the country in nearly three decades this year.

South Korea’s semiconductor exports to China declined for the first time in more than two years in December.

China is an important market for the South Korean chipmakers, led by Samsung and smaller rival SK Hynix (000660.KS), exported about 41 percent of their products to the mainland between January and November 2018.

Samsung’s profit is expected to decline by 2019 if the weakness persists, Refinitiv data showed.

Prices for DRAM chips, devices with temporary workspaces and allow them to multitask, decreased from 10 percent in the fourth quarter, according to industry tracker DRAMeXchange.

The prices of NAND flash memory chips, which hold data permanently, slid 15 percent.

DRAMeXchange expects memory chip prices to fall 10 percent on average in the first quarter.

($1 = 1,122.3700 won)

Reporting by Ju-min Park and Heekyong Yang; additional reporting by Hayoung Choi; Editing by Sayantani Ghosh and Himani sarkar

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