Samsung third-quarter profit seen at record, but peaking, as chips shine

Samsung Electronics is set to post a hefty jump in third-quarter profit to record levels after its chip unit put in a sterling performance on demand from data centres and improved production yields.

The July-September quarter is, however, expected to mark a peak in earnings as a two-year super cycle of tight supply and soaring demand comes to an end, with prices of some types of chips already sliding sharply.

The world’s top memory chipmaker, due to report preliminary results on October 5, is forecast to book an 18 per cent surge in operating profit to 17.2 trillion won ($15.5 billion), a Refinitiv poll of 15 analysts showed. Revenue is seen climbing 3.7 per cent.

That handily beats operating profit growth of 6 per cent in the previous quarter when its Galaxy S9 device missed sales targets and competition from cheaper Chinese-made phones ate into margins for its mobile business.

The big boon for Samsung has been a spike in prices for DRAM chips, which help devices perform multiple tasks at once and are its main memory product. DRAMeXchange estimates the average price of server DRAM rose 14 per cent in the third quarter from a year earlier, as companies build data centres for cloud computing.

But prices for NAND chips, used for longer-term data storage, more than halved in the same period as supply swamped demand. Those drops are expected to accelerate, while most analysts also predict DRAM prices will begin to decline.

“Starting in the fourth quarter, I expect DRAM prices to fall by around 10 per cent. That will hurt Samsung’s operating margin,” said Eo Kyu-jin, an analyst at eBest Investment & Securities.

While Samsung is forecast to still book decent operating profit growth of 12 per cent in the fourth quarter, analysts predict minimal profit growth in the first half of 2019 followed by profit declines, albeit small ones, in the second half, Refinitiv data showed.

Even so, Samsung is expected to weather drops in DRAM chip prices better than rivals due to gains in production technology that allow it to make smaller and faster chips per silicon wafer.

“Even though the average selling price will decline next year, Samsung’s memory chip business will still have solid profits due to cost-saving measures,” said Avril Wu, senior research director at DRAMeXchange.

While its chip unit accounts for nearly 80 per cent of operating profit, Samsung will also benefit from a rebound in prices for large displays, as well as increased orders for organic light-emitting diode (OLED) displays after Apple Inc launched new iPhones.

Samsung’s display unit is expected to post about 812 billion won ($730 million) in quarterly operating profit, down 19 per cent from a year earlier but more than five times the prior quarter.

It will, however, have to deal with more competition next year as rivals from China and South Korea have started or plan to begin mass production of small-sized flexible OLED panels.

Its mobile division will see operating profit drop for the third quarter in a row, hurt by sluggish demand for smartphones as the market matures. Marketing costs for its new Galaxy Note series also pressured mobile earnings, analysts said.