Samsung earnings signal chip sector turnaround in 2024

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Operating profit at Samsung Electronics fell by more than a third in the fourth quarter despite a rebound in chip prices, but analysts expect a semiconductor industry recovery to gather pace this year on growing demand for high-performance chips.

The world’s largest memory-chip maker estimated on Tuesday that operating profit fell 35 per cent to Won2.8tn ($2.1bn) in preliminary numbers for its October-December quarter. That was worse than analysts’ expectations for Won3.7tn, according to LSEG SmartEstimates. Sales fell 4.9 per cent to Won67tn from a year earlier.

Still, this was Samsung’s smallest year-on-year profit fall in five quarters. The industry suffered its worst downturn in decades last year after tepid consumer demand for tech gadgets caused by high inflation led to a supply glut. Samsung last posted a year-on-year profit increase in the second quarter of 2022.

The South Korean company’s shares traded 0.6 per cent lower in Seoul on Tuesday following the announcement. Detailed fourth-quarter and full-year results will come at the end of the month.

Chip prices began to recover in the fourth quarter, helped by production cuts by memory-chip makers. Analysts estimate operating losses at Samsung’s chip division, usually its biggest earner, fell to Won1.2tn in the December quarter from losses of Won4.4tn and Won3.8tn in the second and third quarters, respectively. However, weaker than expected performance in the television and other home appliances business weighed on the company’s earnings, they said.

“The industry cycle is stabilising faster than expected thanks to supply adjustments,” said Roko Kim, an analyst at Hana Financial Investment. “Dram chipmakers’ inventories are likely to fall short of appropriate levels by the end of the first quarter. Then, they will need to think about increasing output and plant operating ratios.”

Samsung has reduced output since April to join rivals such as SK Hynix and Micron Technology. Last month Micron forecast quarterly revenue beating market estimates, adding to signs of a recovery in the $160bn memory chip market.

Samsung’s Dram chip business has already turned profitable, while its Nand flash memory operations remain in the red, analysts said. Data provider TrendForce estimated that mobile Dram chip prices rose 18-23 per cent in the fourth quarter. while mobile Nand flash chip prices gained 10-15 per cent.

Dram chips are used in smartphones, PCs and servers, while Nand flash memory chips are used to store data.

HSBC forecast a “huge earnings recovery” for Samsung this year on a “demand-driven upcycle”. It cited increasing artificial intelligence server investments, growth in demand for high-bandwidth memory (HBM) chips used in AI, and Dram and Nand growth from the introduction of on-device AI embedded in smartphones and other products. It forecast Samsung’s operating profit would more than quintuple to Won43tn and sales would increase 18 per cent to Won308tn.

Samsung has trailed domestic rival SK Hynix in mass-producing the most-advanced HBM chips, but HSBC expects it to become a mainstream supplier in the middle of this year.

Expectations of a fast industry recovery have driven Samsung shares up 25 per cent over the past year. Earnings from its mobile division fell slightly on slowing shipments of its latest foldable phones launched in August, but Samsung plans to launch a new flagship smartphone later this month with on-device AI features to become one of the first handset makers in the world to introduce generative AI to its devices.