Samsung's chip production cut expected to hasten earnings recovery

The Korea Times

The Korea Times

Business

Tue, September 26, 2023 | 07:51

Tech

Samsung's chip production cut expected to hasten earnings recovery

Posted : 2023-04-07 16:03

Updated : 2023-04-08 10:57

Samsung Electronics' office building in Seoul / Yonhap

Analysts express optimism for tech giant to make early turnaround

By Park Jae-hyuk

Samsung Electronics is expected to enjoy a steady recovery in its earnings during the second half of this year at the latest, according to domestic securities analysts, Friday.

This optimistic outlook has been attributed mainly to the tech giant's latest decision to reduce the manufacturing volume of memory chips to a "meaningful level."

While announcing on Friday that its first-quarter operating profit is estimated to have plunged 95.8 percent year-on-year to 600 billion won ($454.9 million), the semiconductor and electronics manufacturer virtually retracted its previous promise that there would be no "artificial" production cut this year.

"We are lowering the production of memory chips … especially that of products with supply secured," the conglomerate said in its explanatory notes attached to its earnings guidance.

This is the first time since the global financial crisis that Samsung Electronics' operating profit has fallen below 1 trillion won. The company is presumed to have offset a nearly 4 trillion won loss in its semiconductor business with gains from its smartphone and home appliances businesses.

Samsung's worse-than-expected earnings, however, prompted the tech giant to follow the trend of other global chipmakers by downsizing outputs to cope with the oversupply issue amid the global economic downturn.

As a result, analysts began to anticipate an earlier-than-expected recovery in the global semiconductor industry, as well as Samsung Electronics' earnings.

"Samsung's recent decision will contribute to an earlier recovery in the memory chip sector," Hyundai Motor Securities analyst Roh Geun-chang said. "We had initially expected the DRAM fixed price to start rising from the fourth quarter, but the price will begin to go up from the third quarter."

Shinhan Securities analyst Choi Yoo-joon expected Samsung Electronics' earnings to bottom out during the second quarter as long as its production cut effectively reduces inventory.

Stock investors also welcomed Samsung's decision to cut its production.

Samsung Electronics' stock price closed at 65,000 won, Friday, after reaching an intraday high of 65,200 won. It closed at 62,300 won on Thursday.

Samsung, however, emphasized that its output cut will not lead to reductions in its investments.

"We will continue our infrastructure investment to secure necessary clean rooms," the company said. "We will also expand R&D investment to strengthen our technological leadership."

Deputy Prime Minister and Finance Minister Choo Kyung-ho also promised that the government will offer all-out support for the nation's semiconductor industry, during his visit that day to Samsung Electronics' factory in Pyeongtaek, Gyeonggi Province.

Deputy Prime Minister and Finance Minister Choo Kyung-ho, third from left, is guided by Samsung Electronics employees during his visit to the chipmaker's factory in Pyeongtaek, Gyeonggi Province, Friday. Courtesy of Ministry of Economy and Finance

On the same day, LG Electronics also announced its first-quarter earnings guidance.

The company estimated its operating profit to reach 1.5 trillion won, down 23 percent from a year earlier. This is the first time in 14 years for LG Electronics to outrun Samsung Electronics in quarterly operating profit.

Analysts attributed the solid earnings of LG Electronics to the improved profitability of the company's home appliances business.

pjh@koreatimes.co.kr