Samsung Braces for Profit Drop as China Slowdown Chips Away at Demand

Samsung Electronics Co Ltd?is set to post its first drop in quarterly operating profit in two years as slowing economic growth in China erodes demand for its products.

Bleak results from the world's top maker of semiconductors and smartphones would ad to worries for investors, already on edge after Samsung's biggest rival Apple Inc this week took the rare step of cutting its sales forecast on slowing iPhone demand in China. Samsung is expected to see a 12 percent year-on-year (YoY) drop in operating profit to $11.85 billion for the period.

"Depressed demand in China will further drive down Samsung's chip sales there. And China's overall smartphone market is stalled and declining which will affect not only Apple but Samsung," Song Myung-sup, s senior analyst at HI Investment & SEcurities.

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

This headwind continued to buffet the industry in the fourth quarter with overall sales in the world's top smartphone market China falling 8 percent in the preceding three months.

China is Key

Samsung's worldwide smartphone business has not been spared with profit at the unit expected to have slumped by a fifth in the fourth quarter.?

"You see, Apple's iPhone are already losing sales in China. For Samsung too, how long this weak demand?from China's mobile phone market will continue is key," said Park, Jung-hoon, a fund manager at HDC Asset Management which owns Samsung shares.

Samsung has a less than 1 percent share of China's smartphone market versus 9 percent for Apple. But its memory and processor chips which account for over three-quarters of its earnings and about 38 percent of sales, power smartphones including those from China's top player Huawei.

Amid the smartphone woes, overall operating profit at Samsung's chip business is expected to have slipped 3.7 percent from a year ago to 10.5 trillion won. Its memory-chip shipments fell 10 percent on an average in the fourth quarter according to brokerage Eugene Investment & Securities.