Samsung affiliates struggle in Q3

After Samsung Electronics announced its shocking third quarter performance last week, dark clouds are also gathering over its parts manufacturing affiliates as analysts predict that they will face similar declines in their earnings.

Samsung Electro-Mechanics, which supplies camera modules for Galaxy smartphones, marked its lowest stock value in 52 weeks yesterday on Korea’s main Kospi bourse. The company’s shares closed at 40,250 won ($37.90), 3.82 percent down from the previous trading day, and at one point fell below 40,000 won.

Analysts said that concerns for the Samsung affiliate’s third quarter performance have caused its value to consistently drop. In the third quarter last year, the part supplier collected 164.3 billion won of operating profit, but analysts predict that figure will be reduced to one-tenth this year and that the company could go into the red.

“The reason why Samsung Electro-Mechanics’ third quarter performance is going lower than the market’s expectation is that shipments of Galaxy S5 were poor and the commercial production of Galaxy Note 4 was later than expected,” said Roh Geun-chang, an analyst at HMC Investment & Securities.

Even its affiliate Samsung Securities yesterday released a dim report on Samsung Electro-Mechanics outlook, estimating it will collect 1.77 trillion won in sales in the third quarter, down 6 percent from its previous forecast, while taking an operating loss of 14.1 billion won. Samsung Securities previously predicted that Electro-Mechanics would collect 13 billion won in operating profit.

“The parts industry’s profit visibility is lower than ever because of smartphone makers’ uncertain roadmap for new products and demand forecasts,” said Samsung Securities analyst Cho Sung-eun. “Considering inventory adjustments between the year-end and early next year, additional adjustments in profits are needed and I’m slightly lowering the profit estimation for the fourth quarter and next year.”

The situation looks no different for Samsung Display. The company is also expected to take an operating loss in the third quarter, with some analysts predicting it will lose more than 100 billion won.

“The shipment of AMOLED panels sharply decreased in the second quarter and so far, the operating rate hasn’t improved compare to last year,” said Eoh Kyu-jin, an analyst at IBK Investment & Securities. “The poor performance is likely to continue through the fourth quarter with the sales offseason.”

Samsung SDI, which supplies batteries for Samsung Electronics, is expected to have a better third quarter performance than Samsung Electro-Mechanics or Samsung Display, but analysts are still dropping their operating profit estimations.

“Samsung SDI’s operating profit in the third quarter is expected to be 44 billion won, which is 45.2 percent more than the previous quarter,” said So Hyun-chul, an analyst at Shinhan Investment Corp. “However, this is below the market expectation of 64 billion won due to sluggish performance of secondary batteries for IT business.”

These three parts makers said they have been trying to reduce dependence on Samsung Electronics by diversifying their sales channels.

Samsung SDI, which collects 30 percent of its total sales from Samsung Electronics, has been reinforcing its battery business in non-IT areas, particularly batteries for electric vehicles and energy storage systems. In the second quarter the company had 90 billion won of revenue from its EV battery business, 210 percent growth from the same period last year.

“The performance of Samsung SDI should be better starting from the first half next year,” Samsung SDI President Park Sang-jin told reporters on Wednesday after a meeting of Samsung Group presidents.

Samsung Electro-Mechanics, which has 60 percent of its sales coming from Samsung Electronics, said that it is trying to sell more parts, even turning to Chinese manufacturers that are flooding the local market with low-price smartphones.

The company is also reinforcing its electronic shelf labels, an electronic price display device that replaces paper labels, for which demand is increasing among American and European distributors.

Samsung Display, which gets more than 60 percent of its revenue from business with Samsung Electronics, is trying to sell more of its products to Chinese companies and Apple.

Some analysts have already predicted that the company’s fourth quarter performance will see a slight upturn from sales of the new iPad, which will be introduced today.

BY JOO KYUNG-DON [kjoo@joongang.co.kr]