Samsung warns of profit hit from currency strength and production costs

Samsung Electronics warned that a stronger South Korean won and higher production costs would hit its first-quarter earnings, as the tech group expressed optimism for a global recovery in demand in 2021.

The forecast is the first from Samsung since Lee Jae-yong, its leader, was sent back to prison, a development that has increased uncertainty over the future direction of the world’s largest maker of computer chips, smartphones and electronic displays.

The South Korean company on Thursday reported a 26.4 per cent year-on-year rise in fourth-quarter net profit to Won6.45tn ($5.78bn). The profits, which were below the Won7.3tn forecast by analysts polled by Bloomberg, were affected by an appreciation in the won against the dollar.

“Looking ahead, Samsung Electronics expects overall profit to weaken in the first quarter of 2021,” the company said, citing the strength of the Korean currency and costs of new production lines. However, it said demand for mobile products and data centres remained robust.

The downbeat short-term forecast contrasted with rivals’ optimistic outlook. Both Intel and Micron Technology were bullish on the first quarter as the pandemic continued to fuel demand for computers and smartphones. TSMC will spend a record of up to $28bn this year to expand its capacity as chip shortages hit global automakers.

Samsung said its full-year outlook remained bright but it was cautious over the impact of resurgences of coronavirus.

Semiconductors, which accounted for nearly half of Samsung’s operating profits last year, are likely to drive an earnings increase in 2021 as chip prices rise.

“The chip price increase this year won’t be as rapid as 2017-18 but we will see a steady rise with a prolonged upcycle, which will be healthier,” said Daniel Kim, an analyst at Macquarie.

Samsung’s foundry business posted record quarterly revenue in the three months to December, led by strong demand for the chips used in 5G mobile technology and high-performance computers, as well as for image sensors.

The company expects to acquire more customers this year as chip supply shortages continue. Analysts have forecast that Samsung will win orders from Intel, which said in July it was considering outsourcing more of its chip manufacturing.

The company expects higher profits from mobile products in the first quarter after launching new flagship models and foldable phones last week. “In 2021, market demand is likely to recover to pre-Covid levels backed by gradual recovery in the economy and accelerating expansion of the 5G market,” the company said.

Samsung shares fell nearly one per cent on Thursday morning. The stock price has risen more than 40 per cent over the past year on expectations of rising demand for semiconductors and higher dividends.

The Lee family faces a tax bill of an estimated $10bn following former chairman Lee Kun-hee’s death in October. Samsung pledged to maintain its policy of returning half its free cash flow to shareholders for the next three years and slightly raised its 2021 dividend payout to Won9.8tn.

Samsung said its ballooning cash pile was “a concern in managing the company” and it expects “meaningful M&A” in the near future. Analysts said that could help ease concerns that Lee Jae-yong’s absence would stall big investments or other strategic moves.

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