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April 13, 2007 1:01 am

Chips are down for Samsung as growth fizzles

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Samsung Electronics investors can be forgiven for feeling a little peeved.

While South Korea’s benchmark stock index hits all-time highs, Samsung’s shares have fallen about 20 per cent over the past 14 months amid growing worries about stalled growth at Asia’s most valuable technology company.

Investors’ fears of slowing growth at Samsung are likely to intensify today as the technology group is expected to unveil disappointing first-quarter results due to weak prices of its mainstay products – memory chips, flat panel displays and mobile phones.

Analysts say Samsung’s operating profit for the first three months of this year could fall to a four-year low of below Won1,400bn ($1.5bn) compared with Won1,610bn a year ago.

“It is expected to report poor performance for the first quarter and that is not likely to improve in the second quarter,” says Jay Kim at Hyundai Securities. “A recovery is expected in the second half but this year’s profit will fall short of last year’s.”

Reduced foreign stock ownership also underlines such concerns that Samsung’s momentum may be weakening after years of spectacular growth.

Foreign stock ownership of the company has fallen from 60 per cent three years ago to 47 per cent.

Through aggressive research spending and technological innovation, Samsung has become a global leader in the production of chips, flat screens and other digital devices but the growth story has started to fizzle in recent years with a lack of new growth drivers and deteriorating margins at its core businesses.

Samsung reported record sales of Won58,970bn last year but it suffered a 14 per cent drop in operating profit to Won6,930bn, hit by a stronger won and rising price pressure.

Its profit margins continued to fall from 21 per cent in 2004 to 14 per cent in 2005 and 12 per cent last year.

“Investors are taking a cautious approach until they see a clear catalyst for earnings growth,” says Michael Min, of Korea Investment & Securities.

Samsung is still a leader in the memory chip market but its market share is declining amid growing challenges from smaller rivals such as Hynix Semiconductor and Toshiba. It has made great strides in some digital products, especially in liquid crystal display televisions, but the LCD business is not generating handsome profit due to falling prices.

The company is also losing ground in the competitive handset market due to a lack of mega-hit products.

Investors’ concerns about stalled growth is shared by Samsung’s top managers.

Asked by reporters last month about falling profit margins, Lee Kun-hee, the company’s chairman, said: “It’s serious. The whole country as well as Samsung will face big chaos in five to six years unless we’re awakened.”

Analysts suggest Samsung may need a radical restructuring. “Samsung needs to benchmark GE,” says Mr Min. “GE has been able to sustain its growth by adding new successful businesses while closing non-profitable operations. Samsung has been slow in restructuring.”

He stresses the need for Samsung to come up with new hit products, such as Apple’s iPod, to create a market. In 2005, Samsung announced a $45bn investment plan to develop its 13 “growth engines” including next-generation printers, system LSI chips and air control system but as yet there has not been any visible progress in those areas.

Chu Woo-sik, Samsung’s vice-president in charge of investor relations, told reporters in January that the company entered a “maturing stage” and that it was too much to ask for continued fast growth of a big company like Samsung.

Some analysts suggest mergers and acquisitions as a way to drive growth at Samsung. “The company spends billions of dollars every year to buy back shares,” says Peter Yu, of BNP Paribas. “But it has failed to boost the share price as foreign investors sell their shares during the buy-back period. The company may as well consider save the money and spend it on buying some attractive companies, if organic growth slows down.”

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