October 13, 2017 10:42 am JST  (Updated October 13, 2017 2:59 pm JST)

Samsung Electronics CEO resignation shocks industry

Record high earnings for Q3 overshadowed by beginning of generation shift

KIM JAEWON, Nikkei staff writer

Samsung Electronics CEO Kwon Oh-hyun will step down.

SEOUL - Samsung Electronics posted record high earnings in the third quarter thanks to rising prices in memory chips, but the announcement was overshadowed by chief executive Kwon Oh-hyun's sudden offer to resign, signaling a generational shift in the technology giant's leadership.

Kwon, who serves as both CEO and board chairman, offered to step down from all of his posts in March. The 64-year-old executive said it was time for a younger generation to take over the reins.

"I believe the time has now come for the company to start anew, with a new spirit and young leadership to better respond to challenges arising from the rapidly changing IT industry," he said in a statement. "Now the company needs a new leader more than ever and it is time for me to move to the next chapter of my life."

Analysts say that Vice Chairman Lee Jae-yong is behind Kwon's resignation. Lee, the de facto leader of the group, is currently in prison after being sentenced to five years for bribery and embezzlement in August. His appeal began at the Seoul High Court on Thursday.

The development appears to mark the beginning of the end for the leadership trio of Kwon; Shin Jong-kyun, the CEO of the mobile business; Yoon Boo-keun at the head of the consumer electronics business.

"Kwon's resignation is a signal that Lee is tightening his grip on the company, replacing old executives with younger ones. I think CEO Shin Jong-kyun and other top management will also be out as early as later this month," said SK Kim, an analyst at Daiwa Capital Markets.

The three executives have been leading the company since Lee was arrested in February. Its Chairman Lee Kun-hee, father of the junior Lee, has been in hospital since suffering a heart attack in 2014.

Daiwa's Kim said company President Kim Ki-nam is a strong candidate to take over Kwon's post. Kim, 59, has experience of working in the memory chip, system semiconductor and display sectors.

Shelley Jang, an analyst at Fitch Ratings, said that Kwon's resignation may raise uncertainty about the company's long-term outlook considering his roles in mergers and acquisitions and alliances with business partners, though there will be no major damage to daily operations. "But as Samsung Electronics has grown considerably for the past decade, I don't think it will pose big risk to the company," she said. 

Record high

Earlier in the day, the country's biggest technology company announced that its sales had risen 29.65% to 62 trillion won ($54.9 billion) in the July-to-September period year-on-year, with operating profit soaring 178.85% to 14.5 trillion won in its preliminary earnings data release.

Quarter-on-quarter sales increased 1.64% and operating profit rose 3.06%. The company plans to announce other earnings data on Oct. 31.

Analysts said that the company's semiconductor business may have led the earnings surprise, offsetting the relatively low-performing display and handset sectors.

"Memory chip prices are on the rise, boosting earnings in the semiconductor segment. The new 3D NAND factory in Pyeongtaek is also helping increase NAND shipments," said Doh Hyun-woo, an analyst at brokerage house Mirae Asset Daewoo. "But operating profit in the display business is expected to have decreased, hit by declining big LCD prices."

On Thursday, Fitch Ratings raised its credit rating on Samsung Electronics for the first time in 11 years, to AA- from A+ , recognizing the company's strong global market position and technology leadership.

"The rating upgrade reflects our belief that Samsung Electronics' [credit] quality is not significantly vulnerable to foreseeable events. This is due to the growing strength of the company's major businesses, which is driven by their strong global market positions, technology leadership, diversification, economies of scale and vertically integrated structure," the credit analysts said.

On Friday, shares of Samsung Electronics slipped as low as 2,689,000 won, a drop of 1.86%, despite the announcement of record high earnings. They were trading at 2,725,000 won in the afternoon, down 0.55% from the previous day's close. The benchmark KOSPI was down 0.94%. 

Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 338,122.22M
Shares: 147.34M

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