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Samsung Q2 profit soars 53% amid strong memory chip demand

South Korea plans support for chipmakers as global competition heats up

Samsung Electronics is benefiting from global demand for semiconductors.   © AFP/Jiji

SEOUL -- Samsung Electronics' operating profit surged 53% in the second quarter from a year ago, the company said Wednesday, as strong memory chip demand amid the coronavirus pandemic more than made up for falling smartphone sales.

The world's largest memory chipmaker released earnings guidance showing that operating profit increased to 12.5 trillion won ($11 billion) in the April-June period, up 53.4% from the previous year.

Samsung's revenue, meanwhile, jumped 18.9% to 63 trillion won during the same period. Quarter-on-quarter, operating profit rose 9.4%, while revenue dropped 3.7%.

The figures beat the market consensus of 21 brokerage houses collected by stock market information provider FnGuide, which had expected 11 trillion won of operating profit and 61.3 trillion won of revenue.

Samsung does not elaborate on its guidance and will release full earnings data later this month.

But analysts say that Samsung's semiconductor division likely led the robust performance due to prices for memory chips rising sharply as clients stock up. Nomura estimated that DRAM prices may have jumped over 20% in the second quarter from the previous quarter.

"The memory chip upside may have led the bullish performance, while one-time gains on the display side also contributed," SK Kim, an analyst at Daiwa Capital Markets, said in reaction to the results.

Kim added that Samsung's results also likely got a boost from what he said may have been a penalty payment of about 1 trillion won by Apple to the South Korean company. Apple pays compensation to Samsung when it cannot order as many displays as promised.

Phone calls to Apple's Seoul office seeking comment went unanswered on Wednesday.

CW Chung, a senior analyst at Nomura, said in a report ahead of the guidance that Samsung could continue to benefit from the continuing need for companies to procure chips.

"We believe Samsung Electronics' second quarter shipment is likely to beat the consensus expectation and DRAM inventory is likely to decline further in the third quarter, thanks to strong demand," Chung said. "Server DRAM demand from hyperscalers is increasing, inducing a shift in DRAM production toward server DRAM."

Hyperscalers refer to companies providing cloud, networking and internet services. They include Google, Amazon, Facebook, Alibaba and IBM, among others.

TrendForce, a Taipei-based research company, said that Samsung and other memory suppliers see no need to lower prices to drive sales because the overall procurement of server memory products is expected to intensify in the third quarter.

Despite Samsung's strong guidance, its shares closed down 0.49% to 80,800 won.

The company's stellar performance comes as South Korea is supporting the country's chipmakers to lead the global market by cutting taxes, loosening regulations and developing talent as competition with rivals including Taiwan Semiconductor Manufacturing Co. is intensifying.

The Ministry of Industry, Trade and Energy said last week that it would expand tax deductions for chipmakers' investments in research, development and facilities by classifying semiconductors as core national strategic technology, along with batteries and vaccines.

Seoul is not alone in aiding its semiconductor manufacturers. The U.S. is also keen to build resilient supply chains in the chipmaking industry under President Joe Biden's leadership to maintain the country's upper hand in technology and counter China's challenge.

In another key business area, smartphones, Samsung's shipments are expected to have dropped to less than 60 million units for the three months through June from 76 million in the previous quarter, hit by lower demand from India and a production suspension in Vietnam due to the coronavirus pandemic, according to Eugene Investment and Securities.

Samsung is the world's biggest smartphone manufacturer with 22% of global market share in the first quarter, followed by Apple at 17%, according to Counterpoint Research.

TrendForce lowered its forecast for the annual growth rate of total global smartphone production to 8.5% this year from the previous projection of a 9.4% increase as a second wave of coronavirus infections swept across India this year.

Kim, of Daiwa Capital Markets, said, however, that Samsung's situation appears solid.

"The mobile business looks better than expected," Kim said. "Its sales may have dropped 20%, but product mix may have improved thanks to high-margin sales of tablets."

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