Dark Clouds Ahead
Samsung Electronics Co. projected its first quarterly profit decline in seven quarters. With the trade dispute between the United States and China escalating, even Samsung Electronics, which is considered one of South Korea’s economic pillars, sees its profits drop, unnerving the entire Korean business community.
Samsung Electronics said on July 6 that it would post 58 trillion won (US$51.92 billion) in sales and 14.8 trillion won (US$13.25 billion) in operating profits in the second quarter. According to the preliminary results, the company’s sales and operating profits dropped 4.2 percent and 5.3 percent, respectively, compared to the previous quarter when its quarterly operating profits hit a record high. The IT giant is expected to see its quarterly operating profits fall for the first time in seven quarters, ending its streak of 15 trillion won (US$13.43 billion) in quarterly operating profits in three quarters.
Poor earnings results are largely due to a lackluster performance of its flagship Galaxy S9 smartphone released in March. Sales of the Galaxy S9 in the second quarter were expected to stand at 8 million units, lower than the 10 million units of sales recorded for a month after the release. It has a mere 1 percent share of the world’s largest Chinese market, losing out to Huawei and Xiaomi, and has also lost its No. 1 spot in the Indian market.
By contrast, the consumer electronics (CE) division has shown an improvement in performance compared to the previous quarter. However, it doesn’t have much significance as the second quarter is the beginning of the peak season and there have been a ripple effect from the World Cup games. Market experts say that it is urgent for Samsung Electronics to restore its business networks in the Chinese market.
The company’s semiconductor division has put up a good show. Although the price of NAND flash memory chips fell, its profits have come close to 11.6 trillion won (US$10.38 billion) in the first quarter. However, it is still too soon to relax as the trade dispute will adversely affect the industry and China will enter the memory market at the end of the year. In particular, Samsung Electronics’ semiconductor division accounts for nearly 80 percent of the total profits. The excessive dependence on the semiconductor sector can cause bad effects on not only Samsung Electronics but also the South Korean economy.
Samsung Electronics’ low second-quarter earnings projections are casting a bleak outlook on the stock market. Amid a continuous foreign capital outflow caused by the trade dispute and the strong dollar, pension funds will also show the selling trend in the second half of the year, according to market experts. Since there are no favorable factors in terms of fundamentals and supply and demand, the balance of individual investors’ credit loans has shown a sharp decline, freezing the investment sentiment.
After Samsung Electronics announced on the 6th that its profits would fail to meet its second quarter targets, the price of Samsung Electronics shares closed at 44,900 won (US$40.20), down 2.29 percent from the previous day. Individual investors and foreign investors net sold 103.4 billion won (US$92.57 million) and 381 billion won (US$341.09 million), respectively, on the main KOSPI bourse on the same day. Notably, foreigners sold 217.8 billion won (US$194.99 million) worth of Samsung Electronics shares.
Foreign investors have continued a selling spree on the KOSPI market from February and sold 1.59 trillion won (US$1.42 billion) worth of stocks last month as well. Market behemoth Samsung Electronics was particularly hit. Foreign investors net sold 1.1 trillion won (US$988 million) worth of Samsung Electronics stocks in June alone and the price of its shares dropped about 8 percent. It was twice the drop of the KOSPI index (4 percent) over the same period.
The problem is that there are no factors in sight that would boost share prices. The US imposed a preliminary tariff on Chinese imports as expected. Accordingly, there will be volatility on the stock market and foreign capital outflow for a while. Lee Jae-sun, an analyst at KTB Investment & Securities Co., said, “The US is unlikely to impose a secondary tariff since it can trigger a second round of trade war not only with China but also with other countries. However, it is hard to expect the stock market rebounds in the short run as President Trump can maintain the trade dispute until the midterm elections in November.”
Pension funds, which are considered a big investor in the stock market, are also unlikely to purchase stocks in the domestic market in the second half of the year. Jung Da-ee, an analyst at Meritz Securities Co, said, “Pension funds were planning to net purchase 940 billion won (US$841.54 million) worth of South Korean shares this year but they have already bought 1.2 trillion won (US$1.07 billion) of them in total from the beginning of the year. This is why they are more likely to sell stocks rather than purchase them in the second half of the year.” In addition, it is hard to expect a good business performance. According to market tracker FnGuide, the forecast of KOSPI-listed firms’ operating profits this year had been lowered by nearly 3 percent from 221.38 trillion won (US$198.19 billion) at the beginning of the year to 215.21 trillion won (US$192.67 billion) at the end of last month.
The investment sentiment is gradually shrinking. As the stock market continues to show a decline, the balance of credit loans on the KOSPI and the KOSDAQ markets decreased 400 billion won (US$358.1 million) for the first time in five trading days and the amount of transactions on the KOSPI market slid to 4.8 trillion won (US$4.3 billion), the lowest level of the year, on the 4th.