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10 October 2016

Samsung’s chip division comes to the rescue despite Note 7 problems

Samsung is still dealing with the blow to its sales and reputation from the exploding Galaxy Note 7 issue, but its other businesses are protecting it from the worst impact on quarterly results.

Last year, amid intense pressures on its smartphone activities, Samsung invested heavily in its semiconductor, memory and display units to offset the decline. This year, the mobile business had enjoyed a significant bounceback, until the major setback of the problems with the Note 7, which was supposed to be the big launch for the autumn and a way to counter the release of the latest iPhone.

However, as it published its preliminary second quarter figures, it was clear that the boost to the components businesses was having a lasting effect of cushioning Samsung from problems with handsets.

According to the preliminary report, operating income was up 5.5% year-on-year to KRW7.8 trillion ($7bn) in the quarter, exceeding analyst estimates, on sales of KRW49 trillion. These early figures do not include net income of divisional breakdown, which will be released in late October.

Samsung is unlikely to detail the cost of the Note 7 recall, but analysts are estimating that could be between $1bn and $2bn. They have cut their estimates of Note 7 sales by 385 to 8m units this year.

“Without the one-off recall costs, Samsung was originally expected to perform better and better this year,” Chung Chang Won, an analyst at Nomura Holdings, told Bloomberg. “If its mobile unit doesn’t get into further trouble from here and given the strong performance of its components businesses, Samsung shares will continue its upward march.”

A consensus of analysts suggests that operating income from the mobile division was KRW2.7 trillion in the quarter, while improving memory prices will have delivered operating income of KRW3.3 trillion at the semiconductor business, on sales of KRW12.9 trillion.

The display division is expected to post profit of KRW760bn while the consumer electronics unit, which includes TVs and home appliances, is expected to deliver KRW635bn won.

Meanwhile, billionaire activist investor Paul Elliott Singer has launched a campaign to get family-controlled Samsung to restructure. Sources say Singer is relying on the firm’s heir apparent, Jay Lee, to be keen to modernize while retaining family control – and therefore to be open to the investor’s complex proposals. These would involve Samsung splitting into an operating company and a holding entity, with the former listed on a US exchange as well as in Seoul.