Concern over falling profit margins at Samsung Electronics Co Ltd grew on Thursday as the company said it was spending more on handset marketing and a top broker issued a "sell" rating on its stock for the first time in years. Samsung, which overtook Motorola as the world's second-biggest mobile phone maker in the third quarter, said that it would continue to increase global marketing spending for its handsets in the fourth quarter.
Shares in Samsung, Asia's most valuable technology firm with a market value of $67 billion, closed down 0.12 percent at 428,500 won, lagging the broad market's 0.83 percent advance and a 1.2 percent rise on MSCI's Asia Pacific ex-Japan technology subindex.
The South Korean firm said in a presentation prepared for a UBS investor conference it expected mobile phone sales volumes and profit margins to pick up in the first quarter of next year after clearing inventories by the end of 2004.
"We believe increases in advertising and promotion costs will eat into the company's handsets margins in the fourth quarter," said D.J. Yook, analyst at Deutsche Bank, who cut his recommendation on Samsung to "sell" from "hold".
"We believe intensifying competition and commoditisation of high-end handsets will also lead to downward pressure on handset average selling prices going forward. Compared to a year ago, most handset producers have a wide range of high-end models with camera, camcorder, MP3 functions," he said.
A price war raging in the mobile phone market after market leader Nokia cut prices has forced Samsung to sacrifice margin by following suit and spending more to lure customers.
It is also suffering from crumbling prices of flat screens for televisions and computers, and a bearish outlook for memory chips.
J.P. Morgan said it expected Samsung's handset margin to fall to 8.7 percent in the fourth quarter from 12.7 percent in the third quarter with an 8 percent shipment decline from the previous quarter's 22.7 million handsets.
"Looking into 2005, we expect Samsung's handset margin to recover to a double digit on the back of new models and more prudent marketing expenses," J.J. Park, a J.P. Morgan analyst, said in a note to clients.
Samsung also said it would make ground into developing markets including CIS countries and China, and shipments of third generation phones would boost average prices. The investor forum was closed to the media.
"Cleaning up inventories at the distribution channel is a smart strategy. When new models are released in the first quarter, distributors will be more aggressive in getting the new phones and selling them," said Yu Chang-eyun, an analyst at BNP Paribas Peregrine.
According to research group Gartner, Samsung had a 13.8 percent market share in the third quarter compared with 12.1 percent in the second quarter.
Samsung's growth has been driven by a combination of innovative designs, cutting-edge technology and aggressive marketing.
The firm has targeted emerging markets as well as customers in developed ones with its range of clam-shell handsets, incorporating colour screens and tiny digital cameras.
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