LG Electronics Inc, the world's fourth-largest mobile phone maker, is likely to report a more than 60 percent drop in quarterly profit on Monday, hit by a squeeze in handset margins and lower flat-screen prices.
The outlook for the South Korean firm, also the world's top maker of air conditioners, is expected to improve as flat-screen prices stabilise, but it looks set to miss its 2005 mobile sales' target as weak sales at home and abroad bite.
"Earnings in the handset division will probably be very disappointing because intense competition in the domestic market cut margins, while a stronger won reduced exports, in particular to Europe," said Lee Seung-woo, an analyst at Meritz Securities.
Second-quarter sales of pricey third-generation mobile phones that LG ships to global operators such as Hutchison Whampoa Ltd grew less than expected, analysts said.
LG, which competes with domestic rival Samsung Electronics Co Ltd in making phones, TVs and refrigerators, is set to report a net profit of 180 billion won ($171 million), according to seven analysts polled by Reuters Estimates.
That is down 63 percent from 493 billion won a year ago, although over double the 83 billion first-quarter profit, after its flat-screen venture LG.Philips LCD swung back to profit from a loss in the first quarter.
Sales are estimated at 6.3 trillion won, versus 6.03 trillion a year ago and 5.96 trillion in the first quarter. LG is likely to see an 881 billion won profit this year, down from 1.6 trillion a year ago. Based on this, LG would post a second-half profit of 618 billion, up 32 percent from year ago.
Shares in LG, the country's ninth biggest stock with a value of $9.8 billion, dropped 3.4 percent in the second quarter, lagging a 4.4 percent rise in the broader market
Analysts expect LG to ship about 12.3 million mobile phones in the second quarter, up from the first quarter's 11.1 million, but below its guidance of more than 13 million.
Mobile phone margins are seen sliding to around 2 percent from 3.6 percent in the first quarter and 6.4 percent a year ago.
But margins are expected to see a slight rebound later this year, driven by new models targeted for year-end holiday season and on reduced manufacturing costs after integrating plants.
LG moved all of its handset operations into a plant near Seoul in the first half to raise efficiency and cut operating costs.
LG, which overtook Siemens last year as the world's number four mobile phone maker, is targeting 2005 mobile sales of 62 million, but analysts now see sales of around 55 million.
James Kim, an analyst at Lehman Brothers, sees full-year margins falling to 3.9 percent from 6.3 percent in 2004.
LG ranks behind Nokia, Motorola and Samsung and had a market share of 6.2 percent in the first quarter, according to research firm Gartner.
On flat screens, losses at LG's plasma business should fall to 18 billion won from 38 billion in the first quarter, Kim said, thanks to more stable prices and lower manufacturing costs.
LG's other flat screen business, which is based on liquid crystal display technology, is also showing improvement.
LG Philips LCD, LG's venture with Dutch Philips NV, posted a better-than-expected quarterly profit on Monday and forecast a rise in panel prices later this year.
LG's appliances division, which makes air conditioners, refrigerators and washing machines, is expected to report solid growth as sales of premium products in the domestic market offset the negative impact of a rise in the won currency on exports.
Appliances accounted for 28 percent of first-quarter sales, versus display and media's 35 percent and telecoms' 36 percent.
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