* Phone business swings to profit in Q3 from big loss
* Smartphone sales rise 23 pct on previous quarter
* Still caught in thin-margin, second-tier market
* Quarterly operating profit beats analysts' forecasts (Recasts, adds analyst comment)
By Miyoung Kim
SEOUL, Oct 24 LG Electronics Inc shipped a record number of smartphones in the third quarter, fuelling confidence it may have a future in the lucrative market as its peers are fading fast.
The South Korean firm and other second-tier vendors such as Nokia and HTC have struggled with losses or razor-thin profits in recent years as consumers have swarmed to Apple's iPhone and Samsung's Galaxy range.
LG's smartphone shipments in the three months to end-September jumped 59 percent on a year ago and 23 percent on the previous quarter to a record 7 million, and the division swung back to a profit.
Analysts caution that the Korean firm still faces daunting challenges, trapped in the low-margin, second-tier end of the market given Apple's stranglehold on premium smartphones.
But while shipments are small compared with the estimated 58 million sold by top-ranked Samsung in the third quarter, smartphones now account for half of LG's total handset shipments and more than 70 percent of mobile revenues.
"Today's results show that it doesn't have to be Apple or Samsung to make profits in smartphones," said Hong Sung-ho, an analyst at I'm Investment & Securities.
"LG won't be able to earn double digit profit margin in handsets as Apple and Samsung do. Still, LG proved it has the potential to stand out among its second-tier peers of Huawei , ZTE, Motorola etc, with its manufacturing competitiveness."
Smartphone shipments helped the handset business report a surprise third-quarter profit of 20.5 billion won ($18.6 million), up from a loss of 58.9 billion won in the previous quarter, and pushed the group to a better-than expected overall profit.
The result marks a sharp improvement from a year ago when a 140 billion won handset loss wiped out profits from LG Electronics' sales of TVs, home appliances and air conditioners, and forced it to sell new shares to raise funds.
LG BACKS OPTIMUS RANGE
In a show of growing confidence, LG recently compared its Optimus G at a product launch with Samsung's flagship Galaxy S III, boasting the Optimus had a longer battery life and a camera that delivered sharper picture quality.
Dubbed "monster phone" in the market, Optimus G is the result of LG's cooperation with its component units, including Apple suppliers LG Display, LG Chem and LG Innotek.
LG said at a briefing on Wednesday it planned to increase spending on marketing to try to overcome its weak branding in smartphones, one of its biggest hurdles.
LG chief financial officer Jung Do-hyun forecast increased shipments in the fourth quarter ahead of a seasonal dip, but said sales were growing faster than expected.
"I think we'll be able to ship over 10 million by the second quarter," he told analysts.
Geoff Blaber, a London-based analyst at British consultancy CCS Insight, said LG's results were reassuring, but the firm still needed to rebuild and strengthen its margins, despite cost cuts and a new range of phones that has helped drive volume growth.
"LG is being pushed deep into the mid and low tiers of the smartphone space due to Apple and Samsung's dominance. LG is adjusting its cost structure accordingly but margins are likely to remain under pressure in the near term," he said.
LG's overall July-September operating profit came in at 221 billion won ($200.3 million) from a 32 billion won loss a year ago, beating a consensus forecast for 172 billion, although the result was down the previous quarter.
Profit from its powerhouse TV division, which competes with larger rival Samsung and Japan's Sony Corp and Sharp Corp was flat as earnings were cut by an increase in spending on marketing to combat a weak economy and stiff competition.
Shares in LG, valued at over $11 billion, closed up 1.4 percent after the earnings announcement, versus a 0.7 percent drop in the wider market.
The stock has climbed 29 percent over the past three months, buoyed by expectations for improvement in its handset business. The KOSPI gained 7 percent during the same period. ($1 = 1103.1000 Korean won) (Additional reporting by Tarmo Virki in HELSINKI; Editing by Richard Pullin)