LG Elec Q2 profit surges, strong margins to ease

By Marie-France Han and Rhee So-eui

SEOUL (Reuters) - LG Electronics Inc (066570.KS) posted a record quarterly profit on strong mobile phone and TV sales, helping it win market share from rivals Nokia and Motorola but concerns over weaker margins may stall a rally in its shares.

The world's No.3 mobile phone maker is benefiting from a weak local currency and a strong lineup of flat-screen TVs, appliances and phones, including new premium products such as the multimedia touch screen phone ARENA.

LG, which battles Samsung Electronics (005930.KS) and Sony (6758.T) in liquid crystal display (LCD) TV, is also enjoying robust sales and improving margins in flat-screen TVs.

But there are doubts about whether LG could maintain such strong earnings growth, after LG said third-quarter handset margins could slip slightly on marketing costs and lower-end phone sales.

"The second quarter is usually the peak season for LG," said Choi Hyun-jae, an analyst at Tong Yang Securities. LG's air conditioner unit, the world's largest, usually reports highest sales and margins in the second quarter.

"Global economic risks remain and fierce marketing competition among new products could also result in price reductions," Choi said.

The global environment was improving but not translating into better demand, LG executives told an investor conference.

LG shares ended 1.1 percent lower against a 0.3 percent gain in the broader market . The strong results had been largely priced in, analysts said, with the stock up about 76 percent so far this year versus the KOSPI's 32 percent gain.

PHONE MARGINS

LG, which trails Nokia (NOK1V.HE) and Samsung in cellphones, sold a record 29.8 million handsets in the second quarter, up from 22.6 million units in January-March.

It posted an 11 percent operating profit margin in handsets, compared with 6.7 percent in the first quarter, a figure Choi said was "pretty remarkable."

The company said the margins would dip.

"LG Electronics expects sales to grow over 10 percent year-on-year (in the third quarter) as demand for LCD TVs and mobile phones continues to expand, with profitability comparable to last year's level," LG said in a statement on Wednesday.

The company's operating profit margin was 7.8 percent in the second quarter and was at 4.3 percent for all of 2008.

Last week, Nokia downgraded its expectations for second-half underlying operating margin to the first-half level of 11.3 percent. Nokia also slashed market share forecasts amid price competition led by Samsung and LG.