Samsung stares at use-it-or-lose-it cash dilemma

A man speaks on his mobile as he walks past an advertisement of the Samsung Galaxy Fold smartphone in central Kiev, Ukraine December 6, 2019. REUTERS/Gleb Garanich - RC2QPD9R9X9J

HONG KONG, Oct 7 (Reuters Breakingviews) - Too much cash can be a problem sometimes, especially in South Korea. The local currency has lost nearly a fifth of its value against the dollar since the start of the year. Samsung Electronics (005930.KS), meanwhile, may find that deploying its $77 billion war chest is getting trickier.

Cooling demand for semiconductors and smartphones is hurting Samsung's bottom line. The company estimates third-quarter operating profit at 10.8 trillion won ($7.7 billion), down 32% from a year earlier and below analysts’ expectations. Prices for so-called DRAM and NAND memory chips, a highly cyclical sector that's Samsung's biggest profit driver, have yet to bottom out. Analysts at JPMorgan forecast average DRAM prices will fall 12% this year and 18% in 2023.

A crashing won should help ease some of the pain at South Korea's top exporter. But at the same time, its ballooning net cash pile is quickly losing value in dollar terms, cutting the size of the cheque it could write for overseas M&A or investments. That adds a wrinkle to the company's ambitions to catch up to rivals in new areas and cut its reliance on memory chips.

Expectations for boss Jay Y. Lee to hunt for deals are high: just this week, for example, SoftBank (9984.T) founder Masayoshi Son's visit to Seoul fuelled speculation of a Samsung investment in its British chip design company, Arm. The South Korean group's planned investments in the United States, including a $17 billion factory in Texas, will probably play a big part in helping it catch up to rival TSMC (2330.TW) in advanced chipmaking.

Samsung's shares are down by nearly 40% since hitting a peak last year. To appease disgruntled investors, Lee has set up a task force dedicated to improving shareholder returns, local media reported. Giving some of the cash back, rather than spending it all, is one option. Either way, the company is staring at a use-it-or-lose- it dilemma.

Samsung's war chest has lost value in dollar terms

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to add chart.)

CONTEXT NEWS

South Korea's Samsung Electronics on Oct. 7 announced earnings guidance for the third quarter of 2022. The company expects operating profit in the three months to September to be 10.8 trillion won ($7.65 billion), a decrease of 32% from the same quarter a year earlier.

Samsung is due to release detailed earnings on Oct. 27.

Separately, Samsung's de facto leader Jay Y. Lee has called for the company to create a task force dedicated to improving shareholder value, The Korea Economic Daily reported on Oct. 4, citing sources.

Editing by Antony Currie, Una Galani and Thomas Shum

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.