[Issue Plus] Samsung Electronics' 3rd Quarter 'Earnings Shock'... Apologizes for "sending because I didn't expect it."

■ Host: Lee Yeo-jin, anchor Jang Won-seok
■ Starring: Kim Kwang-seok, adjunct professor at Hanyang University

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information. Please specify [YTN News PLUS] when quoting.

[Anchor]
Samsung Electronics has released a report card that did not meet market expectations with an operating profit of KRW 9 trillion.

[Anchor]
The head of Samsung Electronics' semiconductor company made an unusual apology. Let's point out major economic issues with Kim Kwang-seok, an adjunct professor at Hanyang University. Please come in.

[Anchor]
Although market expectations were initially around KRW 14 trillion and then downgraded to KRW 10 trillion, they fell far short of expectations. What's going on?

[Kim Kwangseok]
First of all, it seems that a cold wave has already hit the semiconductor market. First of all, D-RAM semiconductors for smartphones and PCs are used a lot, but demand for general-purpose D-RAM semiconductors is slowing down a lot. So, since demand is slowing down, Samsung Electronics has nothing to do. On top of that, another cold wave is China.

As China continues to develop its own DRAM semiconductors from Korea and is developing them on its own, it is very burdensome for Samsung Electronics to occupy a large part of the Korean market. The most important thing is the DS sector. Of the current performance, it is about 9 trillion won, of which about 5 trillion won is in the DS sector. Of the operating profit of about 9.1 trillion won, about 5 trillion won is in the DS sector.

Since the DS division is 5 trillion won, it can be seen as a semiconductor division, but SK Hynix has about 7 trillion won in the semiconductor division. So maybe the symbol of K semiconductor was Samsung Electronics, but now it is being pushed back by SK Hynix. There will be an occupancy DRAM, but one important part is HBM, and what is essential for the artificial intelligence AI semiconductor we know to be driven is HBM high-bandwidth memory semiconductors, but Samsung Electronics is not showing good results in the HBM market. As this falls below market expectations, operating profit is falling a lot.

[Anchor]
Semiconductors account for a large portion of operating profit, which could be dangerous in a way.

[Kim Kwangseok]
Of course. In the case of semiconductors, for example, we can expect the size of the semiconductor market to grow in the mid to long term, but as many major domestic and foreign companies make new investments, our demand for semiconductors could increase. If the economy slows down or the global pandemic economic crisis, demand could slow down significantly. If demand for semiconductors slows down, exports of Samsung Electronics, which relies entirely on semiconductors, and Korea, which relies heavily on semiconductor exports, could be greatly reduced. As such, a system that relies entirely on certain items may be dangerous. It can be good when it's good, but it can also be quite dangerous in a dangerous phase.

[Anchor]
But sales have increased. And hasn't operating profit actually decreased, but increased? Nevertheless, could you please summarize why you used the expression "earning shock"?

[Kim Kwangseok]
If we usually call it an earnings shock, we can substitute it in the stock market. Usually, when substituting for the stock market, is it more than the previous performance? This can also be important. As you can see, based on the existing performance, that is, sales, it is higher than the previous performance. Sales increased from the third quarter of 2023 and from the first and second quarters of 24.

However, operating profit was lower than in the second quarter. This is another part that we need to keep in mind. What's important is the provisional value, but expectations for the provisional value in the third quarter exceeded 10 trillion won. There was an expectation of about 10.8 trillion won. Then, wouldn't the stock price formed in the stock market have been formed according to operating profit equivalent to 10.8 trillion won?

However, since operating profit of about 9 trillion won was announced, not 10.8 trillion won, it was naturally regarded as an earnings shock because operating profit was announced that did not meet the market's expectations. Perhaps the most important thing is that the stock price is formed in line with the market's expectations, and the stock price is adjusted below expectations when operating profit that does not meet expectations is announced, so it can be interpreted that earnings shock can be applied at that time.

[Anchor]
So the head of Samsung Electronics' semiconductor company apologized, isn't this very unusual?

[Kim Kwangseok]
It's an unusual thing. In fact, it's not common to apologize when a company doesn't perform well, doesn't it? For example, if a moral hazard occurred or caused a stir in society, we can apologize, but the fact that Samsung Electronics Vice Chairman apologized directly is an area of considerable symbolic significance to the Korean economy and is an area where many investors are interested, so Vice Chairman Jeon Young-hyun has announced that he will make remarkable growth that meets the market's expectations while serving as the head of the DS division.

I tried, but it didn't follow as much as I tried. I've been to Samsung Electronics' semiconductor research institute, Samsung Electronics' business department, and Hwaseong Industrial Complex several times.That effort and movement is very dominant. That's clear. However, as much as the effort was made, it did not follow that much, so it delivered an apology message for investors who expected it. It can also be interpreted as an announcement of a willingness to actively grow sales and operating profit by using this as a blessing in disguise.

[Anchor]
Samsung Electronics' operating profit increased from last quarter, but LG Electronics' operating profit decreased. But sales are also at an all-time high. How did you come to this?

[Kim Kwangseok]
As you said, sales increased by 10.7%. Sales increased, but operating profit decreased by 20.9%. It's unusual. Therefore, it is understandable if operating profit decreased due to a decrease in sales, but only sales increased and operating profit decreased. How can this be interpreted, it can be interpreted that sales have increased, but costs have increased a lot. Then what cost has increased a lot? Sea freight has increased a lot.

Marine freight and marine insurance premiums have increased a lot. What's 24 years now? Geopolitical unrest, the Middle East war. As a result, many companies that export using sea transportation are seizing shipments near the Middle East, especially in hydrological areas where many shipping passes. As a result, it does not pass through certain areas, canals, and detours. If the shipment is diverted, you have to pay a lot of insurance premiums to defend against the capture of the shipment, and if you detour, you have to cross the continent.

Then, sea freight and crude oil prices will inevitably be high. These things become a cost. Logistics costs are increasing a lot. Marketing costs are also increasing a lot. Also, the huge change in home appliances is the transition from consumption to subscription. However, when you consume it, you consume durable goods at once, so sales are generated immediately, but if you use a subscription service, you can get some of it like so-called rental fees. Because it has such an effect, marketing expenses are generated excessively in a short period of time. Let's confirm that it appears as an effect of reducing operating profit.

[Anchor]
The results of Korea's leading semiconductor companies are not good right now, so can the performance rebound in the fourth quarter?

[Kim Kwangseok]
I think I should say sorry, too. I would like to suggest that it would be difficult to expect remarkable performance in the fourth quarter. Because the Bank of Korea's Monetary Policy Committee results will be announced this week.Ma said in the Bank of Korea's economic outlook report and my economic outlook, the engine of external economic growth in Korea is already running out. The growth engines of the external and export sectors had a significant impact until the first half of 24 and the middle of 24, and among exports, exports of semiconductors, automobiles, and shipbuilding sectors supported Korea's economic growth.

Domestic demand has not recovered at all. Only the external surgery was recovered. However, the growth contribution of foreign and export sectors is also declining. As major countries around the world are saving new investment, and the DS sector and also, as demand for semiconductors slows down across semiconductors, home appliances, and other sectors, we are worried that our export performance of Samsung Electronics could stagnate. Therefore, I would like to carefully express my opinion that it is a situation in which we should actively focus on stimulating the domestic economy rather than the export sector.

[Anchor]
Some predict that winter will come to the semiconductor market, while others say that the semiconductor market is solid, but Samsung Electronics is experiencing winter alone.

[Kim Kwangseok]
It seems that Samsung Electronics is particularly experiencing winter. It can be judged that it is experiencing a more severe cold. First of all, the market size of semiconductors does not decrease. The global semiconductor market size is expected to increase more this year than last year and next year than this year. In the

semiconductor market, the system semiconductor market and the AI semiconductor market are actually exploding. However, the key is who will win this system semiconductor or AI semiconductor. Unfortunately, Samsung Electronics has been missing its market share in this sector so far, and has not been able to close the gap between China and the DRAM sector. I would like to reiterate that the semiconductor market and the AI market itself are growing very strongly, and I would like to suggest that it is time for the government's active support and companies to take more active steps so that major Korean companies can expand their market share.

[Anchor]
The U.S. compares too much with Micron's earnings surprise and SK Hynix, so what measures should Samsung Electronics take?

[Kim Kwangseok]
As I've told you, I want to throw the English expression AI is Everywhere. AI is really extremely in our lives. Everyone, there are people who are watching this broadcast and people who are watching it on TV. However, some people turn on the TV with a remote control even if they watch it on TV, but some people turn on the TV with AI. Please turn on the TV. There are also people watching TV on YouTube. Then how did you watch this video on YouTube? The AI algorithm would have recommended this video.

You're already hearing what I'm saying through AI. AI is everywhere. However, AI semiconductors are essential for AI to operate. And HBM is essential for AI semiconductors to operate. So this means that the market can continue to grow, so will our company secure that market?

It depends on whether to dominate the market or not, but I would like to give my opinion unfortunately that SK Hynix is firmly controlling the HBM market, while Samsung Electronics has not yet produced results in that area.

And in this area of HBM, platform companies are competing with additional HBM next-level models, and importantly, platform companies such as YouTube, Google, YouTube, Meta, and various platform companies are taking internalization strategies, saying that they will develop AI and AI semiconductors on their own. I would like to suggest that the market is growing to the extent that AI and AI semiconductors are competing each other, but we are at war over who will secure this market.

[Anchor]
In such a fierce competitive market, Samsung Electronics and 100,000 electronics have been shouting, "How many people are going to go to Samsung Electronics until a few months ago?", but now it's going up to 50,000 won. When will it be to look forward to 100,000 electronic again?

[Kim Kwangseok]
First of all, the most important thing is that Samsung Electronics plays a very important leading role in Korea's KOSPI, so considerable macroeconomic impact cannot be ignored. So the hedging phenomenon, the Middle East war. Samsung Electronics is directly hit by the risk aversion phenomenon of the Middle East war. In addition, Samsung Electronics' performance, including semiconductors, is combined.

And the signals of interest rate cuts, how these things work positively. In particular, signals that Samsung Electronics has secured plans to supply HBM to the most representative Nvidia, when these are announced. And if active interest rate cuts and the easing of the Middle East instability that we are really looking forward to are combined together, we can expect to go in that direction.

[Anchor]
Let's look at the next topic. The FSS has expressed its willingness to intervene as the tender offer of Korea Zinc, which is in a management dispute, is now overheating. What do you think?

[Kim Kwangseok]
First of all, Korea Zinc and MBK Partners have submitted a petition between the two sides. Since they have submitted petitions asking each other to investigate the other, they are mainly spreading false information in the contents of their authenticity. The most representative dissemination of false information was that it was spreading false information, saying that it planned to acquire treasury stocks at a higher price than the open purchase price.

That's why the Financial Supervisory Service has no choice but to launch an investigation. And as you said so, the stock market could plunge in the middle or immediately after the end of the tender offer. Looking at past cases, if you look at the past cases of open purchase, you can see many cases in which the stock market plummeted in the middle or immediately after the end. Then, many individual investors may participate in or show interest in investing in this overheating pattern, but if you don't do anything like this, individual investors may suffer greatly when the price plummeted.
I can interpret it as a kind of warning or warning message about these things.

[Anchor]
Not long ago, on the day the professor came out, Youngpoong and MBK raised the open purchase price significantly, but they raised a lot again this time.

[Kim Kwangseok]
That's right. First of all, it's a management dispute. Tender buying is different from trading on the exchange. So what you usually invest in stocks is called an exchange transaction, and an open purchase refers to the process of purchasing stocks from an unspecified number of people outside the office that are commonly used to secure management rights for management disputes.

So, in the process of naturally acquiring management control, as you can see, we raise the bid price to each other. So it went up to 830,000 won. As the tender price goes up, the stock price actually traded on the market tends to go up as well.E I would like to suggest that you will need to be very careful in making investment decisions because it could go into a freefall depending on how it unfolds.

[Anchor]
There were also concerns that the company's competitiveness would weaken as astronomical money went into securing management rights.

[Kim Kwangseok]
I think I'm kind of sad about these things. I think the role our companies should play in the Korean economy is to constantly secure new growth engine industries for new businesses, and to focus a lot of investment funds on them as an effort to secure new technologies. I think it will also help the virtuous cycle of the Korean economy.

I said a lot about semiconductors.Obviously, the AI and AI semiconductor markets will grow. That's how it has to grow. However, considering that the conflict between Korea Zinc and Youngpoong is less used to advance into the future growth engine industry as a result of the astronomical tender price due to management disputes, as I suggested that the joy and sorrow could be divided depending on who secures the market.

[Anchor]
In the midst of this, a very important meeting is this Friday the 11th, and the Monetary Policy Committee will be held, and the interest rate will be cut, right?

[Kim Kwangseok]
I already gave my opinion while interviewing the media, but I gave my opinion on the possibility of a rate cut at 60%. Especially importantly, the sluggish domestic demand is serious. The sluggish domestic demand is too serious. Another thing is the inflation rate. The inflation rate is now below 2%. 1. If it's 6% inflation, you have to worry about deflation.

Then if we keep the 3.5% interest rate for another month, and the inflation rate drops further, we could go into a lost 30 years. To avoid such deflationary concerns, we now cut interest rates. However, there is a stumbling block. Household debt growth and property prices rise. The biggest concern is the increase in household debt and the rise in real estate prices and side effects that will occur when interest rates are cut.

Just as the Bank of Korea's governor and the Strategy and Finance Minister recently delivered a message of cooperation during a town hall meeting, the Bank of Korea should cut interest rates to respond to recession and deflation concerns, but there could be side effects. The Ministry of Land, Infrastructure and Transport, for example, should come up with active real estate regulations and supply measures, and the financial authorities, such as the Financial Services Commission, should focus on resolving the side effects from the perspective of the financial authorities even by strengthening more aggressive financial regulations, such as strengthening DSR regulations or applying stress DSR level 3.

Because these two things, I think the Bank of Korea will reveal that we cannot just wait to prevent deflation concerns and sluggish domestic demand. So, even if it's not this Friday, we might think that we can do it again next month even if we can't because of these two obstacles, so I think it's time for the financial authorities and the financial authorities to come up with concrete countermeasures to quickly resolve these two side effects.

[Anchor]
There are two remaining members of the Monetary Policy Committee this year, so how much do you expect the end-of-year interest rate?

[Kim Kwangseok]
Currently, the Bank of Korea's base interest rate is 3.5%. I think we'll cut it once. So I think we're going to cut interest rates from 3.5 to 3.25%. That's why I think we will cut interest rates this Friday or in November, and we can't help but think about concerns about the real estate market or household debt explosion enough to cut rates both times, so we'll cut rates once and slowly following 2025.

[Anchor]
I see. I pointed out major economic issues with Kim Kwang-seok, an adjunct professor at Hanyang University. Thank you.