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Samsung moves focus to components

Electronics giant Samsung plans to plough a record amount of cash into its semiconductor and display panel businesses, hoping to reduce reliance on sales of high-end Galaxy smartphones which are poised to peak after two years of blistering growth.

Samsung, the world's largest smartphone maker, has reported record profits for a sixth straight quarter. But the result still disappointed investors who expected the South Korean firm to book even higher earnings after the Galaxy S4, its latest version of the flagship smartphone, was launched in April. The handset scored 10 million sales in the month after its launch.

Samsung's division that makes and sells handsets, smartphones and tablet computers has been the driving force behind the company's run of bumper profits, with Galaxy smartphone shipments surging every quarter. In the three months ended June 30, the division contributed two-thirds of the company's entire operating profit.

Samsung, which does not disclose its smartphone sales figures, is estimated by research firm IDC to have shipped 72.4 million smartphones in the April-June quarter, compared with Apple's 31.2 million iPhone sales. Samsung's second quarter smartphone sales were double what it sold in the final quarter of 2011, an indication of how fast the company expanded its business and outpaced rivals.

But investors who once cheered the explosive sales growth now fret that consumer appetite for top-of-the-range smartphones is close to being sated. Cutting-edge features have lost some of their lustre as there is now a wide choice of new devices with equivalently fast processors, powerful cameras and crisp roomy displays.

Emerging markets remain a source of growth but the middle classes in such countries flock to cheaper smartphones that are less profitable for manufacturers such as Samsung and Apple. They also face additional competition from Chinese companies which specialise in affordable handsets.

Samsung's share price has dropped 14% since January, cutting 30 billion US dollars from its market value. Robert Yi, senior vice president of investor relations at Samsung, blamed global economic conditions that prompted foreign investors to pull funds from Asian financial markets including South Korea. But many analysts said weaker-than-expected sales and profit from Galaxy smartphones is the key factor behind the tumbling share price. Analysts including those at JP Morgan Chase cut their sales forecasts for the Galaxy S4 by more than 20% in June, predicting shipments would weaken after the first quarter it was on sale.

Samsung said it expected a higher profit contribution from its components businesses in the future. It plans record-high capital expenditure this year, which will help ramp up production of its mainstay memory chips and strengthen its expansion in the mobile processor market.

Out of 24 trillion won (£14 billion) of annual capital spending, it allocated 13 trillion won to the semiconductor business and 6.5 trillion won to its display panel business.

"It's a move to seek all-around growth and balance out what is now centred on sets," which include mobile handsets, said Lee Sei-chul, an analyst at Meritz Securities.

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