Home >Companies >People >Sony Q2 fuels recovery hopes; Samsung outlook tough

Tokyo/Seoul: Sony Corp’s improved outlook and forecast-beating results showed the consumer electronics giant is reaping the benefits of years of cost cuts, but tough economic challenges lie ahead.

Sony’s results came as South Korean rival Samsung Electronics broke a trend of two consecutive quarters of record profit and braces for a challenging outlook on all fronts.

“Sony’s results far exceeded market expectations, reflecting a better product mix and cost-cutting. Based on the results, the company’s cost-cutting measures should be able to support profit growth going forward," said Chiang yi-Chien, manager of Japan and Korean fund at Prudential Financial in Taipei.

“We like the results and we’ll consider buying Sony shares," said Chiang, whose fund sold its holding in Sony shares a while ago.

Quarterly profit at Panasonic Corp, which vies with Sony for the title of Japan’s largest consumer electronics company by market value, also jumped, but stuck to its annual outlook, citing signs of weakness in the European and US markets.

The results underscore a recovery across much of the electronics sector, which is reaping the gains of cost-cuts made in the wake of the financial crisis and benefitting from government programmes such as tax incentives in Japan on energy-efficient goods.

However, the optimism is laced with caution due to signs of weakness in advanced economies. Sony lifted its profit forecast but lowered its annual sales estimate, while analysts warn Samsung’s profits will fall in the current quarter.

Profits up, Outlook Raised

“Looking forward we see the business environment getting harsher, partly due to the economic uncertainty in US and Europe," Sony chief financial officer Masaru Kato told a news conference in Tokyo.

Sony attributed the strong quarterly result, double market expectations, to strong sales of Vaio personal computers and PlayStation 3 game consoles, after the recent launch of its Move motion-based videogame controller to challenge Nintendo’s Wii.

Sony, which competes with Samsung and LG Electronics in TVs and with Nintendo and Microsoft in games, reported an operating profit of ¥68.65 billion ($847 million) for July-September, against a loss a year ago.

Sony lifted its annual profit estimate to ¥200 billion from ¥180 billion, above the market consensus of ¥187 billion, but trimmed its revenue forecast by 3% to ¥7.4 trillion, citing a firmer yen.

“I feel better after the results and after the restructuring. Sony is moving in the right direction and is getting better," said David Huo, fund manager at RBC Asian Equity Fund in Hong Kong. “It was a good sign to see it revise up guidance, and it gives a vote of confidence in its business."

Sony shares have fallen about 26% since hitting a two-year peak in March. The Tokyo market’s electrical machinery subindex is down about 13%. Sony shares closed down 1.4% ahead of the results announcement.

Cutting costs, Prices

Sony also pointed to big gains from cost savings, which suggest the company is making progress on the reforms of chief executive Howard Stringer, who has been struggling to boost the company’s margins since taking the helm five years ago.

“It’s quite impressive to see Sony swinging back to profit when its business conditions were really tough, with the yen surging and TV makers cutting prices to battle weak demand," said Kim Yeong-Jun, analyst at LIG Investment & Securities in Seoul.

“I think it’s the result of Sony’s aggressive restructuring and cost cuts implemented in the past couple of years ... but even Sony will see profit margins going down again in the current quarter because of intensifying competition."

Samsung, the world’s top maker of memory chips, reported a 4.9 trillion won ($4.36 billion) operating profit for July-September, matching a consensus forecast of 12 analysts polled by Reuters.

But analysts expect Samsung’s profits to drop 25% in the current quarter, hit by slumping demand for chips and screens and with growing price competition set to hit flat TV margins ahead of the year-end shopping season, analysts said.

“A slowdown in the memory chip sector is ahead as DRAM prices are set to fall, probably through the first quarter of next year," said Hwang Yoo-shik, an analyst at SK Securities.

“But new devices such as the tablet PC could be Samsung’s next big thing and may help offset a slowdown in other businesses ... I expect Samsung’s earnings to pick up from the first quarter of next year."

Shares in Samsung, Asia’s most valuable technology firm with a market value of $112 billion, have dropped about 5 percent so far this year, lagging a 14 percent gain in the wider market.

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