Fitch Revises Outlook to Negative on Samsung & LG Electronics

Fitch Ratings says that it has revised its rating Outlook on Samsung Electronics (SEC) and LG Electronics (LGE) to Negative from Stable. At the same time, Hynix Semiconductor's (Hynix) Long-term foreign currency (FC) IDR and senior unsecured debt ratings, which are currently at 'B+', remain on Rating Watch Negative (RWN).

The rating actions reflect Fitch's view that the negative impact stemming from the global economic slowdown on the three Korean technology names is likely to deepen as 2009 progresses. Fitch now expects that the economic downturn currently affecting Korea and its major export markets will be protracted, lasting for the next 18 months. Reflecting the depressed state of the panel display industry, which both SEC and LGE are also heavily exposed to, revenue for AU Optronics in Taiwan declined by 62% yoy in Q408, and its operating margin plunged to -44% compared with a gain of 22% a year earlier.

While the sharp depreciation of the Korean currency (KRW) during Q408 helped both SEC and LGE record positive yoy sales growth of 18% and 14%, respectively, meaningful declines in unit prices across all major business areas (semiconductors, liquid crystal/plasma panel displays and handsets) coupled with higher raw material and marketing costs resulted in both companies reporting an operating loss in Q408, and significantly in SEC's case its first ever quarterly loss since it commenced reporting on a quarterly basis in Q300. Notably, both companies gave up providing key operating and financial guidance for 2009, citing low visibility in demand across all business areas.

Accordingly, Fitch does not expect SEC and LGE's recent market share gains to result in improved profitability, at least in the short term. Moreover, the agency stresses that concern over globally weak demand for consumer electronics products is a vitally more important consideration at this juncture.

Samsung

The revision to Negative Outlook reflects the agency's view that SEC's recent poor operating performance in Q408 is likely to continue during FY2009 and possibly FY2010. While SEC's consolidated revenue increased by 18% during Q408 with the help of the sharp depreciation of the KRW, its operating profit margin declined to -2.0% from 9.5% in the same period a year ago. The losses mostly stem from its struggling semiconductor and LCD panel business division. Although the agency believes that possible consolidation in the DRAM industry and substantial capex cuts by LCD panel players during H208 may help supply side dynamics, the global financial crises and the negative GDP growth currently evident in both Korea and its major export markets suggests that overall demand for PC and display components will remain depressed for some time and accordingly the DRAM and display panel industries are unlikely to recover in 2009.

Nevertheless, Fitch does not expect SEC to encounter any financial difficulties in the near future, in light of its extremely strong financial flexibility. However, in the context of the highly cyclical nature of the semiconductor and LCD industries, the prospect of SEC reporting ongoing quarterly operating losses while maintaining substantial capital investments, even after a significant reduction of the same, implies that SEC's credit metrics are likely to weaken. Accordingly, Fitch will consider downgrading SEC's Long-term FC IDR if the current weak memory semiconductor and LCD panel pricing environment is protracted and, together with the company's capital investment policy, results in a less robust credit profile.

LG

LGE's Outlook was revised to Negative from Stable on the expectation that the weak operating and financial performance of the company in Q408 is likely to continue during FY2009 and FY2010. As per the case of SEC, the sharp depreciation of the KRW helped LGE's revenue increase during Q4, but its operating profitability deteriorated into negative territory. LGE's key business divisions are experiencing similar difficulties as SEC's major business divisions. Its operating profit margin in the handset businesses deteriorated to 5.2% in Q408 from 8.8% in Q407, and LG Display (not rated), LGE's 37.9%-owned LCD panel producing subsidiary, reported a -6.9% operating loss in Q4 2008 versus a 20.1% operating profit in Q407. Fitch also noted that LGE's home appliance division, which previously has been a steady cash cow, is likely to have recorded a negative operating profit margin in Q408 even after adjusting for one-off expenses.

LGE's Long-term FC IDR could be downgraded if ongoing depressed demand levels for its major products, including handsets, TVs and LCD panels, leads the company to report negative EBIT margins on a quarterly basis.

Hynix

Hynix's sales declined by 18% yoy in Q408, with its EBITDA margin turning to negative 4.6% (versus positive 17.4% a year ago), and its operating margin declining steeply to negative 52% (versus negative 17% in Q407). Largely in anticipation of Hynix's poor operating and financial performance during H208, the agency downgraded Hynix to 'B+' from 'BB' and placed it on RWN in December 2008. Hynix's ratings are likely to be revisited once the company has released its Q109 earnings and consolidated full year end result for 2008 in April 2009.

Posted to the site on 11th March 2009