Samsung warns of political risks even as Q4 operating profit increased 50%

(Reuters) – Samsung Electronics on Tuesday said it expects profit growth in 2017 despite challenges arising from political uncertainty, after record chip earnings glossed over the Note 7 smartphone fiasco in the fourth quarter.

The South Korean tech giant and Apple rival is embroiled in an influence-peddling scandal surrounding President Park Geun-hye, with five Samsung Group executives already grilled by prosecutors and investigations ongoing.

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“The uncertain business environment such as the changing political landscape in Korea and overseas poses a challenge to the execution of mid- to long-term business strategies, such as M&A and investment decisions and developing new growth engines,” Samsung Electronics said in a statement.

Even so, it flagged higher earnings this year after a slow first quarter, when steeper marketing costs will eat into its bottom line as it tries to rebuild its reputation from the failure of its latest flagship phone.

The world’s top manufacturer of smartphones, memory chips and flat-screen televisions is counting on the booming chip market to continue driving growth and give the mobile business breathing space to rebuild its premium lineup.

The company forecast “stable demand” in 2017 for memory chips, which hit an all-time earnings high in the October-December period.

Fourth-quarter operating profit jumped 50 percent to 9.22 trillion won ($7.93 billion), its highest in over three years and matching prior guidance of 9.2 trillion won. Earnings from the chips business soared 77 percent year-on-year to a 4.95 trillion won. Revenue were flat at 53.3 trillion won.

Analysts said the outlook for 2017 was clouded by uncertainty over the performance of new premium smartphones, succession planning within the controlling Lee family and the fallout from the graft scandal.

Samsung Group scion Jay Y. Lee, 48, is restructuring the sprawling conglomerate in moves analysts see as preparations to succeed his father, Lee Kun-hee, who was hospitalised in 2014.

But the heir-apparent has been classified as a suspect by prosecutors investigating whether the conglomerate paid bribes to a Park associate to win support for a merger of affiliates in 2015.

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“If the head of the group is indicted there will likely be some leadership vacuum, which does present a risk,” Alpha Asset Management fund manager C.J. Heo said.

Buyback

Samsung said it planned to buy back 9.3 trillion won worth of shares this year, in response to calls for improved shareholder returns. In November it said it would return 50 percent of its free cash flow for 2016 and 2017 to investors.

In its mobile business, operating profit rose 12 percent to 2.5 trillion won in the fourth quarter as models such as the Galaxy S filled the void following the discontinuation of the fire-prone Note 7 in October.

Samsung said on Monday that defective batteries caused the Note 7 handsets to overheat and catch fire, and indicated that it may delay the launch of its next premium Galaxy S smartphone as it overhauls its product safety systems.

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Executives declined to give a launch date for the S8 handset when asked on Tuesday.

While the mobile business is struggling, the positive outlook for memory chips used in mobile devices and OLED televisions propelled Samsung’s shares to a series of record-highs this month.

The stock traded flat versus the wider market’s 0.2 percent fall as of 0305 GMT on Tuesday.

($1 = 1,163.0000 won)

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(Reporting by Hyunjoo Jin and Se Young Lee; Editing by Stephen Coates)