Samsung Electronics' <005930.KS> record quarterly profit failed to please investors as a weak European economy looks set to weaken demand for flat screens and chips, hurting profitability at the world's largest memory chipmaker.

The company, three times bigger than rivals such as Sony Corp <6758.T> and Nokia by market value, estimated its April-June operating profit to come above market expectations, mainly helped by robust sales of chips and liquid crystal display (LCD) panels.

The second straight record profit would almost double from a year ago but the South Korean group might be in for a rough ride later this year.

The second half could be a problem and that's because demand in Europe might slow and hurt sales of memory chips and (flat screen) panels, said Michael On, manager director of Beyond Asset Management in Taipei.

Its profits in the second half won't be as good as the first half, he said on Wednesday.

Shares in Samsung, Asia's most valuable technology firm worth $92 billion, have fallen 11 percent over the past three months from a record high, lagging the local market's <.KS11> 2.4 percent drop. The shares ended 0.8 percent lower on Wednesday in a weak broader market <.KS11>.

Samsung, the first major global technology firm to issue preliminary second quarter estimates, had previously outlined a record $15 billion spending plan to turn up the heat against hometown rivals including LG Display <034220.KS> and Hynix Semiconductor <000660.KS>.

Profits will peak out in the third quarter and then gradually decrease from the fourth quarter, said Jay Kim, analyst at Mirae Asset Securities.

There are a few risk factors that could hit earnings, such as a slow recovery in the smartphone business, a potential surge in the won and macroeconomic conditions, but overall the picture is quite positive.

The heavy investment underscores an aggressive push toward new technology by Lee Kun-hee, who returned as Samsung chairman in March and has orchestrated its successful foray into the chip business since the early 1980s.

Lee, 68, has repeatedly warned most businesses and products that represent Samsung today would disappear from the market in 10 years and the company needed to start again.

Samsung, the world's largest maker of flat screen and TVs and also the No.2 producer of mobile phones, expects second-quarter sales at the midpoint of a 36 trillion and 38 trillion won range, slightly below market expectations of 38 trillion won.

It did not provide a detailed guidance breakdown for each division but sales of liquid crystal display flat screen panels also remained strong thanks to robust demand from TV producers betting on healthy demand growth during this summer's World Cup.

Last week, a senior Samsung official said he expects the firm's flat-screen TV sales target to be around 45-50 million units from the previous 39 million to reflect strong demand for premium products such as 3D TVs and LED-backlit LCD TVs.

BUMPY SECOND-HALF

Analysts expects record results in the current quarter but warn Samsung's profits will fall 20 percent in the fourth quarter. For 2010, analysts estimate the firm's operating profit to rise 70 percent on average to a record 18.5 trillion won.

Sluggish demand from Europe and a nearly 10 percent tumble in the euro may have already reduced Samsung's earnings from telecom by nearly half, analysts said, as the region is estimated to make up 30-40 percent of Samsung's TV and handset sales.

Samsung is leading its competitors in earnings recovery in a robust consumer electronics market but its emerging smartphone business, is far lagging behind Apple Inc's smash hit iPhone and may further drag overall growth in the second half as it ramps up spend to increase market share.

Samsung is launching the Galaxy S, its answer to the latest version of iPhone 4, globally with around 100 carriers including the top five U.S. carriers.

It received a strong response in the domestic market, selling more than 200,000 units in less than two weeks but Samsung has yet to give out global sales data.

Samsung will aggressively promote the Galaxy series but it would take a while to win a sizeable market share, as it still needs further improvement in both hardware offerings and application experience to challenge iPhone, said Harrison Cho, an analyst at KB Investment & Securities.

The Galaxy S will help Samsung boost shipments sharply but its profitability will go into the opposite direction.

Samsung reports final quarterly results later this month.

($1=1222.0 Won)

(Additional reporting by Suh Kyungmin and Jungyoun Park in SEOUL and Baker Li in TAIPEI; Editing by Jonathan Hopfner and Anshuman Daga)

Electronics Samsung