Samsung Electronics Co Ltd <005930.KS> said it was on track to top market forecasts with a record quarterly profit thanks to a strong recovery in its flagship chip business, the world's largest.

Better-than-expected demand for personal computers and limited supply growth by smaller players have lifted prices of Samsung's mainstay memory chip prices, raising expectations for record annual profits and pushing its shares to an all-time high this week.

But Samsung, also the world's largest maker flat screen TVs, faces growing risks later this year, as it and rivals increase investments in the panel display and chip businesses, which could derail the recovery in the technology sector.

I believe earnings would peak in the third quarter, but there's risk that DRAM prices' strength may continue and hit demand growth. DRAM supplies will also grow more toward the second half, said Song Myung-sup, an analyst at HI Investment & Securities.

Among key challenges this year is the foreign exchange rate -- not only the won/dollar but also a falling won/yen, as competition with Japan is heating up on flat screen TVs.

Samsung shares fell 0.6 percent to 865,000 won after hitting a fresh high of 875,000 won. The stock, valued at around $110 billion, has risen almost a fifth in the past five weeks.

CHIPS LEAD RECOVERY

Samsung, which overtook Hewlett-Packard last year as the world's biggest electronics firm by revenue, estimated its January-March consolidated operating profit at a record 4.3 trillion won ($3.83 billion), higher than a consensus forecast for 4.1 trillion won polled by Thomson Reuters I/B/E/S.

Sales were seen at 34 trillion won, in a 33-35 trillion won range.

Analysts expect profits from the chip division, which swung to a deep loss a year ago and then made a spectacular turnaround in the third quarter, would account for half of Samsung's consolidated first-quarter operating profit.

Detailed quarterly results are due later this month.

The estimated quarterly operating profit would mark around a seven-fold increase under newly introduced K-IFRS accounting rules Samsung is using from this year, versus a revised 59 billion won profit a year ago.

It will be the first set of results since Choi Gee-sung took over as chief executive in December.

Choi, the former head of Samsung's mobile and flat screen divisions, is known as a marketing guru in Samsung. He literally built its semiconductor marketing in Europe from scratch in 1980s, reportedly boosting sales from just $1 million to $125 million in three years.

Key risks are its television and handset business. Its TV unit is facing intense competition with Sony, as Sony is aggressively cutting its flat screen television prices. The lagging performance of its smartphone business will also weigh on its handset unit's profit margin, said an analyst, who declined to be identified.

Sony <6758.T>, which is falling behind both Samsung in LCD TVs and Apple Inc's iPod in portable music players, reported a first profit in five quarters in February as a restructuring at the Japanese electronics maker starts to pay off.

Samsung competes with Hynix <000660.KS> and U.S. Micron in memory chips, Finland's Nokia and LG Electronics <066570.KS> in mobile phones, and Sharp <6753.T> and Sony in flat-screen televisions.

(Additional reporting by Rhee So-eui and Jungyoun Park; Editing by Lincoln Feast)

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