Samsung Electronics <005930.KS>, the world's biggest maker of memory chips and LCD screens, joined other top tech names to rein in growing optimism over the sector's recovery, even after delivering best quarterly profit in 2- years.

Increasing competition from rivals such as Sony <6758.T> and LG Electronics <066570.KS> and a potential rebound in the Korean currency may put pressure on Samsung's bottomline in the second half.

Thanks to a turnaround in its memory chip business and robust sales of TVs and mobile phones, along with a weak won, shares in the South Korea powerhouse have returned as an investor darling, rallying 50 percent so far this year, beating the broader market's 33 percent gain.

Operating profit may be affected by a possible appreciation of the Korean won and intensifying market competition, said Robert Yi, Samsung's head of investor relations.

LG Electronics, which competes with Samsung in handsets and TVs, said on Wednesday its profit margin in mobile phones could ease in the third quarter due to marketing costs and price pressure.

On Thursday, top software maker Microsoft posted the first-ever drop in annual sales of Windows and offered little hope for a turnaround until next year, while top handset maker Nokia last week cut its profitability and market share forecasts due to tough competition at the top end of the market.

Samsung said it would be prepared for a possible slowdown in the LCD business, where it battles home rival LG Display <034220.KS>, in late 2009 and early 2010, as price competition between TV set makers might heat up.

LCD prices are unlikely to recover much due to signs of a supply glut, said Chang In-whan, chief executive and fund manager at KTB Asset management.

TECHNOLOGY GAP

Still, some investors remain confident in Samsung's ability to withstand any challenge thanks to its sheer size and engineering advances.

In chips, Samsung looks poised to make the most of a nascent recovery in the global memory chip sector following a 2-year-old industry slump, as it enjoys a technological edge over rivals such as Elpida Memory <6665.T>.

Higher chip prices also helped Hynix Semiconductor <000660.KS>, the No. 2 maker of memory chips, post a sharply narrowed net loss on Friday. Hynix is expected to swing to an operating profit in the current quarter.

Samsung Electronics will benefit the most from the current chip sector recovery as it is the market leader in the most advanced mass produced DDR3 chips, said Kim Sung-in, chief technology analyst at Kiwoom Securities.

One of our worries is that its handset unit may not do as well as the markets' hyped-up expectations. Memory chips and flat panels will be the biggest supporter of Samsung Electronics' second half earnings, Kim said.

April-June net profit rose 5 percent to 2.25 trillion won ($1.81 billion) from a year ago, beating an average forecast for 1.68 trillion won in a Reuters poll of 11 analysts.

Samsung's consolidated operating profit came in at 2.52 trillion won, within its earlier guidance of 2.2-2.6 trillion.

Samsung's shares barely moved, ending up 0.74 percent compared with a 0.41 percent rise in the wider market <.KS11>, as the results were in line with guidance provided on July 6.

Samsung shares are underperforming as strong earnings were widely expected following the company's earnings guidance, said Song Kyung-keun, a market analyst at Dongbu Securities.

Shares have gained a lot, and there is some profit taking going on now.

Samsung's semiconductor business posted a consolidated operating profit margin of 4 percent, a strong turnaround from its 13 percent loss margin in the previous quarter.

The industry leader swung to a profit in its LCD business.

But in mobile phones, where Samsung ranks behind only Nokia, the telecom division's profit margin edged down to 10 percent in the second quarter from 11 percent in the first.

(Additional reporting by Kim Yeon-hee, Miyoung Kim, Joungyoun Park and Shin Ji-eun; Editing by Jean Yoon)

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