[Click eStock] "LG Electronics, Painful TV Business Slump... No Short-Term Upside Factors"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] Korea Investment & Securities maintained a buy rating on LG Electronics on the 28th but lowered the target price by 14.2% to 120,000 KRW. This is based on the analysis that recovery in earnings will be difficult due to deteriorating TV demand.

For the third quarter, the company's sales are expected to be 19.9 trillion KRW and operating profit 877.6 billion KRW, in line with market expectations of 20 trillion KRW in sales and 888.9 billion KRW in operating profit. Excluding LG Innotek, LG Electronics' performance is projected at 15.6 trillion KRW in sales and 434.7 billion KRW in operating profit. The Home Appliance (H&A) segment performed well by increasing market share despite a sluggish industry, but the HE segment, which includes TVs, is expected to underperform with a growth rate of 5.9%, below the previous forecast of 11%.

Cholhee Jo, a researcher at Korea Investment & Securities, said, "For LG Electronics, which sells high-end TVs, advanced markets such as the US and Europe are important," adding, "The sharp interest rate hikes have rapidly reduced TV demand in these advanced markets, which is negative."

A rebound in TV shipments is expected to be possible only by the 2nd or 3rd quarter of next year, considering the base effect. Cost improvements from the decline in TV panel prices are offset by the strong dollar, and the HE division's weak operating profit margin (0.5%) is expected to continue into the third quarter. Researcher Jo explained, "Considering this, we are lowering the operating profit estimates for the HE division by about 14.3% for this year and 21.9% for next year compared to previous estimates," adding, "The current stock price is at a historical low with a PBR of 0.7 times for this year, but there is no short-term momentum for stock price increase."

Going forward, market attention is expected to focus on the VS (Vehicle Solutions) division. As a mid- to long-term growth industry, this division succeeded in turning profitable in the second quarter. In the second half of the year, sales are expected to increase by 20.4% quarter-on-quarter due to higher operating rates of automobile OEMs, and the key point in the third quarter results will be whether the division can record operating profits for two consecutive quarters as the proportion of high-profit projects in the sales mix increases. Researcher Cholhee Jo analyzed, "The company's goal is to increase the order backlog from 60 trillion KRW at the end of last year to 65 trillion KRW by the end of this year," adding, "Confirming the order backlog at the end of the third quarter will be an indicator to gauge future growth potential."