LG Electronics
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com -- Ed.
Despite slowing demand, LGE achieved sound earnings that far exceeded our estimates thanks to efficient inventory management and cost reductions. The firm’s shares remain attractive, with a full-fledged demand recovery expected in 2H23 and automotive electronics momentum building.
1Q23 earnings surprise despite sluggish demand
While overall demand declined due to the global macro slowdown, LG Electronics (LGE) announced sound earnings that far exceeded our estimates thanks to preemptive inventory adjustments, reduced logistics costs, and lower raw material prices. We believe that the stock is still undervalued, noting likely earnings expansion from improved demand in 2H23 and a rising order backlog for vehicle electronics.
Despite a general slowdown in demand, sales at the home appliance division were similar to last year thanks to increased B2B system and boiler sales. In terms of profitability, margins remained high at the 2020~2021-level (when sales surged due to Covid-19) amid reduced logistics and distribution costs.
The HE (TV) and BS divisions also achieved stronger-than-expected earnings. At the HE division, preemptive inventory adjustments and cost reductions on lower panel prices led to margin expansion, while the BS division's promotion and cost reduction effects were greater than expected. At the VS division, despite increased costs due to the expansion of the firm’s Mexico plant, profit levels were maintained thanks to a rising order backlog.
Expanding vehicle electronics order backlog to spur momentum
LGE booked 1Q23 OP of W1,497.4bn (-22.9% y-y, +2,061.7% q-q), significantly exceeding our estimate. In 2Q23, OP will likely decline q-q due to greater marketing expenses following new product launches, but a y-y increase is expected thanks to continued reductions in logistics costs.
In addition, it is highly likely that a detailed vehicle electronics order backlog will be disclosed in 2Q23, and momentum is expected to rise as orders are confirmed and diversification of EV powertrain parts customers to European automakers is confirmed.