Diversified Business Portfolio to Drive Earnings Growth
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
While LG Electronics’ earnings are likely to fluctuate amid the spread of Covid-19, we note that the virus is not a unique issue to the firm, but a negative environmental factor impacting all global electronics players. Going forward, we expect LGE’s relative attractiveness to shine thanks to its strong sales of sanitizing appliances, diversified business portfolio, and low valuation levels.
Adjust expectations, but relative attractiveness remains intact
We lower our TP for LG Electronics (LGE) from W83,000 to W75,000. Considering the impact of Covid-19, we adjust our earnings forecasts for all divisions and apply a 10% discount in calculating the firm’s operating value. In particular, shipments of TVs and smartphones are expected to fall short of their targets due to the delay in the Summer Olympics and greater manufacturing instability at smartphone ODM partners. We cut our 2020 forecast for TV shipments from 29.0mn units to 28.2mn units and for smartphone shipments from 27.2mn units to 22.8mn units.
We maintain a Buy rating on LGE, believing that the company’s relative attractiveness may be highlighted by its recent share price decline. While both supply and demand channels in the consumer electronics industry are currently unstable, this is an environmental factor which most firms are facing, rather than a difficulty specific to LGE. Meanwhile, thanks to its strongly diversified business portfolio (electronic parts, home appliance rentals, etc) -- a strength unique to the firm -- LGE’s long-term earnings growth should stand out versus competitors. In addition, LGE is currently trading at a discount (2020E P/E of 5.5x and P/B of 0.6x) compared to the peer averages (P/E of 13.8x and P/B of 1.3x). Of note, excluding the smartphone business, the company’s operating value is currently estimated at W17.3tn.
1Q20 preview: Earnings to meet expectations
We expect LGE’s 1Q20 results to meet the market projection (sales of W15.5tn and OP of W884.2bn), with sales of W15.3tn (+2% y-y) and OP of W858.3bn (-5% y-y). Thanks to both sales volume expansion at the home appliance business (dishwashers, air purifiers, etc) and sales mix improvement at the TV business (60-inch and above TV portion: 15%, OLED model portion: 8%), overall sales growth and healthy profitability are anticipated. But, affected by slowing smartphone industry growth and deteriorating market dominance, the smartphone business is likely to report sluggish earnings. At the automotive parts business, operating losses likely continued in 1Q20, as the business is yet at a stage where costs are incurred but sales have yet to be recognized.