Automotive Parts Business Likely to Turn around in 2021
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
We believe that concerns towards 2Q20 earnings deterioration at LG Electronics are largely reflected in its share price. The firm’s long-term investment attractiveness should rise if the earnings defensiveness of the home appliance business (a cash cow) exceeds expectations or if conditions improve for the automotive parts business (a growth engine). We reiterate a Buy rating.
2Q20 preview: To be dampened by Covid-19, as expected
We maintain a Buy rating and TP of W75,000 for LG Electronics (LGE). Although its 2Q20 earnings will likely evidence deterioration, the home appliance business (backed by its robust growth potential) should help to defend earnings to a greater extent than the situation at overseas competitors, with the growth potential of the automotive parts business entering the spotlight upon the restart of operations at clients’ automobile plants.
In its 1Q20 earnings call, LGE conservatively forecasted its 2Q20 earnings due to Covid-19. We expect its 2Q20 consolidated earnings to be sluggish, with sales of W13.3tn (-43% y-y, -66% q-q) and OP of W371.2bn (-43% y-y, -66% q-q). However, the home appliance business (a cash cow), is unlikely to see a significant drop in earnings, thanks to a government rebate program (provided to buyers of energy-efficient home appliances purchased before end-2020). While the home appliance business is likely to see the pace of its earnings growth slow in the near term, it should remain more competitive than global peers. In addition, LGE reaffirmed the growth trend of its automotive parts business (as expected), mentioning the likelihood of achieving turnaround in 2021 for the important growth engine. Growth at the automotive parts business should accelerate if factors currently undermining near-term performance (such as the halting of operations at automobile plants) are resolved.
1Q20 review: Home appliances + TVs + subsidiary (LG Innotek) led earnings improvement
LGE recorded 1Q20 sales of W14.7tn (-1% y-y, -8% q-q) and OP of W1.09tn (+21% y-y, +971% q-q), with home appliances, TVs, and subsidiary LG Innotek driving overall improvement. At the home appliance business, an increase in domestic home appliance sales (40% of home appliance sales) served as a growth factor. At the TV business, effects from product mix improvement (estimated portions: 60+ inch TVs 17%, UHD+ 72%, OLED 6%) boosted profitability. On the other hand, the smartphone business continued its operating losses for a 12th consecutive quarter (from 2Q17). At the automotive parts business, the impact of plant shutdowns by automotive clients presented a negative for earnings.