Smartphone and Auto Parts Divisions Continue to Lose Money
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
Solid results reported for 2Q20 despite COVID-19 pandemic
LG Electronics reported preliminary 2Q20 results at sales of KRW12.8tr (-18%YoY) and operating profit of KRW493.1bn (-24%YoY). Overall earnings were solid despite the decline in sales caused by the COVID-19 pandemic, with operating profit coming in at decent levels compared with past second quarters. By division, we estimate operating profit from H&A (home appliances & air solutions) at KRW571.9bn, HE (home entertainment; TVs) at KRW121.6bn, and BS (business solutions; B2B) at KRW108.1bn. Operating loss is estimated at KRW203.3bn from MC (mobile communications; smartphones) and KRW148bn from VS (vehicle component solutions).
Company-wide sales fell 18% YoY in 2Q20. However, we believe SG&A costs declined on easing competition among companies amid the global market downturn. As a result, operating margins of major divisions are estimated at 2Q19 levels of H&A 11.0%, HE 5.3%, and BS 8.0%. Meanwhile, new smartphone launches likely led to a QoQ increase in sales and decline in losses for the MC business. The VS business, on the other hand, saw losses reach an estimated KRW148bn in 2Q20 as auto parts demand plunged amid the drop in sales and production of finished cars.
Sales expected to rebound in 2H20
Full-year operating profit is forecast at KRW2.7tr (+11% YoY) for 2020.While past data shows a clear trend of relatively weaker earnings in 2H, we expect LG Electronics to post stronger results for the second half this year. The release of pent-up demand should drive a clear upturn in earnings in 2H20.
Retain BUY and raise target price to KRW80,000
We raise our target price to KRW80,000, based on 2019BPS and a target PBR of 1.0x (past nine-year PBR average). The VS division is expected to become the largest contributor to mid/long-term earnings improvement, with operating earnings projected to improve by KRW300bn and turn positive in 2021. Meanwhile, Korean companies as a whole stand to benefit from the decline in market share of Chinese competitors amid ongoing US-China and China-India conflicts.