OLED Business to Drive Growth
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
LGD’s 2H20 earnings are expected to evidence a rapid turnaround, helped by both effects from short-term LCD market improvement and earnings growth stemming from normalization at the firm’s large-sized OLED factories in China and small- and medium-sized OLED panel shipment growth. From 2021 onwards, with the OLED business poised to become a new growth driver, overall earnings growth is anticipated.
Share price to reflect fundamental recovery
We maintain a Buy rating and TP of W20,000 on LG Display (LGD), expecting positive share price and valuation momentum in 2H20 driven by a sharp earnings turnaround.
LGD shares have suffered a long period of de-rating from 1Q19, affected by: 1) sluggish earnings at the LCD business due to LCD oversupply from China; and 2) cash flow deterioration due to ongoing OLED investment. However, it appears that LGD’s share price has now bottomed out. Recently, earnings-related variables are improving, and fundamentals look set to recover going forward. We expect the firm to successfully enter the black from 2H20 and foresee profit growth from 2021. Moving ahead, the OLED business is predicted to drive growth. With OLED adoption continuing to rise for new products, the OLED business environment should turn increasingly favorable for the firm. Despite being the world’s only producer of small- and medium-sized OLEDs, LGD currently trades at a 2020E P/B of 0.49x, well below the display sector average of 0.94x.
Strong prospects for 2H20 turnaround
We expect LGD to report 3Q20 OP of W148.2bn, expecting a turn to profit after seven quarters of losses. In 4Q20, OP should remain in the black at W100.5bn, riding high on a rapid shift to profit in 2H20.
By business, we expect LGD’s 3Q20 earnings to evidence: 1) earnings growth at the LCD business on panel inventory accumulation effects at set makers and panel price expansion; and 2) earnings improvement at the OLED business on increased panel shipments to North American companies and normalization at Chinese factories. In 4Q20, the OLED business should stand out. Panel shipments of small- and medium-sized OLEDs to North American firms should continue accelerating to 19.18mn units (+18% q-q), and the average utilization rate for large-sized OLED facilities should reach 93% thanks to demand events (Single’s Day, new game console releases, etc). We expect the overall impact on earnings to be positive.