Earnings Hinge on VS Division Next Year
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
3Q20 review: Recovery of demand, resumption of production
LG Electronics posted operating profit of KRW959bn (+23% YoY) on sales of KRW16.9tr (+8%YoY) for 3Q20. The H&A (home appliances & air solutions) and HE (home entertainment; TVs) divisions recorded solid earnings with demand recovering from the impact of the COVID-19 outbreak in 1H20. The QoQ decline in H&A operating margin (12.2% in 2Q →10.9% in 3Q) appears to have been caused by increased marketing spend. The loss-making MC (mobile communications) and VS (vehicle component solutions) divisions staged a steep rebound. MC operating loss was reduced from KRW206.5bn in 2Q to KRW148.4bn in 3Q thanks to improved operational efficiency. VS operating loss declined from KRW202.5bn to KRW66.2bn during the same period on the resumption of production at clients.
2021 outlook: Demand to improve until 2Q21 from low YoY base
LG Electronics is forecast to deliver operating profit of KRW582.2bn for 4Q20, down by 39% QoQ due to seasonal factors but up by 472% YoY. Year-end marketing spend should decrease due to preemptive adjustment of inventories in the distribution channel in 2Q-3Q.
In 2021, operating profit is projected to increase 9% YoY to KRW3.4tr. The most notable improvement should be seen in the VS division. It aims to turn positive in 3Q21 and increase full-year operating earnings by KRW400bn YoY. The MC division should be able to expand shipments to the North and South American markets thanks to the deployment of 5G smartphones and benefits from sales disruptions at Huawei Technologies. The low YoY base created from COVID-19 is likely to continue at least through 2Q21. However, costs may climb from growth in tech product sales amid the recovery of demand and intensifying competition.
Retain BUY for a target price of KRW110,000
Our target price of KRW110,000 for LG Electronics is based on 2020F BPS of KRW88,529 and a target PBR of 1.25x (average PBR high of 2016-2019). Earnings should hinge on the VS division next year. We focus on the resumption of production at clients and rise in demand for vehicle component solutions. The MC division is on the recovery path, with operating loss down from KRW1tr levels seen in the past. We remain upbeat on earnings improvement at subsidiaries. Expectations are high for LG Innotek (consolidated subsidiary), a global leader in camera modules. LG Display (equity method subsidiary) benefits from increases in LCD panel prices and capacity utilization rates of large-and small/mid-size OLED panels.