Earnings Growth to Slow in 2021
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
In 2020, even amid healthy 5G-driven earnings growth, LG U+’s shares have performed sluggishly amid concerns towards Huawei-related sanctions. With investor attention likely to shift towards non-telecom businesses in 2021, the fact that LG U+ shows higher reliance on its telecom business versus peers remains a concern.
Share price remains tepid even amid 5G-driven earnings growth
We downgrade our rating on LG U+ to Hold and lower our TP from W18,000 to W13,500. While the firm’s wireless revenue remains sound on rising 5G subscriptions, earnings growth could slow in 2021, with effects from the merger with LG HelloVision beginning to fade. Also of concern, while investor attention towards non-telecom businesses at telcos is increasing, LG U+’s competitiveness in non-telecom arenas appears weaker than that of rivals.
We note that the portion of wireless revenue out of total sales is the highest at LG U+ among domestic telcos. Given such, the company has been enjoying the strongest impact from 5G-driven wireless revenue growth this year. In 2020, LG U+’s service revenue is expected to jump 9.7% y-y to W10.1tn, with wireless revenue climbing 4.7% y-y to W5.78tn. But, even amid 5G-led earnings growth, the firm’s share price has fallen 19.7% YTD.
Unlike 2012, a time when LTE networks were introduced in earnest, the transition to a next-generation network (5G) has failed to significantly push up telcos’ share prices this year. This suggests that telcos now have to demonstrate their competitiveness in non-telecom arenas to enjoy notable share price growth momentum. In this situation, the fact that LG U+’s competitiveness in non-telecom businesses remains relatively weak compared to that of competitors could dampen investor enthusiasm. That said, we positively view that LG HelloVision (whose earnings began to be incorporated into LG U+’s consolidated earnings in 1Q20) has started to show synergies with LG U+ via greater offering of bundled services, as well as with LG Electronics (LGE) thanks to partnerships in the home appliance rental arena.
Earnings growth to slow in 2021
We size LG U+’s 2021 service revenue at W10.9tn (+3.7% y-y), OP at W949.3bn (+2.9% y-y), and NP at W613.2bn (-24.3% y-y), with earnings growth slowing versus 2020 as the effects of the LG HelloVision merger fade. In addition, if US sanctions on Huawei remain in place, concerns towards uncertainties related to the securing of 28GHz 5G equipment and overseas roaming services could dampen LG U+’s share price.