VS Division Likely to Turn to Profit in 2022
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
2Q review: Sales of KRW17.1tr (+48%), OP of KRW1.1tr (+66% YoY)
LG Electronics posted sales of KRW17.1tr (+48% YoY) and operating profit of KRW1.1tr (+66% YoY) for 2Q21. By division, operating profit came to KRW653.6bn from H&A (home appliances & air solutions), KRW333.5bn from HE (home entertainment; TVs), KRW61.7bn from BS (business solutions; B2B), and KRW137.6bn from the subsidiary, LG Innotek. The VS (vehicle component solutions) division recorded operating loss of KRW103.2bn.
Operating loss of KRW1.3tr from the discontinued MC (mobile communications) business was largely in line with our previous estimate.
Squashing demand peak concerns with strong push of premium models
Operating profit is forecast to reach KRW1.1tr in 3Q21. Half-year operating profit should fall to KRW1.9tr in 2H21 from KRW2.9tr in 1H21 on typical weak seasonality. Going forward, LG Electronics expects to see a slowdown in TV demand on growing distribution of COVID-19 vaccines. We also focus on the possibility of: 1) increase in marketing expenses to pre-pandemic levels; and 2) drop in margins on rising prices of raw materials and panels.
Nevertheless, we believe LG Electronics will fare better than rivals at home and abroad, thanks to its higher sales portion of premium home appliances and OLED TVs. The company’s OLED TV sales volume is projected to climb from 2.05mn units in 2020 to 4mn units in 2021 and 5mn units by 2022.
Retain BUY for a revised-down target of KRW195,000
We lower our target price for LG Electronics to KRW195,000, reflecting the recent decline in peer valuation multiples. Our revised target is based on 2021F EPS and a target PER of 12.3x (PER average of four peers).
Share price gains over the past seven months were driven by several factors including forecasts for a positive swing in VS earnings, discontinuation of MC operations, strong demand for H&A and TVs, and increasing sales volume of OLED TVs. Going forward, we believe the VS business will emerge as the main driver of share performance and overall direction of the company.
Cumulative order backlog of the VS division is set to reach KRW60tr by end-2021. VS sales will likely jump from KRW7.7tr in 2021 to around KRW10tr in 2023. The division's operating earnings should turn to a profit of KRW80.5bn in 2022 from losses of KRW380.3bn in 2020 and KRW108bn in 2021.