1) Investment highlights
- We maintain Marketperform and our six-month target price of KRW80,000 (1.1x 12-month-forward BPS) on LG Electronics. LGE reported preliminary consolidated revenue of KRW14.6tn and an operating profit of KRW664bn for 2Q, both below the market consensus. For 2Q, LGE had guided for 6.1mn in TV set shipments, similar to 1Q; 16mn in smartphone shipments, 8.1% higher than the previous quarter; and a high-single digit QoQ growth in smartphone ASP. However, looking at the preliminary revenue alone, it appears that TV and smartphone shipments, by volume and value, fell short of guidance. We now estimate the company shipped 15.3mn units of smartphones and 6mn TV sets in 2Q. By division, HE likely posted operating profit of KRW224.2bn as the margin fell due to higher marketing costs, and H&A KRW488.4bn. The MC division is estimated to have suffered an operating loss of KRW79.8bn. Above all else, we find it disappointing that consolidated revenue excluding LG Innotek (011070.KS, BUY) inched up just 1.2% QoQ.
2) Major issues and earnings outlook
- Given the circumstances, we do not expect the smartphone margin to turn around anytime soon. We believe current valuations are more reflective of consumer electronics, TV sets and VC rather than smartphones. For consumer electronics, we find it positive that the product lineup is diversifying further to establish a comprehensive portfolio that includes clothes dryers, air cleaners, and a clothing care system (LG Tromm Styler) in addition to such mainstays as refrigerators, washing machines, and air conditioners. The TV margin has fallen from the extraordinarily high level of 1Q but we expect it to recover as costs will decline from 2018 with a 10.5G Chinese LCD fab coming on line and consumer migration toward bigger panels slowing down. The VC division’s top line is also slated to expand continuously on the back of electric vehicle solutions.
3) Share price outlook and valuation
- LGE shares enjoyed a sharp rally in 1Q as the 1Q net profit surprise worked to highlight its attractive P/E multiple. However, shares have corrected recently as earnings deteriorated in 2Q. In our view, LGE’s valuations have to be based on P/B rather than P/E given the volatility of its non-operating profit. The stock tends to trade below 1.0x P/B in the second half due to unfavorable seasonality and in that regard, we do not believe investors need to hurry to catch a bargain-hunting opportunity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.