Is LG Display a Deep Value Play or Cheap for a Reason?
The post was originally published here.
Highlights:
- Intensified price competition leads to loss of market share
- End markets for displays face maturity, expect low growth
- Focus on premium products to turnaround margin
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LG Display’s revenue breakdown 2020
Price recently turned bullish, but low volume support
- In early 2022, the 50DMA has crossed the 200DMA, which is a positive signal
- However, the share price seems to cross the 50DMA soon, which could turnaround the trend
- Volume RSI has been strong in 4Q21
- Recently, it moved to the 50%-line, providing no clear signal going forward
Intensified price competition leads to loss of market share
- The display industry is dominated by Asian manufacturers from China, Taiwan, Korea, and Japan
- Chinese companies aggressively expanded their capacity to produce displays at lower prices
- The Chinese gov’t continues to subsidize its domestic companies which could even lead to a potential oversupply soon
Supply shortages drive up selling price, but only temporary
- In 2019, the average selling price for LG’s displays per sqm dropped by 17% compared to 2015
- Mainly to keep up with cheaper products from its competitors
- During the pandemic, the price for displays spiked in response to excessive demand and supply shortages
- I believe this trend to be short-lived and expect falling prices again
End markets for displays face maturity, expect low growth
- LG Display’s revenue is mainly dependent on the growth of its end markets such as computer, phones, and TV
- A mature market for smartphones translates into low demand for displays
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- The same goes for TV which saw declining trend over the past years
End markets for displays face maturity, expect low growth
- In the past, LG Display has been in a downward spiral
- Between 2015 and 2020, revenue declined by more than 15%
- Despite a jump in 21E revenue, the company faces a challenge to hit the KRW30trn revenue mark over time
- I expect declining revenue in the following 2 years
Focus on premium products to turnaround margin
- Currently there are two major technologies prevailing in the display market
- The first one, LCD, existed since the early 2000s
- Chinese competitors started to compete on price for LCD TVs, leading to a severe drop in selling price
- The other TV tech, OLED, is supposed to deliver a better picture quality, but is more expensive
Focus on premium products to turnaround margin
- LG Display realigned its strategy to transition to high-margin OLED rather than responding to the price competition on LCD TVs
- Currently, only Samsung has emerged as a serious competitor in OLEDs
- This means that OLED TVs can maintain a price premium for some time
- The strategy should help to stabilize LG’s margin and turnaround losses
FVMR Scorecard – LG Display
- A stock’s attractiveness relative to stocks in that country or region
- Attractiveness is based on four elements
- Fundamentals, Valuation, Momentum, and Risk (FVMR)
- Scale from 1 (Best) to 10 (Worst)
Consensus sees a cheap opportunity to buy
- Most analysts have issued a BUY recommendations, while 5 analysts recommend a SELL
- Consensus expects a strong revenue boost in 21E, but flat revenue afterward
- They expect the company to turn around its losses and achieve a higher level of margin
Get financial statements and assumptions in the full report
P&L – LG Display
- The company is likely to benefit from supply shortages and excessive demand in 21E
- The average display selling price per sqm has reached its highest level ever
- I consider this effect only temporary
Balance sheet – LG Display
- Contrary to its Chinese competitors, I don’t expect LG Display to pursue an aggressive expansion plan
- The company started to reduce its long-term debt in 21E
Ratios – LG Display
- The company is characterized by rather weak efficiency
- This means that the company needs to increase investments to drive revenue growth
- With the increased focus on producing higher-margin displays to escape the price competition on LCD TVs, I expect the company to maintain a higher margin over time
- However, the competitive advantage is likely to diminish over time which is also incorporated in my forecast
Long-term share price performance potential
Free cash flow – LG Display
- FCFF in 21E was dragged down by massive changes in net working capital, but should stay positive
Value estimate – LG Display
- I expect a lower revenue growth than consensus as I assume the temporary price-driven revenue boost to not last much longer
- Quantity sold has been on a declining trend before the pandemic and might continue going forward
- A reasonable terminal growth rate of 2%
World Class Benchmarking Scorecard – LG Display
- Identifies a company’s competitive position relative to global peers
- Combined, composite rank of profitability and growth, called “Profitable Growth”
- Scale from 1 (Best) to 10 (Worst)
Key risk is intensified price competition
- Failure to keep up with latest technology to maintain competitive advantage
- High concentration of key customers
- Fluctuations in demand as end markets are sensitive to market conditions
Conclusions
- Markets for displays is mature; expect flat or declining revenue
- Focus on OLED technology could bring sustainable higher margin
- Valuation is cheap; but probably for good reasons
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