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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
    • 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

Download the full report as a PDF


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