LG Twin Towers in Yeouido, Seoul. Yonhap News
Brokerage research centers are divided in their views on major LG Group affiliates following the release of second-quarter results. Some companies within the group posted equally strong results yet received opposite target-price revisions, while a number of firms saw analysts lower their expectations across the board, citing short-term profitability even as they agreed on long-term growth potential.
According to financial data provider FnGuide on the 2nd, target-price revision reports for LG Group affiliates published over the week from the 27th of last month through that day totaled 14 upgrades and 23 downgrades. The stocks that drew the most divided views were LG Electronics and LG Innotek. Both companies beat market expectations in the second quarter, and assessments of their new growth drivers were also positive. For LG Electronics, however, the premium to be assigned to its artificial intelligence (AI) data center cooling and robotics businesses was pitted against the decline in the average KOSPI valuation. For LG Innotek, growth expectations for its semiconductor substrate business and the recent share-price correction among global substrate makers became the factors dividing target prices.
Meritz Securities maintained its “buy” investment opinion on LG Electronics but lowered its target price to 220,000 won from the previous 260,000 won. Yang Seung-soo, a researcher at Meritz Securities, said, “LG Electronics’ current share price is in an undervalued range that does not sufficiently reflect its heightened earnings capacity and mid- to long-term growth potential,” while adding, “We lowered the fair value as we reflected the decline in the KOSPI 12-month forward average price-to-book ratio (PBR) in our valuation.”
For LG Innotek, the growth potential of its optical solutions and its flip-chip ball grid array (FC-BGA) business, a substrate for high-performance semiconductors, was also assessed positively. In particular, the fact that the earnings structure concentrated on camera modules could be eased as the package solutions division grows was cited as a re-rating factor. Indeed, second-quarter package solutions revenue rose 14% from the previous quarter to 498.4 billion won, and profitability also improved on strong sales of smartphone substrates and FC-BGA. According to IBK Investment & Securities, the operating profit margin of package solutions was estimated to have risen to 11.7% in the second quarter from 8.6% in the first quarter.
However, views diverged over whether to reflect this in corporate value immediately or to first consider the share-price declines of global substrate makers. Although the corporate fundamentals are solid, the direction shifted depending on how the multiples of comparable companies were applied. Ko Eui-young, a researcher at iM Securities, noted, “Visibility on industry conditions has improved, but the pace of share-price declines among the global peer group is steep, so a downward revision of fair value is inevitable from a relative-value comparison standpoint.”
LG H&H was the only group stock for which positive analyst forecasts converged in one direction. With North American sales surpassing China for the first time and the cosmetics business turning to a profit, the brokerages that issued reports raised both their investment opinions and target prices in step. The assessment is that this was not simply due to one-off cost cuts or currency effects, but that lowering dependence on China and duty-free channels while expanding the North American distribution network has begun to translate into actual profitability improvement.
Conversely, expectations were lowered for LG Energy Solution due to initial operating costs and production bottlenecks at its North American energy storage system (ESS) production lines, and for LG Display due to declining average panel selling prices and cost burdens at downstream companies. In the case of LG CNS, whose share price has halved in about two months, second-quarter operating profit fell below market expectations, while cost burdens grew as the share of new businesses rose. Oh Dong-hwan, a researcher at Samsung Securities, noted, “We lowered our operating profit estimate to reflect the somewhat slow pace of revenue growth from affiliated companies,” and added, “There is a possibility of further profitability decline amid intensifying competition for orders surrounding large projects such as financial-sector system modernization.”