The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.
Downstream demand for LGD is unlikely to improve significantly before 2023. The utilization (supply) rate, which has fallen to 70% given downstream demand, poses an additional burden to the recovery benefits.
Lower TP to W18,000
Although we adhere to a buy rating, we are lowering our TP on LG Display (LGD) by 36% to 18,000W. Our valuation methodology now reflects P/B rather than EV/EBITDA. Operating losses are likely amid a general global downturn in the display market. We apply the average P/B of 0.56x seen over 2018~2019 (when panel prices and performance fell due to slowing demand leading to large-scale losses) at 2023F BPS of W32,373 (20 % less than the previous level) .
Net losses are expected to continue through 2023 due to: 1) deteriorating earnings amid a global display market downturn; and 2) a higher financial burden due to the increased possibility that put options on convertible bonds will be exercised. But, noting that LGD stock price has fallen to 2022~2023 P/Bs of 0.46~0.47x (from an average of 0.4x from 2018~2019 lows), we maintain a buy rating.
Supply is more of a concern than demand
We estimate 2Q22 sales at 5.5 tn W (-20% over one year, -14% QT) and an operating loss at 470.0 bn W (TTL). LCD TV panel losses likely widened as prices for most TV panels fell below manufacturing costs. We believe the business remained in the red, weighed down by both WOLED’s high fixed costs (2Q22E shipments of 1.6 million units) and likely a heavier inventory load. However, the LCD computer panel business likely remained in the black, withstanding both sluggish downstream demand (eg laptops and monitors) and declines in ASP.
The pace of LCD price declines slowed in July (prices for sizes below 55 inches stopped falling) as inventory was stockpiled to prepare for year-end sporting events and adjustment screen manufacturers’ utilization rates. Even if TV demand improves towards the end of 2022, supply is expected to rise again due to a higher fixed cost load resulting from lower usage rates. Given this, we expect TV panel prices to maintain downward rigidity from the current level, but any rebound in TV sales is unlikely to be significant. In computer panels, sales of laptops, tablets and monitors, which have largely benefited from the pandemic, are expected to return to pre-pandemic levels, with sales expected to remain slow through 2023. Margins in LGD’s LCD computer panel business, which are currently in positive territory, are also likely to deteriorate.