Rather than a demand rebound, LG Electronics (LGE) earnings are to continue being buoyed by its competitiveness in the home entertainment and home appliances markets (absence of rivals strong enough to supplant its positions in these markets). However, we expect earnings at its MC division to remain weak.

2Q16 preview: MC division to book disappointing earnings We expect LGE to register 2Q16 sales of W14.4tn (up 3% y-y, up 8% q-q) and operating profit of W608.0bn (up 149% y-y, up 20% q-q) on weak sales of its ‘G5’ smartphone. But, the home entertainment (HE) and home appliance & air solution (H&A) divisions should deliver solid 2Q16 earnings.


Focus on VC division’s growth potential

With IT hardware players (in search for new growth drivers) having started to develop auto-components for xEVs, LGE is strengthening its relationship with automobile/auto-component makers via its vehicle components (VC) division.

Given automobile makers’ growing focus on developing smarter and safer vehicles, the penetration rate for electronic components in the automobile market is to widen rapidly. As such, LGE’s VC division offers strong growth potential. Moreover, the firm should enjoy steady order flow going forward thanks to its ongoing efforts to diversify its client base. Of note, LGE is expected to start shipping EV components for GM’s ‘Bolt.‘

MC division’s earnings to determine direction of firm’s share price LGE’s shares are sensitive to earnings at its mobile communication (MC) division. With the market starting to hold doubts over the future growth potential of the smartphone market itself, the firm’s shares are unlikely to be pushed upwards simply on positive guidance releases or earnings forecasts—investors will first need to see a clear turnaround at the division.

That being said, LGE’s shares should show downward rigidity as: 1) its current share price already reflects market concerns towards slow earnings at its MC division; and 2) its shares are currently trading at a 2016E P/B of 0.8x.

However, in order for its share price to rebound, the company needs to show clear proof of an earnings turnaround at the MC division. In 4Q16, we will witness the market response to LGE’s new smartphone models—as such, 4Q16 should be the time period that determines the firm’s share price direction.


Source: NH Investment & Securities  www.nhwm.com