[Click eStock] LG Electronics Enters Reevaluation Phase

Restructuring through Expansion of Jeonjang Business and Reduction of Mobile Phone Business

[Asia Economy Reporter Minwoo Lee] LG Electronics is entering a phase of full-scale revaluation, according to analysis. This is due to the simultaneous expansion of orders in the automotive components (VS) business and improvement in the previously sluggish smartphone (MC) division.

On the 9th, KB Securities maintained a 'Buy' rating and a target price of 120,000 KRW for LG Electronics, judging the current point as the early stage of revaluation entry. From next year, the VS business is expected to drive sales and profit growth through order expansion and a return to profitability, while the MC division is estimated to significantly reduce losses from next year due to business adjustments and production efficiency improvements. The improvement in the VS and MC businesses, which had continuously incurred losses and acted as discount factors for LG Electronics' stock price, is expected to lead LG Electronics' corporate value from undervaluation to a revaluation phase.

In particular, the adjustment and business efficiency of the MC division are expected to be effective. LG Electronics' MC business has incurred losses continuously from the third quarter of 2015 to the third quarter of this year, with a total loss of 4.5 trillion KRW over five years. The average annual loss is about 900 billion KRW. Recently, LG Electronics has eliminated core MC departments (development, production, sales) and is restructuring its business into an Original Design Manufacturer (ODM)-centered structure that can improve cost structure. The ODM production ratio, which was 30% last year, is expected to increase to 60% by the end of this year and 70% by the end of next year.

Dongwon Kim, a researcher at KB Securities, said, "From next year, the MC business losses are expected to rapidly decrease due to the expansion of ODM ratio and selective marketing focused on mid-to-low-end 5G phones (North America, Korea)." He added, "Assuming no losses in the MC business, LG Electronics' corporate value would increase by 4 to 6 trillion KRW, reaching a market capitalization of 20 to 22 trillion KRW."

The expansion of orders in the VS business is also a positive factor. Over the past three months, the stock prices of automotive component companies Mando and Hanon Systems rose by 83.9% and 25.7%, respectively, due to the expansion of electric vehicle parts supply. In contrast, LG Electronics, despite owning the VS business, was perceived simply as a home appliance company and only rose by 10.7%. However, LG Electronics' VS sales are expected to steadily increase. In 2021, sales are expected to grow by 30% year-on-year to 7.7 trillion KRW, and in 2022, to increase by 31% year-on-year to 7.7 trillion KRW. Operating profit exceeding 500 billion KRW annually is also expected from 2022.

Researcher Kim said, "The estimated operating profit for 2022 is 509 billion KRW, similar to Mando's 403 billion KRW and Hanon Systems' 657 billion KRW, but LG Electronics' corporate value is lower with a price-to-earnings ratio (PER) of 7.8 times and price-to-book ratio (PBR) of 0.85 times compared to the average PER of 15.3 times and PBR of 2.3 times of Mando and Hanon Systems." He analyzed, "LG Electronics' stock price currently does not reflect the value of the automotive components business, so there is significant potential for future increase."

This content was produced with the assistance of AI translation services.