LG Electronics' Structural Reform Reopens Era of Quarterly Operating Profit Exceeding 1 Trillion Won

Auto Parts, Emerging as a Major Growth Engine Starting This Year

[Asia Economy Reporter Minwoo Lee] LG Electronics, which has reduced the proportion of its smartphone segment and begun to see a significant improvement in profitability in its automotive components (VS) division, is expected to record an operating profit of 1 trillion KRW starting from the first quarter of this year. It is anticipated to reopen the era of 1 trillion KRW operating profit since the first quarter of last year.

On the 31st, Meritz Securities forecast that LG Electronics will achieve sales of 17.954 trillion KRW and an operating profit of 1 trillion KRW in the first quarter of this year. The Home Appliance & Air Solution (H&A) division is expected to continue growing as demand centered on hygiene appliances persists compared to traditional home appliances. The TV and Home Entertainment (HE) division is expected to see a deterioration in operating profit compared to the same period last year due to cost burdens from rising panel prices. For the VS division, operating losses are expected to continue in the first quarter due to investment expenditures at the beginning of the year, but profitability is expected to improve every quarter starting from the second quarter.

Researcher Minwoo Joo of Meritz Securities said, "The VS division, which is expected to grow more than 20% annually, will gradually increase its share of the company's total operating profit," adding, "It is expected to grow to 2% this year, 7% next year, and 11% in 2023." This marks the beginning of a structural improvement where the VS division establishes itself as a new growth engine.

Signs of change appeared from the fourth quarter of last year. While the smartphone (MC) division’s losses deepened, the VS division’s losses began to narrow. Researcher Joo explained, "MC’s profitability worsened compared to the previous quarter due to sluggish premium smartphone sales and chipset supply shortages," and "VS achieved meaningful profitability improvement thanks to new project sales and growth centered on electric vehicles." In fact, the VS division’s operating loss in the fourth quarter of last year was 2 billion KRW, approaching the threshold for turning profitable.

Against this backdrop, Meritz Securities maintained a 'Buy' rating on LG Electronics and raised the target price by 37.7% to 230,000 KRW. The closing price the previous day was 153,000 KRW. Researcher Joo explained, "The fair price of 230,000 KRW is based on a price-to-earnings ratio (PER) of 11.6 times and an enterprise value to EBITDA (EV/EBITDA) ratio of 4.9 times in 2022, when the VS division achieves stable profitability," adding, "If the MC division is divested, the 2022 operating profit is expected to improve by 14% compared to the existing estimate, further highlighting the valuation appeal."

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