[Into the Stocks] LG Electronics' Strong Earnings, Growing Expectations

[Asia Economy Reporter Junho Hwang] LG Electronics has attracted increasing attention from investors as it recorded its highest-ever second-quarter performance in 12 years this year. The strong sales of TVs and home appliances shone even brighter after the company exited the smartphone business (MC).

With expectations for continued performance growth in the second half of the year, a target stock price in the 200,000 KRW range has been set. However, short-selling forces are gradually approaching LG Electronics, and fluctuations in demand due to COVID-19 vaccination progress in various countries are expected to act as variables affecting the stock price in the second half.

Second Quarter Highlighted by Strong Performance in Home Appliances and TVs

LG Electronics announced that its preliminary (consolidated) operating profit for the second quarter reached 1.1128 trillion KRW. This marks the second consecutive quarter with operating profits exceeding 1 trillion KRW following the first quarter. This represents a 65.5% increase compared to the same period last year. It is also the highest second-quarter performance in 12 years since 2009, when operating profit was 1.2439 trillion KRW. The results also met market expectations (sales of 17.3 trillion KRW, operating profit of 1.1 trillion KRW).

LG Electronics did not disclose performance by business division. However, securities firms believe that TVs (HE) and home appliances (H&A) drove the strong results. Choeolhee Jo, a researcher at Korea Investment & Securities, said, "Home appliances likely maintained an operating profit margin close to double digits." He added, "The TV division probably defended well against profitability erosion caused by rising LCD panel prices as the OLED share rapidly increased," and analyzed that "HE’s operating profit margin was likely slightly lower than the previous quarter’s 10.1%, recording around 7-8%."

Kyungtak Noh, a researcher at Eugene Investment & Securities, estimated, "Operating profits by division are approximately 671.2 billion KRW for home appliances, 342.8 billion KRW for TVs, -98.2 billion KRW for automotive components, and 78.5 billion KRW for IT & B2B." He explained, "The MC division’s results have been reflected as discontinued operating losses from the second quarter, and the exact scale will be known through the confirmed earnings announcement on the 29th." The reflection of MC’s losses as discontinued operating losses highlighted the strong performance of other divisions. The business loss from discontinued operations is expected to be around 900 billion KRW.

Securities Firms Maintain Buy Ratings

Following this earnings announcement, most securities firms maintained buy recommendations. Target stock prices were set in the range of 220,000 to 240,000 KRW.

Expectations for the third quarter have increased. Firstly, recent housing price indicators globally, including in the U.S., are rising. As COVID-19 vaccination rates increase, economic recovery is underway, and demand for premium home appliances is expected to continue expanding. Additionally, the recent spread of the COVID-19 Delta variant and the resulting increase in confirmed cases are also expected to sustain demand growth for TVs and home appliances through the third quarter.

In particular, improvements in the automotive components business are expected to positively influence the stock price. Researcher Jongwook Lee of Samsung Securities said, "The automotive components business turning profitable and positive news about electric vehicle parts will stimulate the stock price," adding, "Especially, the aggressive electric vehicle transition by key client GM is expected to be the driving force behind the excess growth of automotive components." Go Eoyoung, a researcher at Hi Investment & Securities, also analyzed, "LG Electronics’ stock price is showing a differentiated pattern, decoupling from traditional home appliance companies, and this phenomenon is expected to become more pronounced as achievements in the automotive components business become visible."

However, the fact that short-selling forces are eyeing LG Electronics is expected to act as a burden. As of the 7th, LG Electronics’ short-selling transaction amount was recorded at 34.456 billion KRW, the largest among short-selling transaction amounts on that day. The short-selling ratio during the day’s trading was about 8.81%.

Future factors such as the resurgence of COVID-19 in emerging markets like India and increased activity populations due to expanded COVID-19 vaccination in major advanced countries could lead to decreased demand for home appliances and TVs, which may exert downward pressure on the stock price.

Currently, despite strong earnings, the stock price is showing a downward trend. After rising from the 2nd to the 6th, the stock price closed at 165,000 KRW on the 7th, down 2.94%. As of 10:59 AM on the 8th, the stock price is recorded at 161,500 KRW, down 2.12%.

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