[Into the Stocks] Foreign and Institutional Investors Also Sell... LG Electronics Target Price Downgraded

Stock price down 7% in one month
Business unit performance expected to slow
Hantoo Securities sets target price at 190,000 won

[Asia Economy Reporter Minji Lee] The securities industry's outlook on LG Electronics is becoming more pessimistic. This is due to expected sluggishness in the automotive components (VS) business and the business solutions (BS) division in the second half of the year, along with a slowdown in home appliance demand, which is anticipated to lower earnings forecasts.

LG Electronics Stock Falls 7% in One Month... Weak Performance Expected in Q3 BS and VS Divisions

According to the Korea Exchange on the 23rd, LG Electronics' stock price dropped about 7% from 151,000 KRW to 139,500 KRW over the past month. Expanding the period, the stock fell approximately 9.7% over the last three months and about 11.7% over six months. Considering that the electrical and electronics index listed on the KOSPI market declined by only 6% over the past six months, LG Electronics' drop was relatively significant.

The main investors influencing the recent stock decline are foreign and institutional investors. LG Electronics ranked sixth among the top net sellers by foreigners and institutions this month, following Kakao, NAVER, LG Chem, NCSoft, and Amorepacific. The total net selling amount was 211.5 billion KRW, with foreigners selling 155.3 billion KRW and institutions 56.2 billion KRW worth of shares. Conversely, individual investors purchased 206.3 billion KRW worth of shares during this period, absorbing most of the selling pressure.

The recent sharp stock decline is analyzed to be due to growing concerns over Q3 earnings. According to financial information provider FnGuide, the consensus operating profit forecast for LG Electronics in Q3 is about 1.136 trillion KRW. Three months ago, some securities firms projected LG Electronics could earn up to 1.35 trillion KRW in Q3, but now the highest expected operating profit is around 1.2 trillion KRW.

Among LG Electronics' Q3 divisions?Home Appliance & Air Solution (H&A), TV (HE), Vehicle Components (VS), and Business Solutions (BS)?weakness is expected in the Business Solutions and Vehicle Components sectors. Ji-san Kim, a researcher at Kiwoom Securities, stated, “For the VS division, due to semiconductor chip supply disruptions leading to reduced production by automotive OEMs, expectations for a return to profitability should be postponed to Q4. The BS division faces difficulties in profit generation due to rising costs of solar wafers and intensified price competition, and the Information Display segment's business normalization is delayed.” Meanwhile, the home appliance division is expected to see strong sales centered on premium products, and the TV division is projected to maintain relatively good profitability compared to competitors due to increased OLED TV sales.

Home Appliance Demand Also Expected to Slow... Securities Industry Lowers Outlook

LG Electronics was one of the companies that benefited from the COVID-19 boom last year. Over the past year, major IT sets such as TVs, PCs, and home appliances saw sharp increases in shipments due to demand concentration after COVID-19. The market interprets this as reflecting a shortened replacement cycle caused by longer time spent at home rather than the creation of new demand. Chul-hee Jo, a researcher at Korea Investment & Securities, explained, “From the second half of this year, the shipment growth rate is expected to slow rapidly. While some sets may see restocking demand from retailers ahead of the year-end consumption season, a demand slowdown is unavoidable until the first half of next year.”

The increase in vaccinated individuals, leading to reduced goods consumption and increased service consumption, is also a factor contributing to demand slowdown. Researcher Jo added, “We are lowering the forecast for durable IT sets (TVs, personal computers) for the second half of this year and the first half of next year. Given the significant demand increase over the past year, the demand decline over the next year will be larger than previously expected, but a gradual increase is expected again starting in the second half of next year.”

Accordingly, securities firms are lowering LG Electronics' target prices. Among those adjusting target prices this month, Korea Investment & Securities lowered its target by 13% to 190,000 KRW, citing a lack of factors that could continuously increase sales growth in the core home appliance and TV divisions. Although the automotive components division has recently become a stock momentum driver, it is judged difficult to expect significant short-term gains. KB Securities also set a target price of 200,000 KRW, down 16% from before. Dong-won Kim, a researcher at KB Securities, explained, “This reflects the downward revision of earnings estimates through 2023 due to delayed profitability improvements in the Business Solutions and Vehicle Components divisions in the second half.”

Time to Raise Long-Term Expectations for VS Division

However, in the long term, it is predicted that expectations for the Vehicle Components division can be raised. Despite earnings uncertainty due to delayed profitability turnaround caused by vehicle supply shortages and GM Bolt provisions, the division is expected to record high growth rates of 15-20% annually through 2024.

In particular, the establishment of LG Magna, a joint venture producing EV power components (motors, inverters) last year, is expected to drive sales growth in the VS division. Min-woo Joo, a researcher at NH Investment & Securities, analyzed, “Power components have relatively low competition intensity and present higher entry barriers compared to LG Electronics' existing core products like infotainment and lighting. Power component technology and references will be expanded to robotics and UAM fields, contributing to the overall expansion of LG Electronics' automotive components business.” According to NH Investment & Securities, the expected sales of the VS corporation, which will consolidate LG Magna JV's performance, are projected at 7.9 trillion KRW in 2021, 9.9 trillion KRW in 2022, and 11.5 trillion KRW in 2023. The turnaround to profitability is estimated to occur in 2022.

The sales proportion of the Vehicle Components division is expected to reach 8% by 2024. While it will be difficult to surpass the core home appliance and TV divisions (60%), it is expected to gradually increase its sales share. Kang-ho Park, a researcher at Daishin Securities, predicted, “As competitiveness expands as a global automotive components company, there is a high possibility of strategic alliances between Apple and LG Group and LG Magna when Apple enters the electric vehicle market. Global automakers are also expected to begin orders in earnest, cooperating with LG Electronics on key components.”

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