"Unlock Potential" Jo Joo-wan's Special Mission... Focus on LG Electronics' Corporate Value Rebound Next Year

4.6→3.67→3.58... 3 Consecutive Years of Decline
President Cho Declares "Raise to 7%"
From the Start of Appointment, "Increase Growth Momentum"

Cho Joo-wan, CEO of LG Electronics who will continue to lead the company next year, has set a goal to double the company's value in seven years. In July, LG Electronics announced its future vision for 2030, aiming to transform the company from a home appliance-centered business into a life solution platform company and achieve the 'Triple 7' (7% annual growth rate, 7% operating profit margin, and more than 7 times corporate value) by 2030. The estimated corporate value indicator at the end of this year was 3.58 times as of the 23rd. To achieve the goal, it needs to increase by about twice the current level. Since this figure has been declining for three years after Cho’s appointment, there is keen interest in whether it can rebound next year.

According to financial information provider FnGuide, LG Electronics' EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) was 4.6 times at the end of 2021, 3.67 times at the end of last year, and the estimated figure for the end of this year is 3.58 times, showing a downward trend. EV (Enterprise Value) is calculated by adding market capitalization and total debt, then subtracting cash and cash equivalents. EBITDA is an indicator of a company's cash-generating ability from operations, calculated by adding depreciation and amortization expenses to operating profit. For example, an LG Electronics EV/EBITDA of 7 means that accumulating seven years’ worth of LG Electronics’ earnings would be enough to buy the company. Currently, LG Electronics can be acquired with 3.58 years’ worth of earnings.

Cho Ju-wan, President of LG Electronics, is presenting Future Vision 2030 at the LG Electronics press conference held on July 12 at LG Science Park in Magok-dong, Gangseo-gu, Seoul.
[Photo by Yonhap News]

Generally, a low EV/EBITDA is interpreted as a signal for stock price appreciation because it means the current stock price is undervalued relative to the company's operating cash flow. However, maintaining this low level for several years is risky. It implies that investors have doubts about what new businesses will drive the company's future and how much the accumulated cash will grow going forward. Typically, if it remains low for five consecutive years, it is interpreted as a warning sign that the company's long-term vision is unclear and the future is uncertain. Simply put, investors believe that while the company is currently profitable, its future is unstable.

CEO Cho has repeatedly stated that he will increase corporate value. In July, he said, "We will raise the company's EV/EBITDA to more than 7 times." At the CES 2023 press conference in January, he said, "Until now, management has focused on sales and operating profit, but going forward, how much we increase corporate value will be an important issue," adding, "We need to maximize the potential of existing businesses and enter completely new areas where we have not been involved before."

The market is paying close attention to whether LG Electronics' EV/EBITDA will rebound next year. The key is how much operating profit from the automotive electronics (electric and electronic equipment for vehicles) division can be increased. Recently, the global electric vehicle market has been sluggish, raising concerns about whether LG Electronics' automotive electronics business can maintain explosive growth momentum. However, the securities industry has issued positive forecasts. Dongwon Kim, a researcher at KB Securities, predicted that the VS Business Division, which handles automotive electronics, will account for 11% of the company's total operating profit next year, about three times larger than this year's 4%.

Unless there are unexpected events, it is highly likely that LG Electronics' VS Division will increase its order backlog. Typically, once an auto parts supplier receives an order from a finished car manufacturer, it secures research and development (R&D), production, and supply work related to that customer for the next three years. This means the company can steadily increase its sales and operating profit for up to three years from the contract date. This is why the market expects the VS Division's contribution to operating profit to rise.

Ryu Jae-cheol, head of LG Electronics H&A Division, is answering questions at the LG Electronics UP Home Appliances 2.0 Media Day held on the 25th at LG Science Park in Magok-dong, Gangseo-gu, Seoul.
[Photo by Yonhap News]

While increasing order volume, LG Electronics must also discover new business models with high growth potential. The business community notes that since CEO Cho took office, LG Electronics has not recklessly focused only on the automotive electronics business but has simultaneously reformed its existing home appliance (H&A) and TV businesses. The H&A Division has strengthened its rental business, UP appliances (appliances that automatically update after purchase), and built-in appliances (appliances embedded into kitchen walls or similar). The HE Division has exported not only products (TVs) but also software (various content based on the 'webOS' operating system) simultaneously.

LG Electronics' ability to activate new businesses (automotive electronics) and change the sales approach of existing businesses (home appliances) as CEO Cho promised is attributed to his continuous efforts to strengthen the company's mid- to long-term fundamentals, having served as head of LG Electronics Australia, head of the U.S. branch, and vice president and head of the North American region. Kim Kyung-jun, CEO of CEO Score, said, "If EV/EBITDA rebounds, it means the market recognizes that the innovations led by CEO Cho have succeeded and LG Electronics' momentum has strengthened."

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