"No Money"... Workforce and Financial Adjustments Immediately After Inauguration [Business & Issues]

①LG Display's Challenge

LG Display, which has been operating at a deficit, has resolved a paid-in capital increase worth 1.36 trillion KRW, bringing to the surface long-standing concerns about its cash flow. Approximately 30% of the newly raised funds must be used to repay existing debt. With LG Display initiating voluntary retirement for production workers for the first time in four years since 2019 earlier this month, new CEO Jeong Cheol-dong faces the challenge of balancing ▲ workforce operation efficiency, ▲ investment for business restructuring from LCD to OLED, and ▲ financial structure improvement.

◆ How will the funds raised through the paid-in capital increase be used?

Of the 1.36 trillion KRW LG Display aims to raise through this paid-in capital increase, only 415.9 billion KRW, or about 30%, will be allocated to facility investments such as the new 6th generation IT OLED (small-to-medium OLED) business. This investment will be used to prepare for the mass production and supply system in 2024 of the IT OLED production line applying tandem technology, which was developed for the first time in the industry and can be utilized in the automotive electronics business.

The remainder will be used to repay existing debt or cover shortfalls in operating expenses. Debt repayment (approximately 390 billion KRW) and operating funds (approximately 548 billion KRW) account for 70% of the total raised funds, indicating that the company cannot operate properly without incurring additional debt.

The financial rescue role is played by LG Electronics, LG Display’s largest shareholder with a 38.9% stake. Despite the increased burden of supporting affiliates through a 1 trillion KRW loan in the first half of this year and participation in this paid-in capital increase, it is evaluated that sufficient support is possible considering the growing operating cash flow from the expansion of the automotive electronics business.

◆ Effect of lowering the debt ratio

LG Display has been facing tight cash flow. The net borrowings stood at about 13.4 trillion KRW as of the end of September this year, an increase of about 5 trillion KRW compared to approximately 8.4 trillion KRW at the end of 2021. Through this paid-in capital increase, LG Display has diversified its funding channels, which previously relied on corporate bond issuance and borrowing, and can prevent further deterioration of its credit rating in the capital market by repaying debt and reducing interest expenses.

Currently, the three domestic credit rating agencies assign LG Display a credit rating of 'A'. Considering that it was rated 'AA' in 2018, 'AA-' in 2019, and 'A+' in 2020, it is clear that its creditworthiness has been declining over time.

Korea Ratings assessed that if LG Display’s paid-in capital increase is completed as planned, downward pressure on credit ratings could ease in the short term. NICE Credit Rating also stated that this paid-in capital increase would positively impact LG Display’s financial burden relief, analyzing that "LG Display’s debt ratio will decrease from 322.2% to 279.5%, and net borrowing dependency will fall from 35.9% to 31.1%, improving overall financial stability indicators."

LG Display OLED TV Panel

◆ Deficit management remains a challenge

The problem is that LG Display’s borrowings have already increased significantly, there are many areas requiring funds, yet deficit management continues. Without securing cash-generating capability, the vicious cycle of continuously raising funds will persist.

LG Display has recorded losses for six consecutive quarters from Q2 last year through Q3 this year. The cumulative loss over the past six quarters amounts to approximately 4.72 trillion KRW. Even if it manages to turn a profit in Q4 this year, the profit is expected to be around 100 billion KRW, which would only signify breaking the deficit trend temporarily.

While the deficit in Q1 next year may be reduced compared to Q1 this year, it is difficult to generate profits in the first quarter due to the seasonal 'off-season' characteristic of the display industry. Accordingly, this paid-in capital increase decision is interpreted as reflecting CEO Jeong Cheol-dong’s determination to accelerate the business restructuring period from LCD to OLED and return to a profit-making structure, even if it requires immediate expenditure.

Kim Un-ho, a researcher at IBK Investment & Securities, said, "The capital securing plan has accelerated due to recent management changes," and "Expectations for additional growth have increased with the secured funds." In his inaugural speech earlier this month, CEO Jeong emphasized, "A performance turnaround is the top priority," adding, "It is important to thoroughly fulfill promised projects with customers and achieve planned goals."

Chung Cheol-dong, CEO of LG Display

◆ Shareholders worry about dilution of equity value

Shareholders are concerned about stock price adjustments due to dilution of equity value caused by LG Display’s paid-in capital increase. The stock price plummeted to a 52-week low level after the announcement, reflecting these shareholder concerns.

LG Display’s stock closed at 12,310 KRW on the 18th, the day of the paid-in capital increase announcement, down 6.01% from the previous trading day, and further declined 3.9% to 11,830 KRW on the 19th. During intraday trading, the stock price dropped more than 11%, hitting a 52-week low of 10,940 KRW.

Generally, large-scale paid-in capital increases lead to stock price declines due to concerns about a flood of new shares hitting the market. Since the number of new shares issued through this paid-in capital increase amounts to 39.7% of existing shares, there are overhang (potential sell-off) concerns.

As much as shareholders worry about the stock price decline, CEO Jeong, who has become LG Display’s new leader, is also deeply concerned about workforce efficiency and financial structure improvement. Shortly after his inauguration, LG Display conducted voluntary retirement targeting production workers aged 40 and above at its Paju and Gumi plants to efficiently reallocate personnel during the LCD business exit process. This is the first time in four years that LG Display has offered voluntary retirement to senior production workers.

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