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LG Electronics (066570 KS) Preparing for a Future in Automotive Electronics

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LG Electronics (066570 KS) Preparing for a Future in Automotive Electronics LG Electronics (066570 KS) Preparing for a future in automotive electronics Technology Automotive electronics could be the next growth engine for LGE LG Electronics (LGE) launched a vehicle components (VC) division after merging with its Results Comment auto engineering subsidiary V-ENS on July 1st. We believe the move is part of the July 25, 2013 company’s efforts to find its next growth driver beyond smartphones. LGE, which was once ranked on par with Samsung Electronics (SEC), has struggled ever since failing to ride the smartphone wave. But now that the TV, home appliance, and air conditioner (Maintain) Buy businesses are stabilizing, and the once-lagging smartphone business is also back on track, the firm needs to look for its next growth engines, one of which we believe will be Target Price (12M, W) 108,000 automotive electronics. Automotive electronics is a vast market estimated at W600tr annually. It is one area in Share Price (07/24/13, W) 74,200 which the LG Group has a competitive advantage, given its strength in motors (LGE & LG Innotek), wireless/audio (LGE), camera modules/LEDs (LG Innotek), batteries (LG Chem), Expected Return 46% and other various parts (LG Hausys). We believe the VC division will be in charge of combining all these components into marketable products. Although it will take some OP (13F, Wbn) 1,501 time for the business to stand on its own, we are encouraged by the fact that LGE has Consensus OP (13F, Wbn) 1,647 taken a major step forward towards future growth. EPS Growth (13F, %) 670.7 2Q13 review: OP in line at W479.3bn Market EPS Growth (13F, %) 18.2 For 2Q, LGE posted revenue of W15.2tr (+8% QoQ) and operating profit of W479.3bn P/E (13F, x) 26.1 (+37.1% QoQ), largely in line with our projections (W15.1tr and W487bn, respectively). Market P/E (13F, x) 9.4 KOSPI 1,912.08 The Air Conditioning & Energy Solution (AE) unit delivered a positive surprise, with OP margin hitting a record-high 9.9%. The Home Entertainment (HE) unit also saw a better- Market Cap (Wbn) 12,143 than-expected OP margin of 1.9% (+1.3%p QoQ), aided by the rollout of new TV models Shares Outstanding (mn) 181 in March. Free Float (%) 65.9 Foreign Ownership (%) 14.6 The Mobile Communications (MC) unit, on the other hand, posted weak margins despite Beta (12M) 1.02 solid shipments (12.1mn units in 2Q) due to higher marketing costs as more new models 52-Week Low (W) 55,800 were released overseas. However, increasing marketing expenses are not entirely 91,800 52-Week High (W) negative, as they help promote LGE’s brand reputation. We are also upbeat on the (%) 1M 6M 12M scheduled release of the G2 model in 3Q, especially as the new smartphone will be Absolute 5.4 0.8 29.5 carried by Verizon, which has the largest LTE network in the US. Relative -0.9 3.5 22.9 For 3Q, we forecast LGE’s revenue and operating profit at W15.1tr and W345.2bn, Share price respectively. 160 KOSPI 140 Maintain Buy with TP of W108,000 120 We retain our Buy call and target price of W108,000 for LGE. We derived our target 100 price by applying a P/B of 1.62x (near the five-year average of 1.66x) to our 2014F BPS 80 of W66,609. We believe the stock is undervalued given the company’s stabilizing 7/12 11/12 3/13 7/13 business conditions and preparations for its future in automotive electronics. Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Telecom equipment/ Revenue (Wbn) 55,754 54,257 50,960 60,860 67,136 75,539 Electronic components OP (Wbn) 177 379 1,136 1,501 2,185 2,869 Wonjae Park OP Margin (%) 0.3 0.7 2.2 2.5 3.3 3.8 +822-768-3372 NP (Wbn) 1,227 -470 67 515 1,108 1,508 [email protected] EPS (W) 7,345 -2,809 369 2,846 6,129 8,339 ROE (%) 10.0 -3.7 0.5 4.2 8.8 11.0 P/E (x) 15.7 - 199.3 26.1 12.1 8.9 P/B (x) 1.6 1.1 1.2 1.2 1.1 1.0 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 12. July 25, 2013 LG Electronics LG Group to expand auto electronics business LGE launched a VC division after merging with its auto engineering subsidiary V-ENS on July 1st. The company appointed the CEO of V-ENS as the head of the new division. As a result, the company now has five divisions under its umbrella. LG Group aims to strengthen the automotive electronics business by integrating auto parts-related businesses. Given that LGE’s divisions generate quarterly average revenue of over W12tr (except the AE division; W4tr), the company’s merger with V-ENS (full-year revenue of less than W110bn in 2012) reflects the company’s high expectations for the VC business’ growth potential. LGE, which was once ranked on par with SEC, has struggled ever since failing to ride the smartphone wave. But now that the TV, home appliance, and air conditioner businesses are stabilizing, and the once-lagging smartphone business is also back on track, the firm needs to look for its next growth engines, one of which we believe will be automotive electronics. Figure 1. Corporate structure of LGE Source: Company materials Figure 2. LGE’s revenue by division (2012, Wtr) Figure 3. Market size comparison by product (US$bn) Home Entertainment 23.1 600 510 Home Appliance 11.2 Mobile 10.1 400 357 Communications 300 Air-Con. & Energy 4.3 Solution 200 Average 12.2 110 56 Vehicle Component ? 0 Memory TV Semiconductor Handset Automotive 0 5 10 15 20 25 components Source: Company data, KDB Daewoo Securities Research Source: Fuji Chimera Research Institute, Gartner, IDC, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 July 25, 2013 LG Electronics The global automotive electronics industry is growing rapidly. The global auto market, after a setback in 2008 amid the financial crisis, is now resuming growth driven by emerging markets. Given that about 80mn cars are sold every year, the global auto market is estimated at W1,000tr annually (W600tr for auto parts, excluding heavy plates). In such a vast auto market, the adoption of electronic parts is sharply expanding. With growing interest in the electric vehicle (EV) market, Tesla Motors, a US-based EV manufacturer, is seeing a surge in its share price. While it remains to be seen what type of cars (EV, hydrogen vehicles, traditional cars, etc,) will take control in the future auto market, the increase in electronic parts appears to be an irreversible trend. Figure 4. Global auto sales volume Figure 5. Stock price of Tesla Motors (mn units) Historical High 90 83.5mn units 60 30 0 Low Volume 1950 1970 1987 1991 1995 1999 2003 2007 2011 Source: Fuji Chimera Research Institute, KDB Daewoo Securities Research Source: QwayNEO Figure 6. EV charging station of Tesla Motors Figure 7. European operations of Tesla Motors Source: Company materials Source: Company materials Figure 8. Automotive electronic system Figure 9. Self-driving car by Google Source: Press data Source: Company materials KDB Daewoo Securities Research 3 July 25, 2013 LG Electronics In our view, automotive electronics is one area in which the LG Group has a competitive advantage, in light of its affiliates’ strength in audio system/motor/wireless solutions (LGE), displays (LG Display), LED lights/ABS (LG Innotek), batteries (LG Chem), and various other parts (LG Hausys). We believe the VC division will improve the LG Group’s module-making process for automotive electronic parts based on V-ENS’ design and module-making capabilities. Automotive electronics is still a fledgling industry and has unclear growth prospects. However, we are encouraged by the fact that LGE has taken a major step forward towards future growth. Figure 10. Corporate structure of LG Group Koo Bon-moo LG International Heung JI LG International (001120 KS) 100% & affiliates 28.0% (001120 KS) 51.0% 100%33.3% 7.5% 48.6% Kumah Steel PixDix Sladaebidi Korae Global Digest LGLG Corp.Corp. Foreign support 33.5% 33.7% (003550(003550 KS)KS) 36.0% 35.0% LGLG ChemChem LGLG ElectronicsElectronics LGLG UplusUplus GIIRGIIR (051910(051910 KS)KS) (066570(066570 KS)KS) (032640(032640 KS)KS) (035000(035000 KS)KS) 85% 100% 50.0% 37.9% 100% SeeTec LGLG DisplayDisplay CS Leader LG CNS HS Ad (034220(034220 KS)KS) 33.5% 100% LGLG HausysHausys 100% 88.1% 100% Bugs Com Ad (108670(108670 KS)KS) Image & Materials Media Log LG N-Sys 100% 100% 80.0% 83.7% L Best Hausys Interpane Nanumnuri 51.0% Dacom Crossing Korea Elecom 50.0% 47.9% Tostem BM LGLG InnotekInnotek 100% 100% 100% (011070(011070 KS)KS) A-in Teleservice V-ENS Hausys ENG 100% Innowid 100% 100% 34.0% CS ONE partner Ucess Partners LGLG H&HH&H 100% Hiplaza (051900(051900 KS)KS) 100% 61.3% Serveone 100% 100% BNE The Face Shop HiBusiness Logistics 100% LG Sports 75.0% 50.0% EverOn CleanSoul 100% 100% Himsolutek LG Solar Energy 100% Fuser 100% 51.0% 70.0% 100% Hiteleservice LG Siltron LG-Toyo Engineering Haitai Beverage 64.8% 100% Lusem 90.0% Ace R&A 90.0% Coca-Cola Korea 50.0% Konjiam Yewon 100% LG MMA 100% Hientech 100% LG Pure Cell Systems Hankook Beverage 51.0% LG Hitachi 100% 30.4% LG MDI LGLG LifeLife SciencesSciences (068870(068870 KS)KS) Source: Company data, KDB Daewoo Securities Research Figure 11.
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