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Is LG Electronics trading too high?

Shares of LG Electronics have risen by more than 100 percent in just over a year. The company's shares ended at 107,500 won last week, up from 47,600 won on Oct. 28, 2016, according to data from the Korea Exchange (KRX).

LG Electronics was one of the best performers in terms of its share growth rate over the period among other "big players" on the KOSPI index; however, the key question is how much further can its shares rise?

A global market research firm said LG Electronics is "overvalued" and remained cautious about its "niche-market" mobile phone strategy.

"We rate LG Electronics as market-perform and presents our target price at 79,000 won," Bernstein Research said in its latest report.

The biggest upside hope would be a recovery in LG Electronics' mobile phone shipments, market share and margins primarily due to better-than-expected sales of its flagship G6.

In that context, downside risks include disappointing phone sales and investment income from its biggest affiliate LG Display. LG Electronics holds a 38 percent stake in the firm which has risks due to panel price weakness, said the research firm.

"Handset weakness continued, with aggressive discounts to clear G6 inventory hurting margins. Given that LG Electronics recycled 2016 flagship model's components for the G6, 2018 flagship component costs are expected to increase year-on-year, hindering any near-term improvement especially with rising competition in both premium (Samsung and Apple) and mass market (Chinese players)," Mark C. Newman, managing director at Bernstein said in the report.

"History has repeatedly been shown to punish handset players such as Nokia, Motorola and Blackberry, all of which ultimately downsized to oblivion," said the senior analyst.

Newman said LG Electronics reported preliminary fourth-quarter results were well below a consensus but matched its estimates with the handset division posting a 10th consecutive quarterly loss, cumulatively totaling 2.2 trillion won.

But Bernstein remained rather positive over the outlook for LG's television and home appliance businesses, segments in which the technology unit has a competitive edge over its international competitors.

LG Electronics is the world's No. 2 TV manufacturer after its long-time cross-town rival Samsung Electronics, while it's been regarded as one of the most trusted suppliers in "white goods" in key international markets.

"TVs likely remained the bright spot, with operating margins elevated in the high single digit area. Although TV margins are likely to normalize in the long term given the competitive nature of the business, we believe LG Electronics' strong position within the premium TV segment is a real moat in the short term and we see mid to high single digit margins in this year," the research firm said.

The decision by the United States to possibly actualize safeguard measures is likely to have a limited impact on LG's appliance unit.

"The appliances business is likely on track, with operating margins in the mid-single digit area thanks to a premium mix improvement. Despite the safe guard measures by the United States against LG Electronics' washing machines and the division's low margins historically, we believe LG Electronics will continue to benefit from its strong position in the premium appliance segment and expect margins to remain in the mid-single digit area in the short term," said Newman in the report.

Bernstein expects LG Electronics shares to increase in value if its affiliates including LG Innotek, in which LG Electronics holds a 48 percent stake, are rated higher in the market or if their earnings prospects improve significantly.

LG Electronics reported 16.96 trillion won as its fourth quarter earnings with the company forecasting 366 billion won as its quarterly operating profit, LG said in a preliminary earnings report.
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Publication:The Korea Times News (Seoul, Korea)
Date:Jan 21, 2018
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