Fitch: LG Electronics' Profitability to Improve in 2012

Published on: 2nd Feb 2012

­Fitch Ratings says that it expects LG Electronics's profitability to improve in 2012, following a turnaround in the mobile handset business in Q411. However, Fitch says the operating environment is still tough and the Negative Outlook on the company's debt rating remains.

"In Q411, LG finally recorded an operating profit in the mobile handset division backed by the launch of LTE smartphones and Fitch expects the company to continue to restore profitability in 2012", said Alvin Lim, Associate Director in Fitch's Asia Pacific Telecom, Media and Technology team. "However, major risks remain for the company in that its smartphone market share is still small, the display panel industry is suffering and developed market economies are weak," added Mr. Lim.

LG's mobile handset business successfully returned to profitability in Q411 with a 0.4% EBIT margin, after six consecutive quarters of operating losses, backed by an improved product mix with an increased share of smartphones, especially the LTE phones. Fitch forecasts that this trend will continue to boost the average selling prices and market share of LG's handsets and drive recovery in profitability in 2012.

Fitch also noted that LG recorded relatively strong TV sales while securing sound EBIT margin of 2.4% in Q411 despite weak economic conditions in developed markets. This illustrates that LGE has solidified its position as one of the top competitors in the global TV industry while Japanese TV makers continue to record losses. In addition, Fitch notes that the company's net debt decreased marginally to KRW5.1trn at end-2011 (end-2010: KRW5.3trn) principally due to a KRW980bn rights issue.

However, Fitch believes that some major weaknesses need to be resolved for the company to improve its credit profile in 2012.

Firstly, despite the operational turnaround, Fitch notes that LG's smartphone market share and brand recognition remain weak compared to the top-tier makers. Secondly, the over-supply in the display panel business is not likely to be resolved for at least the first half of 2012 and the frail global economic conditions will also dampen demand for LGE's other products.

Fitch will consider downgrading the rating if the company's EBIT margin remains below 1% and leverage is sustained above 3x with negative free cash flow. Conversely, Fitch may revise the Outlook to Stable if LG's EBIT margin improves to above 2%-3% and leverage trends down towards 2.5x on a sustained basis. In its analysis, Fitch proportionally consolidates LG's two major operating subsidiaries, LG Display and LG Innotek.

 

Tags: [lg electronics]  [Korea]