Fitch Affirms LG Electronics Debt Ratings Despite Weak Smartphone Performance
Published on: 7th Mar 2014
By: Ian Mansfield
Fitch Ratings has affirmed South Korea based LG Electronics's (LGE) Long Term Foreign and Local Currency debt ratings at 'BBB '. The outlook is stable.
Fitch said that LGE holds competitive positions in the global flat panel TV and home appliance markets. LG Display (LGD), which is 37.8% owned by LGE, is the second-largest flat panel display manufacturer with a 22% share of the global market. Strong market presence and product diversification are likely to provide earnings stability to some extent despite LGE's exposure to the weak consumer electronics industry, such as mobile phones.
However, handset profitability is unlikely to improve in 2014 as competition intensifies. Lenovo's access to American market through its Motorola Mobility acquisition will present a significant challenge to LGE's market share in the medium term.
Given Apple and Samsung's dominance of the high-end smartphone market and Chinese makers' aggressive expansion in the mid- to low-end segment, it will be difficult for LGE to improve its market share in the near term.
LGE's position in the global TV market will likely remain solid, but significant margin improvement is unlikely. The TV manufacturing industry will remain volatile given the intense competition. As Chinese manufacturers become more aggressive to take market share, TV sales prices are likely to fall, even for the premium products.
Capacity expansion in China and the slow reduction in utilization rates will result in oversupply of display panels globally. While there will also be fragile demand for TV display panels, Fitch believes this will be offset by LGD's technology leadership and solid relationship with customers as well as strong growth in sales of small to medium display panels for mobile devices, where LGD is a strong player.
Pressure on Margin Continues
A substantial improvement in LGE's margin is unlikely in the short term. We continue to believe that the handset business will drag down LGE's overall profitability, although the decline will be mitigated by its solid market positions in TVs and home appliances.
The unfavourable outlook for the display business poses downside risks to profitability, but this would be partly offset by a possible increase in orders from Apple. LGD is a major supplier to Apple, providing around 40% of its total mobile phone display panels in 2013.