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Securities firms' research centers are divided in their views on major LG Group affiliates following the release of second-quarter results. Some companies posted equally strong earnings yet received opposing target-price revisions, while a considerable number saw analysts uniformly lower their expectations—citing short-term profitability—even as they agreed on the firms' long-term growth potential.
According to financial data provider FnGuide on the 2nd, among the target-price revision reports on LG Group affiliates published during the week from the 27th of last month through that day, 14 raised targets while 23 lowered them. The stocks that split analysts' views most sharply were LG Electronics and LG Innotek. Both companies beat market expectations with their second-quarter results, and assessments of their new growth engines were also positive. However, for LG Electronics, the premium to assign to its artificial intelligence (AI) data center cooling and robotics businesses clashed with the decline in the KOSPI's average valuation. For LG Innotek, growth expectations for its semiconductor substrate business and the recent share-price correction among global substrate makers became the factors dividing target prices.
Meritz Securities maintained a "buy" rating on LG Electronics but lowered its target price from 260,000 won to 220,000 won. Yang Seung-su, a researcher at Meritz Securities, said, "LG Electronics' current share price is in an undervalued range that does not sufficiently reflect its heightened earnings capacity and its mid-to-long-term growth potential," but added, "We lowered the fair value as we reflected the decline in the KOSPI's 12-month forward average price-to-book ratio (PBR) in our valuation."
For LG Innotek as well, the growth potential of its optical solutions and its flip-chip ball grid array (FC-BGA) business—substrates for high-performance semiconductors—was assessed positively. In particular, the point that its earnings structure, heavily concentrated in camera modules, could ease as the package solutions division grows was cited as a re-rating factor. Indeed, second-quarter package solutions revenue rose 14% from the previous quarter to 498.4 billion won, and profitability also improved on strong sales of smartphone substrates and FC-BGA. According to IBK Investment & Securities, the operating margin of package solutions was estimated to have risen from 8.6% in the first quarter to 11.7% in the second quarter.
However, views diverged over whether to reflect this in corporate value immediately or to first factor in the share-price declines of global substrate makers. Fundamentals are solid, but the direction shifted depending on how peer companies' multiples were applied. Ko Eui-young, a researcher at iM Securities, noted, "Visibility for the industry has improved, but as the share-price declines among the global peer group have been steep, a downward revision of fair value is unavoidable from a relative-valuation standpoint."
LG Household & Health Care was the only group stock for which analysts' positive outlooks converged in one direction. With North American revenue surpassing China for the first time and the cosmetics business turning to profit, the securities firms that issued reports raised both their investment opinions and target prices in tandem. The assessment is that this was not merely one-off cost cutting or a currency effect, but that reducing dependence on China and duty-free channels while expanding the North American distribution network has begun to translate into actual profitability improvement.
Conversely, expectations were lowered for LG Energy Solution due to initial ramp-up costs and production bottlenecks at its North American energy storage system (ESS) production lines, and for LG Display due to declining average panel selling prices and cost burdens at downstream firms. In the case of LG CNS, second-quarter operating profit fell short of market expectations, and cost burdens grew as the share of new businesses rose. Oh Dong-hwan, a researcher at Samsung Securities, noted, "We lowered our operating-profit estimate to reflect the somewhat slower pace of revenue growth from affiliated companies," adding, "There is a possibility of further profitability decline amid intensifying order competition surrounding large projects such as financial-sector system modernization."
