LGD Posts Another Loss in Q3

Published October 29, 2019

As the flat panel display industry struggles with oversupply, LGD reported another big loss in its Q3 earnings release this week, kicking off what it likely to be a grim earnings season for panel makers.
LGD reported a loss of KRW 442 billion (US$370 million) on revenues of KRW 5.8 trillion ($4.9 billion) for the July to September quarter. Revenues were up 6% Q/Q but down 10% Y/Y, and the loss compares with a net profit in Q3 2018 of KRW 18 billion ($16 million). The loss was much more severe than consensus analyst expectations of a KRW 322 billion ($270 million). LGD has now lost money in five of the last seven quarters, and its losses in 2019 have already passed more than KRW 1 trillion ($900 million), with additional losses very likely in the fourth quarter.

​Earlier in the week, ahead of the Q3 earnings release, analysts at NH Investments and Securities downgraded LGD’s share target price from KRW 24,000 to KRW 19,000. LGD’s share price on the Seoul exchange closed Friday at KRW 13,700 KRW.

LG Display Income Statement Highlights, Q3 2017 to Q3 2019

Source: DSCC Quarterly Display Supply Chain Financial Health Report

As grim as the picture looks, on a sequential basis there were a few bright spots. Revenue increased 6% Q/Q, and while gross margin decreased to a slender 5%, EBITDA margin improved from 9 to 11% and EBITDA improved from KRW 458 billion ($392 million) to KRW 612 billion ($512 billion). LGD badly needs as much EBITDA improvement as it can get, to generate cash to fund its transition from commoditized LCD to OLED.

LG Display Revenue by Product Group, Q3 2017 to Q3 2019

Source: DSCC Quarterly Display Supply Chain Financial Health Report

The relative improvement in LGD’s margins was driven by a shift away from LCD TV panels and an increase in mobile shipments, as shown in the chart here. The % of revenue from TV was the lowest at least since 2013, and likely the lowest since LCD TV grew dramatically in 2008-2010.

Since LCD TV panels have the lowest area price, and mobile panels the highest, LGD managed to record a 13% Q/Q increase in average selling price (ASP) per square meter, as shown in the next chart. Area ASPs were even 3% higher than Q3 2018, despite the 25-30% decline in LCD TV panel prices during that time. LGD is helped in this metric, of course, not only by increased mobile shipments but by increased shipments of OLED TV panels.

LG Display ASP per Square Meter, Q3 2017 to Q3 2019

Source: DSCC Quarterly Display Supply Chain Financial Health Report

A separate report this week on LGD’s OLED TV expansion in Guangzhou, China, suggested that OLED TV shipments may fall short of expectations in Q4. The Korean site ETNews reported that the Guangzhou fab is struggling with low yields in its initial operating phases. LGD has applied many new technologies to maximize productivity, and the additional complexity has the plant off to a rough start.

“Although LG Display’s goal was to increase the yield in a short period of time as the Guangzhou plant is constructed as same as LG Display’s Paju plant, current yield is between 50 and 60%.” said a representative for the industry quote by ETNews.

The report cited changes in the stack structure of LGD’s White OLED (WOLED) design, and new materials suppliers, as additional factors causing lower yields in Guangzhou. The structural changes in the stack were intended to increase luminous efficiency and productivity at the same time. Given the unstable yield rate, LGD will postpone the application of Multi-Mode Mother Glass (MMG) in its Guangzhou plant. MMG promises a dramatic improvement in glass substrate utilization for 65” panels on the Gen 8.5 line.

LGD addressed the Guangzhou problem in its conference call: “One of the reasons why there has been a slight decline to OLED TV panel sales this year is the output of the Guangzhou plant being lower than our initial plan. We are hoping that the plant will be operating normally by end of this year and we expect that there will be about 6.5 million OLED TVs in 2020.” In the call LGD stated that OLED TV panel shipments would fall short of its prior target of 3.6 million units, and will be slightly less than 3.5 million, due to the Guangzhou issues.

LGD’s cash flow and balance sheet have been deteriorating throughout this difficult year. LGD reported a negative KRW 48 billion (-$40 million) in operating cash flow in Q3, mostly as a result of increases in working capital. LGD’s inventory increased by $82 million and its Accounts Receivable balance increased by a whopping $791 million, while its Accounts Payable decreased by $119 million, all of those figures consuming cash at a time that LGD needs to conserve cash. LGD’s free cash flow came in at a negative KRW 1.5 trillion (-$1.26 billion), and LGD’s free cash drain in the last twelve months has amounted to almost $5 billion.
LGD took on substantial new debt in Q3, increasing their debt load by more than KRW 2 trillion ($1.5 billion) to 13.4 trillion ($11.2 billion). With the quarterly losses decreasing the book value of LGD’s equity, LGD debt to equity worsened from 77% as of June 30th to 94% as of September 30th, and net debt to equity worsened from 60% to 74% during that time.

The debt picture looks much worse if you consider the market value of LGD’s equity, which is 63% lower than its book value. LGD’s market capitalization as of 10/23 was KRW 5.3 trillion ($4.4 billion), so LGD’s debt to market equity is a worrisome 253%. LGD will find it increasingly difficult to raise funds in the debt market with these ratios. During the call, LGD indicated that the ratios are expected to gradually improve after year-end as LGD completes most of the OLED investments.

LGD indicated that it recognized the seriousness of its financial situation. Chief Financial Officer Suh Dong-hee said that the company is going through “structural reforms at zero base”, and that LGD would reduce its 2019 capex by KRW 500 billion ($427 million) and revamp its P7 and P8 LCD TV production lines. The LCD line restructuring will be completed early next year, with details shared later.

The LCD restructuring will result in area shipments to decline Q/Q in Q4, but LGD expects ASPs to increase in the low-to-mid teens % with the small/medium product mix increasing and the LCD portion decreasing. LGD also indicated that it expects LCD TV supply/demand dynamics to stabilize by the end of the year, but they have a conservative outlook on the LCD TV market for 2020.

LGD has set a course to re-engineer itself as an OLED maker, but most of its operations are still in LCD. The company will be challenged to fund its aspirations for OLED expansion unless LGD can generate cash from its LCD operations. With some restructuring of LCD lines, LGD hopes to shift the supply/demand dynamics to a favorable position. We’ll see if their actions (and corresponding moves by Samsung) are enough.

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Written by

Ross Young