LGD Returns to Profitability in Q3
Rising LCD TV panel prices and a seasonal increase in shipments helped LG Display (LGD) turn the corner on profitability in Q3 2020, as the company reported net profits for the first time after consecutive quarters of losses for the Korean flat panel display maker. While LGD held to its long-term strategy of shifting to OLED, the company indicated that it would be flexible in its plans for LCD.
LGD reported a net profit of KRW 11 billion (US$9 million) on revenues of KRW 6.7 trillion ($5.7 billion) for the July to September quarter. Revenues increased 30% Q/Q and 13% Y/Y and reached the highest level since 2018, but just missed consensus analyst expectations of KRW 6.8 trillion. Both operating profits and net income beat analyst expectations of KRW +77.3 billion and KRW -7.5 billion, respectively. LGD recorded KRW 164 billion ($138 million) in operating profits, recovering from six straight quarters of operating losses.
LGD’s margins all improved dramatically in Q3 from Q2 by between 8% and 12%, with gross margins recovering to 13% and EBITDA margins of 19% hitting the highest level since Q4 2017. LGD badly needs as much EBITDA improvement as it can get, to generate cash to fund its transition from commoditized LCD to OLED, and Q3 gave investors greater confidence that it can generate cash from operations.
LG Display Income Statement Highlights, Q3 2018 to Q3 2020
In its Q2 earnings call, LGD had declined to give its usual guidance on area shipments and prices, citing the uncertainty surrounding COVID-19, but the company did give some comments about Q3, and actual performance met or exceeded those comments:
- LGD expect continued strong demand in IT panels from WFH and education. Although LGD’s revenue share of IT panels decreased from 52% to 43%, this was a result of TV and smartphone revenues increasing faster. Revenues from IT panels increased 8% Q/Q and 28% Y/Y to $2.4 billion.
- LGD expected a “significant improvement in profitability” in Q3; a 12% improvement in operating margin and a 9% improvement in net margin certainly seems significant.
LGD’s revenue increase was driven by substantial increases in both area shipments and area prices. LGD reported shipments of 8.3 million square meters, up 24% Q/Q although down 13% Y/Y. The company also reported increased capacity of 10.8 million square meters, up 16% Q/Q but down 17% Y/Y, for a capacity conversion of 77%. LGD is steadily reducing its LCD capacity in Korea as part of its restructuring, but now includes its OLED TV lines in Guangzhou in the totals.
In Q3, LGD changed its reporting by application, combining Monitors and Notebooks into an “IT” category, and as noted above although the share of IT panels decreased, the revenue of IT panels increased, just at a slower rate than the increase of TVs and mobile panels. TV panel revenue increased by 58% Q/Q and 2% Y/Y, while mobile revenues increased 51% Q/Q and 20% Y/Y.
Although LCD TV panels typically have the lowest area prices, and the increased share of LCD TV would put downward pressure on LGD’s area ASP, increasing OLED panel revenues overcame this headwind. LGD’s area prices increased 8% Q/Q and 38% Y/Y to $706 per square meter, their highest level since Q4 2014.
LG Display Area ASPs and Product Mix, Q3 2018 to Q3 2020
LGD’s cash flow and balance sheet stabilized in Q3 2020, relieving some of the company’s financial stress. LGD reported a positive cash flow from operations of KRW 465 billion ($391 million), despite a big increase in working capital which accompanied the higher revenues. LGD’s inventory increased by $348 million, but inventory days increased only slightly, from 36 to 37. LGD’s cash flow was buoyed by its biggest depreciation charge since Q1 2014, KRW 1.124 trillion ($946 million), as the company starts to depreciate its OLED TV lines in Guangzhou.
LGD’s capex in 2020 has been restrained compared to its big investment surge in 2018-2019, and Q3 capex was the lowest since at least 2014 at KRW 370 billion ($311 million), and LGD recorded positive free cash flow of KRW 95 billion ($80 million), marking only the 2nd time in the last 12 quarters that LGD’s free cash flow has been positive.
LGD’s debt level was stable, edging up less than 1% to $12.1 billion, and LGD’s book value of equity increased by 3% to $10.2 billion. LGD debt to equity improved from 121% to 118%, and net debt to equity improved from 91% to 90% during the quarter.
Still, the debt picture looks much worse if you consider the market value of LGD’s equity, which despite a recent increase in the stock price remains 51% lower than its book value. LGD’s market capitalization as of October 23rdwas KRW 5.9 trillion ($4.99 billion), so LGD’s debt to market equity is still a worrisome 242%. LGD will continue to find it difficult to raise funds in the debt market with these ratios.
LGD provided more detail in Q4 guidance than in the previous two quarters, and again offered some qualitative comments on business in the coming quarter.
- LGD expects low single-digit growth in area shipments.
- LGD expects ASPs “to keep the pace of increase.”
- Sales of OLED TV panels in the 2nd half of 2020 will be twice as high as the first half, but LGD reduced its outlook for OLED TV panel sales from “high 4 million to 5 million” in the prior quarter to 4.2-4.5 million in the October call.
- Capex in 2020 will be in high KRW 2 trillion level (cumulative capex in Q1-Q3 was KRW 2.1 trillion), and capex will be less than EBITDA.
In other notes from the earnings call:
- LGD is converting LCD TV facilities to IT to take advantage of trends. LGD believes it has advantage over its competitors in IT in product/customer/technology.
- The IT segment has seen capacity conversions by competitors, but also decrease in number of suppliers (Samsung, CEC Panda).
- Korea LCD TV capacity will be run flexibly based on short term supply/demand and customer needs.
- LGD expects 7-8M units for OLED TV in 2021.
- POLED will be “consistent business” in 2021, but LGD made no comment on profits.
- LGD will start 48” OLED production on Paju line, and will increase production of 48” in 2021.
- LGD does not expect sales to Huawei to resume soon, but Huawei did not represent a large business, only a small loss.
- MiniLED TV market impact has been minimal, LGD believes OLED will win.
- The Paju P7 line is well suited for ultra-large commercial products, and production of those products on P7 will continue.
- 2021 Capex will be within EBITDA, but LGD does not plan any big debt payoff.