LG Display Co Ltd. (ADR) Trading Below Break-Up Value $LPL

Tobias CarlisleStocksLeave a Comment

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LG Display Co Ltd. (ADR) $LPL is another super cheap company in the All Investable Screener offering substantial upside. The stock has been beaten up over the last twelve months, falling almost 50 percent from its 52-week high of $18.43. At its $9.64 price at the time of writing, the stock has a market capitalization of $6.9 billion. Its net debt to the tune of $1.7 billion pumps up its enterprise value to $8.6 billion. With operating earnings over the last twelve months of $2.1 billion, LPL trades on a very modest acquirer’s multiple of 4.13x. With a PE of 5.46, a free cash flow / enterprise value yield of 10 percent, and a 2.2 percent dividend yield, LPL is cheap across the board, and worthy of a closer look.

LG Display Co., Ltd., founded in 1985 and is headquartered in Seoul, South Korea, manufactures and sells thin film transistor liquid crystal display (TFT-LCD) panels in Korea, the U.S., Europe, and Asia. It offers various display panels comprising large-sized panels for use in televisions, notebook computers, and desktop monitors; and small-sized panels for other application products, such as mobile phones and tablet computers. The company also provides panels for industrial and other applications, including entertainment systems, automotive displays, portable navigation devices, and medical diagnostic equipment, as well as organic light emitting diode panels and flexible display products. LPL sells its products directly to end-brand customers and their system integrators. The company was formerly known as LG.Philips LCD Co., Ltd. and changed its name to LG Display Co., Ltd. in February 2008.

LPL is a safe stock on the metrics I favor. Its F-Score, which examines its fundamental strength, is a perfect 9. Its Z-score, at 2.76, puts it in the grey zone, which is appropriate given its debt load, but it is close to the >2.99, which would indicate an absence of financial distress (a Z-score below 1.81 indicates financial distress). Its M-Score, which measures earnings manipulation, is a healthy -2.99.

A month ago LPL announced a plan to shell out KRW 10 trillion (around $8.5 billion) through 2018 for the manufacture of OLED displays. Given LPL’s size, this is a very significant investment. OLED materials are a self-emitting light source, which means that OLED TVs, in particular, can be made incredibly thin, flexible, and even semi-transparent, all while offering unrivaled picture quality and virtually infinite contrast. From the same article:

Vaunted as the next-gen display technology, OLED boasts of improved brightness, contrast and efficiency as compared to LCD or Plasma. However, OLED is said to highly expensive to be used for manufacturing TVs and thus Samsung Electronics Co. Ltd. SSNLF – the TV maker giant – reduced its exposure to OLED TVs way back.

Presently, LG display and its sister concern LG Electronics are the only major players that are carrying the technology for TVs on their strong shoulders amid improving OLED market prospects. As per IHS DisplaySearch, a global market research firm, the flexible OLED market is expected to thrive from 2015, with projected sales to increase to $4.8 billion by 2021 from $3.5 billion in 2015. We believe on the back of such vigorous and dedicated efforts, LG Display can break all odds and emerge as a leader in the OLED market.

The Fool thinks the deal is a good one for LPL despite the fact that it’s likely a near-term money loser:

The (money losing) question
But that also raises the question: Why is LG Display willing to strike such a seemingly sour deal with its Chinese counterparts? It’s all about jump-starting demand for the OLED TV market, which LG Display views as the future of display technology and wants to ensure it continues to lead.

In addition, these imminent agreements with Chinese display manufacturers were a long time in coming. As The Wall Street Journalsuggested in February, affiliate LG Electronics was still “virtually alone in the global market for TVs using OLED technology,” so had been planning for some time to forge agreements with “select Japanese and Chinese companies.”

To be fair, however, just last week Panasonic unveiled its own curved 65″ OLED television, and recent reports suggest Samsung — which effectively shelved its large OLED panel development following manufacturing challenges last year — remains committed and will reenter the OLED TV market by 2017.

But for now, the primary problem is one of manufacturing capacity and, therefore, prohibitively high prices for OLED TVs. LG’s latest 55″ curved OLED television (pictured above), for example, currently sports a suggested retail price of $5,000. Though older models sell for considerably less, that’s hardly competitive in many consumers’ eyes.

The solutions
Speaking in a WSJ interview in April, Dr. Sang-Beom Han offered another pre-emptive look with a compelling explanation that so happens to speak to the most recent reports:

Because of the small capacity, there are limitations in the number of OLED TV panels we can produce. We have to ultimately reach economy of scale but we’re not there yet. This isn’t something that a panel maker can do single-handedly. Participation from multiple players is needed for addressing problems like cost reduction and product competitiveness. I believe other panel-makers are working on developing OLED panels as well. It’s just a matter of time before competitors jump in.

LG Display is also working hard to expand its OLED manufacturing capabilities and increase production yields. In addition to more than tripling production at its current Gen-8 OLED manufacturing line by the end of this year, just last month LG Display announced it will invest a whopping 10 trillion won, or $8.5 billion, to shift LCD manufacturing operations to OLED over the next three years.

Bernstein writes in Barron’s that they like the entire sector:

We believe we are now trawling along the trough of the crystal cycle, which will likely lead to industry moves to constrain supply, triggering a moderation of panel price declines, and an upward rerating of the stocks. We therefore take a more “constructive” view and upgrade our coverage to Outperform. To be clear, we are not saying “this time is different”, and that we’re structurally more positive on the sector. Far from it. But the conditions for a long trade on some inexpensive stocks seem to be coalescing.

We are now expecting companies to react to weakened industry conditions by cutting back utilization rates and begin moderating the rate of supply growth in Q4 2015 and into 2016.

– It is worth noting that both AUO and LGD mentioned during their recent earnings conference that they will adjust utilization rates according to market demand, which is a rare and cautious tone from the companies. As we highlighted in our previous work, panel makers are usually unwilling to be the first to cut utilization rates than competitors. Management’s comment on utilization indicates that the industry sentiment is likely at the bottom.

– Current stock valuations imply that LGD, AUO, and Innolux will report net margins of -5.8%, -7.7%, and -7.6% in 2016 respectively, which would mean EBITDA margin compression of ~10 percentage points from current levels. This is close to 2011 trough levels when the industry was at utilization rate of 60-70% (vs. currently ~85-90%). Given recent cycle trough margin compression trends, we think this is too pessimistic, and believe further de-rating of the stocks to be unlikely.

The thin-film-transistor liquid-crystal display (TFT-LCD) stocks in our coverage have rerated downward well below our breakup value-estimated target prices. Hence, we upgrade LGD, AUO, and Innolux to Outperform. Given the uncertainty on the timing and strength of the ASP catalyst, we retain our current target prices for all three companies.

– LG Display’s valuation has de-rated the earliest since the beginning of 2015, from above 1.1x P/BV to currently below 0.6x P/BV. We had recently upgraded the company to Market-Perform. However since then the stock price declined to well below what we believe to be the “breakup” value, and is now materially undervalued.

We believe we are at the bottom of the crystal cycle and the stocks are more than incorporating expectations for a terrible Q4 2015 and an overall weak 2016. Hence, there is sufficient margin of safety between current valuations and our target multiples to upgrade the stocks now. We do acknowledge that there is some risk on the timing of when the “price moderation” catalyst kicks in and how quickly it leads to more positive investor sentiment.

Investment Conclusion

We upgrade LG Display to Outperform, while maintaining our Target Price of KRW 28,000 ($13.18 for the ADR LPL), as we believe the stock is currently undervalued relative to our trough multiple valuation. LG Display usually has the highest valuation and re-rates first, given its liquidity, investor focus, financial strength, and capability for technological improvement that peers are unable to replicate.


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