LPL - LG Display: Recent Progress May Get Overshadowed By Changing Market Dynamics

2023-07-28 02:03:06 ET

Summary

• LG Display posted a net loss in Q2 for the fifth consecutive quarter, but the numbers improved in a number of ways.
• The latest outlook from LPL sees a profit as soon as in Q4, which is sorely needed with the current state of the balance sheet and income statement.
• The more distant outlook is more cloudy based on how the display market and the OLED market in particular continues to evolve.
• LPL may be worth playing as a short-term trade, but as a long-term hold, a lot more needs to happen for it to be worth the risk.

LG Display ( LPL ) released its Q2 report on July 26. As expected, LPL reported a big loss once again. On the other hand, the Q2 numbers were not as bad as in Q1. There were also a number of other positives to be gained from the latest report. However, while LPL seems to be making progress, there are some less than desirable developments to be noted elsewhere that could send LPL back to square one. In fact, the charts may be anticipating this and thus getting prepared for that eventuality. Why will be covered next.

LPL is still down, but progress was made

A previous article mentioned how even though the Q1 numbers marked a new low in several ways, there was reason for optimism since the numbers were likely to get better in the following quarters. This turned out to be warranted with the release of the Q2 report. LPL still suffered from big YoY declines in the top and the bottom line, but the Q2 numbers were an improvement compared to the preceding quarter.

Q2 revenue declined 15% YoY, but it also increased by 7% QoQ to KRW4,739B, which equals $3.72B using a USD:KRW exchange rate of 1:1,275. LPL finished in the red for the fifth consecutive quarter with a net loss of KRW699B or $0.55B. Operating loss was KRW881B or $0.69B. The table below shows the numbers for Q2 2023.

Source: LG Display

The improvement can be attributed to several factors. There has been a reduction of excess inventory in the market for display panels, which has led to improved demand, resulting in an 11% QoQ increase in shipments to 4.7M square meters as shown below. Market prices for display panels were better in general, especially in the LCD TV panel segment, but a change in product mix with fewer mobile shipments resulted in a 6% QoQ decrease in ASP to $803 per square meter. Note how ASP increased YoY with can be attributed to the shift towards OLED screens and away from LCD screens.

The balance sheet has also seen changes along with the income statement. Cash and cash equivalents ended at KRW3,853B or $3.02B in Q2 2023, which was more than KRW3,669B in Q2 2022, but less than KRW3,894B in Q1 2023. However, total debt increased to KRW17,421B or $13.66B in Q2 2023, up from KRW17,180 in Q1 2023 and KRW13,987B in Q2 2022. Net debt-to-equity ratio reached 143% in Q2 2023, double the 71% in Q2 2022.

The lack of profits means LPL does not have a multiple for most commonly used metrics, including P/E ratios. However, some might argue LPL is in some sense undervalued, which might explain why short interest in LPL is so low at less than 0.19% of the share float, even though LPL is deep in the red. LPL, for instance, is valued at less than book value, which some consider as a sign of an undervalued company.

With a market cap of $3.84B and TTM sales of KRW23,223B or $18.21B, LPL is valued at about 0.21 times sales. On the other hand, LPL is not only deep in the red with LPL posting a hefty loss of KRW4,720B or $3.7B in the last 12 months, but it also carries lots of debt as mentioned earlier, which is why its market cap of $3.8B is much less than its enterprise value of $15.5B. Still, LPL has a low value for a company as big as LPL, but one might argue there is a reason for it with all the debt and the losses it has.

LPL is upbeat about the near-term outlook

The recent improvement in the quarterly results is expected to continue. Q3 guidance calls for area shipments to increase in the mid single digits QoQ and ASP are expected to increase in the high single digits QoQ. This is unlikely to pull LPL out of the red, but it might result in an estimated 30-35% sequential reduction in net losses. From the Q2 2023 earnings call:

With inventory level moving down across the industrial ecosystem, shipment of medium- and large-sized products is expected to grow again in Q3 following Q2. Area shipment is thus expected to grow by a mid-single digit in Q3. ASP per square meter is expected to increase by high single-digit Q-o-Q, thanks to seasonal growth in mobile panel shipments."

A transcript of the Q2 2023 earnings call can be found here .

More importantly, LPL expects to turn a profit in Q4, which would be quite an achievement.

Going into the second half, turnaround to profit as expected in Q4 on anticipation of high panel demand by set makers following the return to healthy inventory levels and growth in contract-based business. But as explained earlier, the market is yet to start full recovery driven by real demand. The company will keep a close eye on the external environment as we strive toward more meaningful performance by focusing on recovering financial soundness and upgrading the business structure."

Still, LPL seems to leave open the possibility there may be additional headwinds down the road. The market has yet to truly recover and real demand is not where it needs to be.

What may be putting doubt in the minds of people

The income statement may be better off, but the same cannot be said of the stock. The stock is up 5.4% YTD, but notice how in the chart below, the stock broke the uptrend that was in place for almost all of 2023 until about a week ago. The stock was trending higher with a series of higher highs and higher lows, which can be connected to form trendlines to create a what is effectively an ascending channel.

The stock was moving higher within this channel. So for much of 2023, the trend was pointing in the direction of higher prices. That is until about a week ago when the stock broke through the lower trendline on a second attempt after the first one was unsuccessful. The Q2 report did not stop the slide as the stock lost another 3% after the latest report from LPL.

However, the stock seems to have encountered some measure of support once it got close to $5 or so. The stock got as low as $5.18 on July 26, which is $0.04 below the March 15 low at $5.22. Going back further in time shows how the stock has pivoted on several occasions in the $5 region. The last time the stock got close to $5 in March, the stock bounced, so it is possible the stock might do so one more time now that it is close to $5. Keep in mind the stock is well into oversold territory with an RSI of 26 after the big decline in the stock since peaking at $6.69 on June 20. A bounce is likely.

The poor performance of the stock recently stands in contrast to all the progress LPL has made, which includes the prospect of getting out of the red as soon as Q4. One possible reason for this may have to do with the market's lack of confidence LPL will be able to keep it up. Remember that LPL has a history of not being able to stay profitable on a sustained basis.

There are other reasons to be wary. LPL has decided to focus on OLED, large OLED in particular, and in a way this makes sense. For instance a recent report predicts the OLED market in terms of area shipments will grow at a CAGR of 11% in 2022-2030. The percentage of smartphones equipped with an OLED screen reached 42% in 2022 and this number is expected to grow in the future.

However, while OLED demand is expected to increase, earning a profit may be harder to do. South Korean companies like LPL and Samsung ( SSNLF ) used to dominate the OLED market, but China, with companies like BOE, Tianma and Visionox, is looking to capture market share in a possible repeat of what happened in the LCD market.

According to Trendforce , China holds 43.7% of the global OLED production capacity, behind South Korea's 54.9%. China had 10% five years ago, which shows how much production capacity China has added. Furthermore, capacity additions continue unabated. What should be of concern to LPL is that the planned additions include larger OLED fabs like its own 8.5-Gen OLED fab. This includes an 8.5-Gen OLED fab from BOE and an 8.6-Gen OLED fab from Samsung.

It's not that difficult to see where all this could be heading. It's not possible for everyone to be a winner if everyone is going after a bigger share of the OLED market, no matter how much it grows. A price war is likely if or when too much capacity results in too much supply exceeding demand, something that LPL has seen a lot of in the past.

Investor takeaways

LPL has made progress in a number of areas, but I remain neutral on LPL. LPL might succeed in posting a profit in Q4 with the aid of the holiday shopping season, but it remains to be seen it that can be sustained in long run. LPL might have looked at OLED as a sanctuary, but one look at how the OLED market is developing suggests competition in the OLED market will be far more intense than many may have thought.

Demand for OLED panels may grow, but if OLED supply grows even faster, then turning a profit becomes very difficult. China has more than quadrupled its share of OLED production capacity in five years and with all the new fabs in the pipeline, it's very possible the anticipated growth in OLED demand will get overwhelmed with supply growth. The ability of all players, LPL included, to thrive under these market condition is suspect.

There is after all a reason why LPL is valued the way it is with a market cap far below what one would expect for a company with tens of billions in annual sales. LPL has lost $3.7B in the last 12 months and it is sitting on debt of $13.7B. Both the income statement and the balance sheet have big holes that need to be plugged, but LPL needs sustained profits to do that and that may not be in the future with the way the OLED market is evolving.

Bottom line, LPL may be due for a short-term bounce if the charts are anything to go by and some may want to play LPL for a short-term bounce. Those looking at the long-term picture need to think twice. The OLED market continues to evolve and things can and do change, but the way the cards are laid out does not bode all that well for LPL.

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