LG Display (NYSE: LPL) — Korean manufacturer of screens for high-tech equipment. The company is very cheap., and favorable conditions. But the company's huge debt can't help but worry investors..
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What do they earn
LPL was born as a joint venture of Korean LG Electronics (LGE) and Dutch Philips. Now LPL is an independent company, but its largest shareholder with 37,9% shares remain LGE. LGE and LPL have been working closely together so far.
LPL makes LEDs, liquid crystal and flexible screens. According to the annual report, its revenue is divided as follows:
- TV screens - 27,67%.
- IT goods - 41,77%. Screens for computer monitors, laptops and tablets.
- Mobile communications and more - 30,37%. These are smartphone screens., entertainment systems, industry and automotive, navigation devices and medical equipment.
- Royalties - 0,05%.
- Other - 0,14%. Sale of raw materials and components.
Company revenue by country and region:
- South Korea - 3,8%.
- China - 68,8%.
- Other Asian countries - 9,5%.
- United States and other Western Hemisphere countries 9,5%.
- Europe without Poland 5%.
- Poland - 4,4%.
Regions actually also include manufacturing enterprises, also affiliated with LPL: for example, LG International.
Arguments in favor of the company
Cheap. Company P / It's about 4,51, a P / S about 0,24. Its capitalization is about 5.78 billion dollars, what, to put it mildly, Little. This alone could attract many new investors to LPL shares..
Positive news background. South Korea GDP growth in 2021 amounted to 4%, which is a record for the last 11 years - and this against the backdrop of an ongoing pandemic. Considering this, as well as good production and export performance of Korea, I think, that the LPL is waiting for a good quarter.
Truth, should be taken into account here, that LPL does not have production facilities in Korea itself - almost all factories are located in China and Vietnam. But since LPL is still embedded in the production chains throughout Asia, The good performance of Korea as a whole clearly indicates that, that she's doing well too.
Korean bonus. As we have said in the investment news, Western investors are now inclined to withdraw money from China and invest in successful technology companies from other Asian countries, to boost the development of economies and technologies in countries affiliated with Washington. Think, this could lead to a pumping of LPL shares by investors, especially considering the relative cheapness of her business.
What can get in the way
Too many LG. The company accounts for LGE 17,5% proceeds. Yet 1,6% revenue is provided by trading company LG International. Also LGE is the largest shareholder of the company, even though she owns less than half of the LPL.
LGE, as the largest shareholder and important partner, can impose unfavorable terms of cooperation on LPE, and appointed directors can make decisions that are not at all in the interests of minority shareholders like you and me. In particular, LGE may interfere with the theoretical sale of LPL to LGE competitors. It would suit us, but LGE is not very.
Accounting. The company currently has $19.5 billion in debt., of which almost 60% must be paid within a year. At the same time, that the money in the company's accounts is only 3.583 billion. Such a huge debt, which is many times greater than the capitalization of the company, is the main reason, Why are her shares so cheap?.
Considering, that the Korean Central Bank, and not only korean, took a course on raising rates as part of the fight against inflation, i would expect, that the LPL will become more difficult to borrow money.
However, maybe, that a larger and more influential LGE with the Korean government will help the company get the right amount at a sane percentage. It would be very good - but you can't hope for it.
This is your logistics. Most of the company's production is outside of Korea., and she has to do business all over the world. This may have a negative impact on its reporting due to interruptions and shortages of components., caused by the instability of the age of eternal pandemic.
Particularly worrisome is the possibility of a large-scale quarantine in China: quarantine practices in China are quite strict, therefore, a possible worsening of the epidemiological situation in this country could hit LPL business hard.
Not all panels are the same. The TV screen segment is highly competitive, and the recent 37% drop in prices in this area heavily spoiled the company's latest report. Revenue increased by 18%, but operating profit fell by 30%. You can expect, that the "television segment" will continue to pull the company's reporting down in the future - therefore, all hope, that more marginal sales segments for IT and smartphones will offset this problem.
Resume
In August 2021, I took these shares at a price 8,88 $ with a plan to sell them 10 $ within the next purchase 14 Months. It turned out even better - already in January 2022 I was able to sell them for 10,65 $, having earned almost 20%.
Now the shares are standing 8,08 $. Basically, stock entry point looks good. But still, the combination of epidemiological and financial risks makes these shares quite risky - especially in the context of possible unfriendly actions by LGE against minority shareholders. Therefore, I would only invest in LPL if one of the following two conditions is met::
- Something will change dramatically for the better in the macroeconomic situation - in particular, with logistics and production indicators.
- LPL stock will drop so much, that the low price of the company will look too indecent - and we can take the stock based on a rebound.
