March 7 (The following statement was released by the rating agency)
Fitch Ratings has affirmed South Korea-based LG
Electronics Inc.'s (LGE) Long-Term Foreign- and Local-Currency Issuer Default
(IDR) ratings at 'BBB-'. The Outlook is Stable. Its senior unsecured rating has
also been affirmed at 'BBB-'.
KEY RATING DRIVERS
Benefits From Diversified Products: LGE holds competitive positions in the
global flat panel TV and home appliance markets. LG Display (LGD), which is
37.8% owned by LGE, is the second-largest flat panel display manufacturer with
a 22% share of the global market. Strong market presence and product
diversification are likely to provide earnings stability to some extent despite
LGE's exposure to the weak consumer electronics industry, such as mobile phones.
Intensifying Competition in Handsets: Handset profitability is unlikely to
improve in 2014 as competition intensifies. Lenovo's access to American market
through its Motorola Mobility acquisition will present a significant challenge
to LGE's market share in the medium term. Given Apple Inc. and Samsung
Electronics Co., Ltd's (A+/Stable) dominance of the high-end smartphone market
and Chinese makers' aggressive expansion in the mid- to low-end segment, it will
be difficult for LGE to improve its market share in the near term.
Maintain Strength in TVs: LGE's position in the global TV market will likely
remain solid, but significant margin improvement is unlikely. The TV
manufacturing industry will remain volatile given the intense competition. As
Chinese manufacturers become more aggressive to take market share, TV sales
prices are likely to fall, even for the premium products. However, we expect LCD
TV demand to increase slightly in 2014 driven by growth in emerging markets and
an increase in replacement demand for premium products.
Oversupply Persists in Display: Capacity expansion in China and the slow
reduction in utilization rates will result in oversupply of display panels
globally. While there will also be fragile demand for TV display panels, we
believe this will be offset by LGD's technology leadership and solid
relationship with customers as well as strong growth in sales of small to medium
display panels for mobile devices, where LGD is a strong player.
Pressure on Margin Continues: A substantial improvement in LGE's margin is
unlikely in the short term. We continue to believe that the handset business
will drag down LGE's overall profitability, although the decline will be
mitigated by its solid market positions in TVs and home appliances. The
unfavourable outlook for the display business poses downside risks to
profitability, but this would be partly offset by a possible increase in orders
from Apple Inc. LGD is a major supplier to Apple, providing around 40% of its
total mobile phone display panels in 2013.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- An increase in total adjusted debt / operating EBITDA to over 3x on a
sustained basis (2013: 2.1x)
- EBIT margin falling below 1.5% on a sustained basis (2013: 2.6%)
Positive: Future developments that may, individually or collectively, lead to
positive rating action include
- An increase in total adjusted debt / operating EBITDA to below 2x on a
- EBIT margin rising above 3.5% on a sustained basis
These financial metrics are based on a proportional consolidation of LGD.