March 11 (The following statement was released by the rating agency)
SEOUL/SYDNEY/HONG KONG, March 11 (Fitch) Fitch Ratings has downgraded South
Korea-based LG Electronics Inc.'s (LGE) Long-Term Foreign- and Local-Currency
Issuer Default Ratings (IDR) and senior unsecured ratings to 'BBB-' from 'BBB'.
The Outlook is Stable.
Key Rating Drivers
The downgrade reflects LGE's continued weak operating margins and thin free cash
flow (FCF) generation that are not commensurate with a 'BBB' rating despite its
improved operating result in 2012. Fitch expects FCF to stay weak due to intense
price competition and heavy investment needed to develop new products. This will
restrict the company's ability to deleverage.
The Stable Outlook reflects Fitch's view that continued recovery in smartphone
competitiveness as well as a solid appliance business will enable LGE to
maintain credit metrics commensurate with the lowest investment grade. LG
Display Inc., (LGD) a key subsidiary, is also likely to continue margin recovery
due to the company's strong product mix and limited industry-wide capacity
growth in 2013.
However, LGE's margins are likely to fall in the LCD TV segment, as happened
during H212 as competition intensifies and demand remains weak due to frail
economic conditions. In addition, depreciation of the Japanese yen will
strengthen Japanese TV makers' price competitiveness which may force LGE to
reduce prices to maintain its market position.
Fitch forecasts that recovery in LGE's smartphone margins and market share will
be slow but steady, despite improvement in quality and brand recognition. This
is because competition is becoming increasingly fierce among second-tier
manufacturers as they attempt to close the technological gap with first-tier
manufacturers. Fitch expects the industry will remain dominated by Samsung
Electronics Inc. (A+/Stable) and Apple Inc. at least in the short-to
medium-term, making it difficult for LGE to improve its market share
LGE reported an EBIT margin of 2.2% (2011: 0.7%) while LGD returned to
profitability with an EBIT margin of 3.1% in 2012. LGE's total adjusted
debt/operating EBITDAR improved to 2.1x at end-2012 from 4x at end-2011.
However, FCF margin was marginally positive in 2012. In its analysis, Fitch
proportionally consolidates LGE's two major operating subsidiaries, LG Display
and LG Innotek.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
- An increase in total adjusted debt/operating EBITDAR to over 3x on a sustained
- EBIT margin falling below 1% on a sustained basis
Positive: Future developments that may, individually or collectively, lead to a
revision of the Outlook to Stable include
- A decline in total adjusted debt/operating EBITDAR to below 2x on a sustained
- An increase in EBIT margin to above 3.5% on a sustained basis