HONG KONG/SEOUL, January 31 (Fitch) Fitch Ratings says LG
Electronics Inc. (LGE, 'BBB'/Negative) still faces an
unfavourable macro-economic environment and intensifying
competition in its core businesses, notwithstanding the
turnaround in the company's operating results and financial
profile during 2012.
LGE reported an EBIT margin of 2.2% (2011: 0.7%) and EBITDA
grew 65%, lowering gross debt to KRW6.5trn at end-2012 from
KRW7.4trn at end-2011. LG Display, a key subsidiary, returned to
profitability with an EBIT margin of 3.1% in 2012 while almost
doubling its EBITDA to KRW5.4trn. As a result, Fitch estimates
LGE's financial leverage to have improved to about 2.5x at
end-2012 from 4.4x at end-2011. In its analysis, Fitch
proportionally consolidates LGE's two major operating
subsidiaries, LG Display and LG Innotek.
Fitch expects LGE's margins to remain stable in 2013, backed
by its solid market positions in the TV and appliance
businesses, as well as by gradual recovery in its smartphone
competitiveness. LG Display is also likely to continue its
margin recovery, mainly on account of an improved product mix
with higher average selling prices for its panels.
However, this could be partly offset by a lower level of
orders from Apple Inc. during H113. However, risks stemming from
an unfavourable operating environment have not fully abated.
Fitch expects demand for consumer electronic products to remain
weak due to frail global economic conditions. In addition,
accommodative monetary policies overseas have contributed to the
recent appreciation of the Korean won which could erode LGE's
price competitiveness. Further, the weakening Japanese yen could
elevate competition in the TV industry where LGE struggled to
maintain healthy margins during H212. However, Fitch does not
expect LGE to lose its competitive edge over Japanese peers.
Within LGE's smartphone business, Fitch forecasts that
recovery in margin and market share will be slow but steady,
despite improvement in quality and brand recognition. This is
because competition is increasingly becoming fierce among
second-tier manufacturers as they close in on their overall
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
Fitch will consider revising the Outlook to Stable if LGE's
EBIT margin improves further and leverage remains below 2.5x on
a sustained basis. However, Fitch may downgrade the rating if
the company's EBIT margin deteriorates and leverage is sustained
above 3x with negative free cash flow.