20080722-Mirae Asset-LG Electronics (066570.KS)

Rising Above Macro Pressures
Earnings in line with the market as LGE becomes stronger
LGE posted consolidated revenue of W12.7tn (2.1% below our estimates) and
OP of W856.0bn (4.0% below our estimates). We believe the 2Q08 results
came in line with market expectations given the weak demand for IT goods
towards the latter half of 2Q08. While competitors’ earnings woes continue,
LGE handsets posted operating margin of 14.4%, appliances showed strong
margin protection, and TVs showed an operating profit, all of which suggest
LGE’s upgraded position in the industry.
Look to brand value to counter slowing demand in 2H08
We expect handset strength to continue as LGE should see strong handset
shipments to North America, Latin America, and the domestic market. Also, as
its supplies for higher-margin carriers (e.g. Verizon) are growing, stable
earnings can be expected in 2H08. Although LGE’s market share is expected
to drop to 8.3% in 3Q08 (25.8mn units) from 9.3% in 2Q08 (27.7mn units), this
will be due mainly to sluggish low-end demand from emerging markets. As
such, this should not hurt the company’s fundamentals.
3Q08 consolidated OP to reach W630.1bn; Handset operating
margin to reach 12.0%
We expect 3Q08 consolidated OP to reach W630.1bn, significantly easing
worries over 2H08 earnings. Handset division is expected to post OP of
W414.1bn (operating margin of 12.0%), while TV and appliance divisions
should record OP of W39.8bn and W150.1bn, respectively. Despite price cuts
expected in the TV industry, the TV division should protect margins through
launches of new TV models while the appliance division should record
stronger-than-expected results thanks to a resurgence of air conditioner sales.
We reiterate our BUY rating and TP of W200,000
We believe the upgrade of LGE as a global handset maker along with brand
value growth in its appliance and TV divisions remains largely intact. However,
we lower FY08 forecast EPS by 3.2%, but maintain our BUY rating and TP of
W200,000. We believe the company should succeed in protecting margins in
2H08 and realize strong handset growth in FY09. Our TP of W200,000 implies
a forward 12-month P/E of 10.4x.