Monday, January 27, 2014

LG Announces First TV With Flexible Screen Using OLED Technology-01/14/2014


  1. Business Division of LG Corp.-
    Revenue/ Profit KRW bn

    Home Entertainment 5557 304 45% 55%
    Mobile Communications 2321 -28 19% -5%
    Home Appliance 2875 184 24% 33%
    Air Cond. & E S. 1464 91 12% 17%
    Total 12217 551 100% 100%

    FCF Conversion Ratio-

    2013 2012 2011 2010 2009 2008
    -131 -166 259 480 469 910
    27269 25427 28097 29238 30513 27638
    -0.5% -0.7% 0.9% 1.6% 1.5% 3.3%

    Things to Mention:

    1, the handset business still needs time for a recovery: Despite the robust earnings in the non-handset business, LGE’s handset business continues to drag down overall profitability

    2, TV business remains a bright spot: Despite all the concerns surrounding the TV market, LGE continues to surprise on the upside on ongoing market share gain, prudent marketing expenses and declining panel prices

    3, As a nature of A/C business, due to the seasonal effects of its main operations (appliance and A/C), LGE usually shows strong earnings in first half of the year

    Comparison of TVs in the market:
    • LCD (Liquid Crystal Display): most common these days. Involves having a back light, with a LCD screen in the front. Problem: it can never display true blacks; advantages: thin and relatively inexpensive
    • LED (Light Emitting Diode): LCD Panel + LED backlight. Advantage: 1, lower power consumption; 2, even thinner in production because they are not nearly as bulky; 3, can make blacks much more true and rich;
    In sum, this is just higher-end LCDs
    • Plasma: 1, excellent deep blacks because it puts light right to the front. 2, Extremely response time which is great for gaming. Disadvantage: 1, the color will be likely washed out if you are in a very bright environment; 2, the front is glass, which can get frustrated to watch in the day time
    • OLED: address some of the issues: 1, For LCD, slow response time. So it will be able to handle much sharper movement, which is great for 3D; 2, it emits its own light instead of depends on the backlight with a panel in front of it. Drawback: 1, very expensive

  2. By segments based on Q2 2013
    Total revenues: 10% increased compared to Q2 2012
    -Home Entertainment (HE): 36% of total revenue, 6.4% increased; 22% of operating income
    -Mobile Communications (MC): 21%, 34.5% increased, 13%
    -Home Appliance (HA): 21%, 10.9% increased; 25%
    -Air Conditioning & Energy Solution (AE): 11%, 18.4% increased; 36%

    -LG Innotek Co.,Ltd. and its subsidiaries (Innotek): 10%, 7%

    Revenues by region:
    Korea: 25%
    North America: 19%
    Central & South America: 15%
    Europe: 10%

    Free cash flow/Revenue:
    LG Display: Q2: 2.1%, Q1: 3.8%

    Stalling TV market share:
    Samsung: 26%
    LG: 15%
    Sony: 9%
    Sharp: 7%
    Panasonic: 5%

    Global TV shipment percentage in 2013:
    CRT: 4% with declined growth rate
    LCD (CCFL): 10%
    LCD (LED):80%
    PDP and OLED: less than 5% but high growth rate

    OLED market estimation:
    2014: $100M
    2020: $1700M

    High competition in consumer electronics and declining profit margin
    Exchange rate risk: KWR appreciation

  3. LG Electronics Inc.

    Business structure; In 2012
    • Home Entertainment (HE) 45%; 2.3%
    • Mobile Communications (MC) 20%; 0.6%
    • Home Appliance (HA) 22%; 5%
    • Air Conditioning & Energy Solution (AE) 8%; 3.6%
    • Other—Supporting segment 5%; -4%

    Operating profit margin
    • LG 2.2%
    • Sharp -1.5%
    • Samsung 9.5%
    • Panasonic 2.2%

    Free cash flow from MorningStar
    • (2,486,023) m in 2010; -4% of sales
    • (616,423) m in 2011; -1%
    • 4,281 m in 2012; 0.01%
    • Heavy investment in capital expenditure

    Key issues
    • Smart phone business
    o No. 3 smartphone seller
    o Released its high-end G2 smartphone in August; Highest marketing fee; Sales are slowing
    o Third-quarter operating loss of 79.7 billion won on sales of 3.05 trillion won
    o Price war
    o Shifting resources from smartphone into TV business

    • TV Business
    o LG ranks No. 2 in revenue share for flat-panel TVs
    o OLED (organic light emitting diode); Ultra high-definition (UHD) resolution (4K)
    o Reducing LG’s profit margin
    o High price premium
    o 4K content

  4. LG Electronics has five operating segments. Based on external revenue from the consolidated 2012 fiscal year income statement, Home Entertainment is 45%, Mobile Communications 20%, Home Appliance 22%, Air Conditioning & Energy Solution 9%, and Other segments 5%. Based on operating income, Home Entertainment is 48%, Mobile Communications 5%, Home Appliance 47%, Air Conditioning & Energy Solution 14%, and Other segments -13%.
    Home Entertainment sells flat-panel TVs, monitors, PCs, Security devices, Audio, Video and others. Mobile communications sells cellphones, tablets, and network equipment. Home Appliance sells, well you can think of, refrigerators, washing machines, microwaves, vacuum cleaners, and healthcare products. Air Conditioning & Energy sells air conditioners and chillers.
    From the financial statements, Home Entertainment is the largest segment, while Home Appliance is the most lucrative. Home Appliance is also the only segment that saw growth in 2012.
    I have different free cash flow figures from Bill’s. I copied the data from Bloomberg terminal, which I did not verify. Both free cash flow and the corresponding conversion ratios have been on the rise since 2010. It was -3.1% in 2010, -0.2% in 2011, 0.7% in 2012, and is projected to be 0.8% this year. Even though the company has limited free cash flow, it is improving.
    The Bloomberg article talks about the introduction of LG’s first flexible screen with OLED technology. I read an interview article from USA Today with HS Kim, Samsung executive VP of Visual Display Business, which is very interesting and informative. You can find the link in my post. Kim talks about price being the main sticking point for OLED technology. Samsung and LOG are the only two manufactures that sold OLED TVs in 2013. Prices started at $9,000 and went up from there. Kim acknowledged that “not many consumers tried to purchase OLED TVs at that price.” He indicated that the unfriendly prices are due primarily to difficulties with manufacturing process, and predicted that “it will take around three to four years” to lower the cost.
    So pretty much OLED is for technology demo, and is irreverent in the top lines at this point. Major TV manufacturers include Samsung, LG, Sony, Sharp and others are right now pushing Ultra-HD or 4K TVs to the market. The Ultra-HD transition is comparable to the adoption of high-definition TV less than a decade ago. In order to expedite the transition and foster growth in the Ultra-HD ecosystem, companies are trying to form partnership with other electronics manufacturers and even Hollywood studios. Samsung has limited success, while partnered with AMC Theatres to market its 4K technology. They offer Sony 4K Digital Cinema in select, popular locations, such as AMC Empire 25 in Times Square, Manhattan.

  5. Five operating segments (2012):
    - Home Entertainment(HE) : 44.62% of sales; 47.73% of operating income
    - Mobile Communications(MC): 19.78%; 5.16%
    - Home Appliance: 22.02%(HA); 46.50%
    - Air Conditioning & Energy Solution(AE): 8.54%; 13.76%
    - Other: 6.9%;-13.16%
    HE & HA- 94% of operating income and are the main profit drivers, followed by AE.

    Free Cash Flow (Korean Won):
    - In 2010-12: - 2486b FCF, -4.46% of sales
    - In 2011-12: -616b FCF, -1.14% of sales
    - In 2012-12: 4b FCF, 0.01% of sales
    - TTM: -540b FCF, -1.01% of sales
    Overall, the ability for LG Electronics to generate FCF is disappointing in recent years and is expected to stay weak.

    - Recovery in smartphone margins and market share with a scheduled launch of G Pro2 and remaining strong sales in Nexus 5.
    - Potential benefits from developed markets’ consumption recovery in the appliance business, making it the major profit driver

    - Home Entertainment segment may fall as TV market faces intensified competition and demand remains weak due to weak economic conditions
    - Depreciation of the Japanese yen will strengthen Japanese TV makers' price competitiveness
    - Slow growth of market share in smartphone segment because market dominated by Apple and Samsung and making it difficult for LGE to improve its market share significantly
    - Seasonal Drop in AE in Q42013.