LG Electronics: Initiation and Debut $ Bond

Zerlina Zeng, CFA - Head of East Asia Corporates
Zoey Zhou Qianyun, CFA - Analyst, LGFVs & East Asia Industrials
Stephanie Sim - Analyst, North Asia Industrials

  • We initiate coverage on LG Electronics; while we like LG Electronic’s strong global brand name, stable cash flow through cycles, and a strong balance sheet, we are concerned about the credit outlook of its unconsolidated affiliate, LG Display, and the need for LG Electronics to continue providing financial support; we see a material rating downgrade risk if LG Electronics raises its stake in and consolidates LG Display.
  • LG Electronics is looking to issue a 3Y/5Y $ 144A/Reg S bond at an initial price talk (IPT) of T+135 bp/150 bp; the proceeds will be used for general corporate purposes (operating, investment, debt refinancing); the 5Y sustainability tranche will be used to fund eligible green/social projects based on its Sustainable Finance Framework; despite numerous enquiries from investors at the roadshows, LG Electronics has not disclosed the details of the green investment projects or the debt that the new $ bond proceeds will be used for, which does not provide us with comfort.
  • We would only be buyers of the new 3Y/5Y $ bonds down to T+115 bp/135 bp; however, we think that the issuer is targeting 100-105 bp for the 3Y and 110-115 bp for the 5Y; as a result, we do not recommend investors to participate in the new issue; for investors looking for exposures in LG Electronics, we think there could be better entry levels in the secondary market given the tight pricing; we caution against aggressively chasing the new LG Electronic deals given the underperformance of a few tightly priced new Korean/Japanese issues over the past month and abating risk sentiment as US rates are priced higher; we see better value in AA Korean quasi, BBB corp such as SK Hynix and LG Energy Solution, as well as Korean FIs (credit cards, and life insurers).
  • Key credit strengths include: (1) LG Electronics is a leading consumer electronics company with a global presence and market leadership across a wide range of products; the fast growing B2B business is expected to reduce revenue volatility and improve margins over the medium-term; (2) LG Electronics maintains a strong balance sheet, stable cash flow through cycles, and excellent liquidity; (3) LG Electronics is a flagship subsidiary of the parent, LG Group, and has a good track record of receiving parental support.
  • Key credit weaknesses include: (1) LG Electronics’ core consumer electronics and display panels businesses are cyclical and face intense industry competition; the industry downcycle since 2H22 has weighed on its topline and margins; we expect only a mild recovery in FY24; (2) we expect LG Electronics to continue providing financial support to its 36.7%-owned (non-consolidated) subsidiary, LG Display, which may erode LG Electronics’ balance sheet strength and result in increasing downgrade risks.

LG Electronics is a leading consumer electronics company with global presence and market leadership in a wide range of products; the fast growing B2B business is expected to reduce revenue volatility and improve margin over the medium-term.

LG Electronics operates in five business segments: (1) home appliances (refrigerators, washing machines, vacuum cleaners, air conditioners; 36% of FY23 revenues); (2) home entertainment (TVs, audio and beauty appliances; 17%); (3) vehicle solutions (telematics, lamps, EV chargers, E-powertrains; 12%); (4) workplace solutions (outdoor signage, commercial TVs, projectors, service robots; 6%); and optical solutions (LEDs and camera modules under LG Innotek; 24%).

LG Electronics has a strong brand name across its key business segments and product offerings.

LG Electronics is the largest home appliance manufacturer globally based on 9M23 revenues, according to the company, focusing on premium appliances (>50% of sales).

LG Electronics is the 2nd largest TV manufacturer globally with a 17% market share of 2023 global shipments. In particular, it is the creator of OLED TV with a top market share of 55%.

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