Supply Chain Disruptions And Chinese Competition Will Tighten Margins

Key Takeaways

• Shifting consumer preferences, supply chain risks, and dependency on key partners threaten core revenue stability and expose the company to significant long-term volatility.
  
• Margin pressures from aggressive Chinese competition and ongoing high investment requirements challenge profitability and limit improvements in cash flow and balance sheet strength.
  
• Strategic shift to OLED, operational efficiencies, and diversification into premium and B2B segments drive profitability, revenue growth, and reduced reliance on commoditized consumer electronics.

Catalysts

Engages in the manufacture and sale of thin-film transistor liquid crystal display (TFT-LCD) and organic light-emitting diode (OLED) technology-based display panels in Korea, China, rest of Asia, the Americas, Poland, and rest of Europe.

• Intensifying geopolitical tensions and deglobalization are expected to drive persistent supply chain uncertainty, raising input costs and threatening timely access to both components and end-markets, which could lead to both revenue volatility and margin compression over the long run.
  
• The global shift in consumer demand away from large-format displays, driven by the accelerating adoption of mobile, AR/VR and compact connected devices, directly undermines LG Display's core revenue segments in TVs and monitors, putting its top line at structural risk.
  
• Ongoing dependence on a small set of major customers increases revenue concentration risk. A strategic decision or supply chain shift by a key partner, such as Apple or LG Electronics, would sharply reduce sales and erode earnings leverage.
  
• Rapid advances by Chinese manufacturers in both OLED and next-generation display technologies are likely to intensify price competition, further squeezing LG Display's margins and weakening long-term earnings prospects.
  
• High capital expenditure needs for OLED and next-gen technology investment, combined with uncertainty around market adoption and persistent global oversupply, threaten to keep free cash flow generation subdued and limit improvement in return on invested capital, increasing risk to both balance sheet strength and future profitability.

LG Display Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LG Display compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LG Display's revenue will decrease by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.5% today to 2.3% in 3 years time.
• The bearish analysts expect earnings to reach ₩547.3 billion (and earnings per share of ₩1108.28) by about August 2028, up from ₩-669.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from -8.2x today. This future PE is lower than the current PE for the US Electronic industry at 15.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

LG Display Future Earnings Per Share Growth

Risks

• LG Display has achieved a structural improvement in operating results through a strategic shift from LCD to OLED panels, driving a substantial increase in average selling prices and profitability, which could support higher revenues and net margins.
  
• The company expects strong growth in both small and large OLED panel shipments, particularly for smartphones, tablets, and gaming monitors, indicating rising demand and potential expansion of market share, positively impacting future sales and earnings.
  
• Aggressive cost innovation, reduction of low-margin products, and operational efficiency initiatives have resulted in significant improvements in operating profit and reductions in debt levels, strengthening the company's balance sheet and bottom line.
  
• Investment in advanced OLED technologies and continued leadership in tandem OLED and high-end displays positions LG Display to benefit from long-term secular trends toward premium and energy-efficient displays, supporting sustained revenue growth and competitive margin advantages.
  
• Steady expansion in automotive and B2B display segments, with a focus on technological differentiation and strategic partnerships with global top-tier customers, diversifies LG Display's revenue streams and reduces reliance on cyclical consumer electronics, supporting long-term earnings stability.

Valuation

• The assumed bearish price target for LG Display is ₩6768.83, which represents two standard deviations below the consensus price target of ₩11435.0. This valuation is based on what can be assumed as the expectations of LG Display's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩17000.0, and the most bearish reporting a price target of just ₩6500.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩23317.7 billion, earnings will come to ₩547.3 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₩10930.0, the bearish analyst price target of ₩6768.83 is 61.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.