Business Context and Reporting Period
Company: LG Display Co., Ltd.
Filing Type: Form 6-K (Semi-Annual Report)
Reporting Period: Six months ended June 30, 2018 (H1 2018)
Business Overview: LG Display is a global leader in the research, development, and manufacture of display panels, primarily utilizing TFT-LCD and OLED technologies. The company operates production facilities in Korea (Gumi, Paju) and China (Guangzhou, Nanjing, Yantai, Suzhou), with sales subsidiaries globally. The business is reported as a single segment focused on display and display-related products.
Key Financial Metrics (Consolidated K-IFRS)
| Metric | H1 2018 | H1 2017 | Full Year 2017 |
|---|---|---|---|
| Revenue | W 11,286 billion | W 13,691 billion | W 27,790 billion |
| Gross Profit | W 1,009 billion | W 3,233 billion | W 6,466 billion (approx) |
| Operating Profit (Loss) | (W 326 billion) | W 1,831 billion | W 2,462 billion |
| Net Profit (Loss) | (W 350 billion) | W 1,416 billion | W 1,937 billion |
| Net Profit Attributable to Owners | (W 357 billion) | W 1,324 billion | W 1,803 billion |
| Earnings Per Share (Basic) | (W 997) | W 3,700 | W 5,038 |
| Total Assets | W 31,444 billion | W 29,160 billion (Dec 31, 2017) | - |
| Total Liabilities | W 16,911 billion | W 14,178 billion (Dec 31, 2017) | - |
| Net Borrowings to Equity Ratio | 30% | 15% (Dec 31, 2017) | - |
| Operating Cash Flow | W 2,238 billion | W 3,194 billion | - |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by approximately 17.6% year-over-year (YoY) to W 11.3 trillion, driven by a decline in average selling prices (ASPs) across major product categories, particularly in the TV and IT sectors.
- Profitability Reversal: The company reported a significant operating loss of W 326 billion in H1 2018, a sharp contrast to the W 1.83 trillion operating profit recorded in H1 2017. This was primarily due to falling ASPs outpacing cost reduction efforts and increased depreciation/amortization expenses.
- Product Mix Shift: While TV panel revenue declined, the company continues to expand its OLED portfolio (including Crystal Sound OLED and Wallpaper OLED) and high-end IT products (IPS, Oxide) to mitigate price pressures in the LCD market.
- Accounting Policy Changes: The company adopted K-IFRS No. 1115 (Revenue from Contracts with Customers) and K-IFRS No. 1109 (Financial Instruments) effective January 1, 2018. These changes resulted in the recognition of refund liabilities and assets for the right to recover returned goods but had no impact on the opening balance of retained earnings.
Guidance, Outlook, and Risks
- Strategic Outlook: Management is focusing on a strategic transition to the OLED business, which is viewed as having strong future growth potential. Plans include expanding production capacity for 8.5th and 10.5th generation OLED lines and securing mass production capabilities for 6th generation OLED smartphones.
- Investment Plan: The company plans to continue capital expenditures in 2018 to invest in new OLED and oxide technologies and to respond to demand for large-sized panels. In 2017, total capital expenditures were W 6.6 trillion.
- Market Risks:
- Cyclicality and Oversupply: The display industry is highly cyclical. There are concerns regarding structural oversupply in the LCD industry, driven by continued capacity expansion by Chinese manufacturers.
- Price Volatility: ASPs for TFT-LCD and OLED panels remain under pressure. Margins are at risk if prices decline faster than the company can reduce costs.
- Customer Concentration: The top ten customers accounted for 77% of total sales revenue in H1 2018. Two specific customers (Company A and Company B) each accounted for more than 10% of sales.
- Foreign Exchange: Sales are primarily denominated in U.S. dollars, while costs are in Won, Yen, and other currencies. The company uses hedging strategies (forward contracts, swaps) to manage exposure.
- Legal and Regulatory: The company is involved in various legal proceedings, including an anti-trust litigation with Argos Limited (settled in principle in Dec 2017). It also faces ongoing regulatory scrutiny regarding environmental compliance and labor safety, resulting in several fines and corrective orders in 2017 and 2018.
Key Facts for Investor Verification
- ASP Trends: Verify the trajectory of average selling prices for LCD panels, which decreased by approximately 4% in Q2 2018 compared to Q1 2018, and assess the sustainability of this trend.
- OLED Transition Progress: Monitor the ramp-up of OLED production capacity and the adoption rate of premium OLED products (Wallpaper, Crystal Sound) to determine if they can offset LCD margin compression.
- Customer Concentration Risk: Assess the stability of relationships with the top two customers, who collectively represent a significant portion of revenue, and the risk of supply chain shifts to competitors.
- Capital Expenditure Efficiency: Review the return on the significant capital investments made in 2017 and planned for 2018, particularly regarding the new OLED lines and the Vietnam facility (LG Display Vietnam Haiphong).
- Regulatory Compliance Costs: Track potential future costs associated with environmental regulations (greenhouse gas emissions) and labor safety compliance, given the history of fines and corrective orders.