LG Display Q2 Earnings: Not Everything Is Bleak (NYSE:LPL)

LG Display (NYSE:LPL) has released its latest earnings report and the results were worse than expected. There was a lot of deterioration to be spotted in several areas, including the first net loss in two years. The stock too has been having a hard time, being stuck in a downtrend all year. With this being the case, it is not hard to see why many are down on LPL. Some may even be tempted to short the stock, if they haven’t already. However, there are a few reasons why doing so deserves some second thoughts. Why will be covered next.

LPL is back in the hole it used to be in

The bad numbers did not come as a complete surprise. The quarterly numbers had already gotten much worse in the Q1 report and they were expected to get worse in the Q2 report, especially with China resorting to lockdowns due to COVID-19. Still, there was a lot of bad news to digest in the latest report. Q2 revenue declined by 19% YoY to KRW5,607B, which equals about $4.31B using an exchange rate of roughly 1:1306 for the U.S. dollar.

Margins collapsed with gross margin at 4.9% and operating margin at minus 8.7%. LPL finished with an operating loss of KRW488B or $0.38B and a net loss of KRW382B or $0.29B. EBITDA declined by 62.6% YoY to KRW662B or $0.51B, down from KRW1,211B in Q1 2022 and KRW1,770B in Q2 2021. The table below shows the numbers for Q2 2022.

(Unit: B KRW)	Q2 2022	Q1 2022	Q2 2021	QoQ	YoY
Revenue	5,607	6,471	6,966	(13.35%)	(19.51%)
Gross margin	4.9%	12.6%	20.8%	(770bps)	(1590bps)
Operating margin	(8.7%)	0.6%	10.1%	(930bps)	(1880bps)
Operating income (loss)	(488)	38	701	–	–
EBITDA	662	1,211	1,770	(45.33%)	(62.60%)
Net income (loss)	(382)	54	424	–	–

Source: LG Display

The table below shows how the numbers have taken a drastic turn for the worse in 2022. LPL ended up with its first net loss in two years in Q2 2022, the previous one being Q2 2020, which was itself the last in a series of quarterly losses. LPL got out of the red as COVID-19 emerged thanks to pandemic-related factors, including global stimulus which boosted sales of consumer products with display panels like notebooks and TVs. This tailwind is now rapidly fading.

(Unit: B KRW)	Revenue	Operating income	EBITDA	Net income
Q2 2022	5,607	(488)	662	(382)
Q1 2022	6,471	38	1,211	54
Q4 2021	8,807	476	1,645	180
Q3 2021	7,223	529	1,696	463
Q2 2021	6,966	701	1,770	424
Q1 2021	6,883	523	1,620	266
Q4 2020	7,461	685	1,744	621
Q3 2020	6,738	164	1,288	11
Q2 2020	5,307	(517)	413	(504)
Q1 2020	4,724	(362)	630	(199)

The table below shows why the numbers were worse than what LPL had guided for. Q2 guidance called for average selling prices or ASP to decline by 10% and for a slight increase in shipments, both QoQ. However, shipments of display panels decreased to 7.8M square meters and ASP fell by 14.2% QoQ to $566.

	Capacity (M m²)	Shipment (M m²)	ASP/m²
Q2 2022	10.9	7.8	$566
Q1 2022	11.5	8.1	$660
Q4 2021	11.6	9.4	$806
Q3 2021	11.9	8.4	$750
Q2 2021	11.6	8.9	$703
Q1 2021	11.2	8.5	$736
Q4 2020	10.8	8.7	$790
Q3 2020	10.8	8.3	$706
Q2 2020	9.3	6.7	$654
Q1 2020	9.7	7.0	$567

There were some bright spots. In general, sales of high-end products held up better, which favors LPL since it focuses primarily on the high end. For instance, the OLED TV segment continued to outperform. The market for TVs shrank by 10% in the first half of 2022, but sales of OLED TVs grew by over 20% YoY. On the other hand, growth is expected to slow down into the mid teens in the second half due to worsening market conditions. From the Q2 earnings call:

“in the second half of the year, now, unlike the market in general, we still expect the actual sales of OLED TV to continue to grow. Having said that, because of the economic downturn, as well as the sluggish demand in the downstream, we believe that the overall sales are also going to slow down, compared to the first half. So it is projected to be in the mid-teen percent.”

A transcript of the Q2 2022 earnings call can be found here.

The balance sheet also got worse as a result of the deteriorating numbers, but also because of increased spending on investments on the part of LPL. Cash and equivalent fell to KRW3,669B in Q2 2022, down from KRW4,111B in Q1 2022 and KRW4,317B in Q2 2021. Net debt was going down in prior quarters, but it rose to KRW10,318B in Q2 2022, up from KRW8,941B in Q1 2022 and KRW9,501B in Q2 2021. The current ratio was 80%, down 10 points QoQ and 16 points YoY. Net debt-to-equity ratio was 71%, up 10 points QoQ and 2 points YoY.

Why everything is not as bleak as it looks for LPL

Lockdowns in China were a major driver of the disappointing results. However, there were other factors at work. In general, demand for products utilizing display panels is getting weaker. Inventories are high, resulting in some OEMs needing to order less panels as they unwind their existing stock. The market for LCD panels remains in a state of oversupply, leading to a continued decline in LCD prices.

However, it was not all bad news. Q3 guidance calls for shipments to increase by mid single digits QoQ due to seasonality with several high-end smartphones scheduled to be released by fall and with COVID-19 under control in China. Furthermore, ASP is projected to increase by 20% QoQ. From the Q2 earnings call:

“Let me now move on to guidance for Q3 2022. In Q3, area shipment will increase by mid-single digit Q-o-Q. Shipment of IT panels affected by Chinese lockdowns will recover and shipment of large OLED and POLED smartphones is expected to grow, in response to the seasonal demand. But recovery in Q3 is likely to be limited, due to demand slowdown caused by macro instability and weaker consumer confidence, as well as customers’ attempt to minimize inventory.

ASP per square meters is also expected to rise to 20% level, thanks to increased shipment of POLED smartphones and wearable products as well as OLED TV panels. Per product, price is expected to keep declining for IT panels, while for LCD TV panels, the price decline is expected to gradually moderate as panel makers adjust production such as utilization rates.”

More importantly, there are moves underway to bring balance to the display market. At the moment, the display market is suffering from oversupply. The good news is that panel manufacturers in China have committed themselves to production cuts starting from June. The reduction in supply is expected to bring supply in line with demand, which in turn should reduce the slide in prices, if not halt it altogether. The imbalance in the display market is arguably the biggest problem, which is why any measures taken to address the imbalance should be taken as a positive sign for all participants, LPL included.

Why the stock may be due for a rebound

The drastic deterioration in the quarterly numbers this year has driven the stock down all year. The stock has lost 40% of its value YTD. In addition, the stock has trended lower all year with both the highs and the lows pointing down in a downtrend. The chart below shows how the stock has declined in 2022.

However, there have been changes in recent days. Note how the stock has managed to get above the upper trendline connecting the highs this year. In doing so, the stock has overtaken the 20-day moving average and it is within striking range of the 50-day moving average. Overtaking the latter would be considered a bullish signal.

Valuations are a mixed bag

LPL’s greatest attraction in the last two years was probably valuations. Valuations had fallen prior to COVID-19 as LPL posted loss after loss with the display market struggling with excessive competition and oversupply. However, when earnings recovered during the pandemic, valuations started to draw interest with multiples often in the low single digits.

Multiples still remain low in most cases, but valuations are not as appealing as before with quarterly earnings getting worse. For instance, the stock is valued at just 0.38 times book value with a market cap of $4.12B. LPL’s enterprise value is higher at $12.9B due to the amount of debt on its books, but it still equals 3.99 times EBITDA on a forward basis and 2.65 times EBITDA on a trailing basis.

Note how the forward multiples are worse than the trailing ones, a reflection of deteriorating earnings. LPL has a trailing P/E of 5.8, a low number, but LPL is projected to finish in the red in 2022, which is why it no longer has a forward P/E. While valuations may seem low to some, they are arguably justified in light of all the challenges facing LPL. LPL is in the red and the past suggest it is not easy to get out of it.

	LPL
Market cap	$4.12B
Enterprise value	$12.90B
Revenue (“ttm”)	$24,255.5M
EBITDA	$4,873.3M
Trailing P/E	5.82
Forward P/E	N/A
PEG ratio	–
P/S	0.17
P/B	0.38
EV/sales	0.53
Trailing EV/EBITDA	2.65
Forward EV/EBITDA	3.99

Source: SeekingAlpha

Investor takeaways

The overall situation has gotten much worse for LPL. Both the income statement and the balance sheet deteriorated. LPL is no longer profitable and, if past history is any indication, it will likely stay that way for some time due to the intricacies of the display market. The display market has long suffered from too much supply, making it difficult for everyone to remain profitable. COVID-19 changed that temporarily, but it now looks like the market is back to how it used to be pre-pandemic.

The stock has dropped this year, giving LPL a market cap of just $4.1B, which looks low for a company as big as LPL with annual sales of $24-25B. LPL also owns a lot of valuable fixed assets, including a state-of-the-art OLED fab, which should be worth several billions by itself. The stock is valued way below book value, which some might see as justification that LPL is undervalued.

I am neutral on LPL. Some might be tempted to short LPL based on how the stock has behaved all year and the fact that both the income statement and balance sheet are getting worse along with the global economy, but doing so may be a risky move at this point. Panel manufacturers are reducing their output, which should bring a least some improvement to the market in terms of pricing.

Seasonality is turning in LPL’s favor with the second half of the year underway. If manufacturers, and this is a big if, can remain disciplined and keep supply and demand in a state of balance, the earnings picture could improve significantly for LPL. Multiples would improve as well and one could make an argument that current multiples have already priced in a lot of bad news for LPL. While charts are by no means infallible, they too suggest short is not the way to go.

Bottom line, LPL is facing a difficult situation, but there is reason to believe relief is on the way, especially with panel manufacturers committed to stabilizing the display market. Long LPL may not be warranted with too many issues in need of correction, but short LPL may not be a good idea either with the way the cards are currently laid out. Neutral is best.