LG Display: Positive Earnings Results Overshadowed By The Need For Cash (NYSE:LPL)

LG Display (NYSE:LPL) put in a mixed report on the 24^th. On the one hand, LPL reported, for instance, its first quarterly profit after six quarterly losses. On the other hand, the relief is not likely to last with further losses in the pipeline for a number of reasons. There is also the issue of the issuance of a huge number of new shares due to LPL’s need for cash to keep going. Why will be covered next.

LPL is out of the red, but likely not for long

A previous article from last October rated LPL a hold even though there was reason to believe the quarterly numbers from LPL were likely to improve with LPL getting out of the red. LPL, for instance, has decided on making OLED technology its bread and butter, something one can argue is justified, but the release of new products utilizing a competing display technology with good reviews suggested LPL has its work cut out in fending off the competition.

LPL did rebound strongly with both the top and the bottom line showing big improvements in the Q4 2023 report released on January 24. LPL finished with net income of KRW51B, which converts to $38M using a USD:KRW exchange rate of 1:1,336. Q4 revenue increased by 55% QoQ to KRW7,396B or $5.54B, although it was up just 1% YoY.

In comparison, LPL posted a loss of KRW775B in Q3 2023 and a loss of KRW2,094B in Q4 2022. Keep in mind that Q4 2022 was weighed down by an impairment charge of KRW1,330B. EBITDA was KRW1,272B or $0.95B, an increase of 233% QoQ and 509% YoY. The table below shows how there was significant improvement to note in the most recent report.

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Source: LG Display

If the Q4 numbers are out, then so too are the numbers for all of 2023. Revenue declined by 18% YoY to KRW21,331B or $15.97B. Net loss was KRW2,576B or $1.93B. EBITDA was KRW1,704B or $1.28B. Operating loss increased to KRW2,509B or $1.88B.

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The table below shows the reasons behind the sequential improvement. Area shipments increased by 17% QoQ to 5.6M square meters, below guidance of an increase of 19%, but this was offset by average selling prices increasing by 32% QoQ to $1,064 per square meter, much more than the mid-20% guidance called for, thanks mostly to a better product mix.

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Keep in mind the Q4 results got an assist from seasonality due to the December holidays. Furthermore, Q1 2024 guidance calls for area shipments to decline by 10% and ASP are expected to decline by mid-20%, both QoQ. Using these guidelines from LPL, area shipments are estimated at 4.32M with ASP of $798, which suggests Q1 2024 revenue in the $3.8-3.9B range, depending on the exchange rate. This is almost certain to cause LPL to fall back into the red with a projected loss of around KRW300B in Q1 2024. From the Q4 earnings call:

“Next is on Q1 guidance. With panel shipment expected to decline across the products Q-o-Q due to seasonality, area shipment is projected to decline by 10% level with ASP per square meter falling by mid-20% level.”

A transcript of the Q4 2023 transcript can be found here.

LPL may look undervalued, but not so much with shares set to be diluted

Cash and cash equivalents totaled KRW3,163B or $2.37B in Q4 2023, down from KRW3,547B in Q4 2022 and down from KRW4,087B in Q3 2023. Total debt was KRW16,529B or $12.37B in Q4 2023, down from KRW17,487B in Q3 2023, but up from KRW14,991B in Q4 2022. The current ratio stands at 68%, flat YoY and down 400 basis points QoQ.

This balance sheet is set for change. LPL has announced plans to raise KRW1.43 trillion or more than $1B in new capital with around KRW394B to be used to pay down debt and the rest to be used mostly for operating expenses and capex spending. The flip side is that LPL will need to issue about 142M new shares, which will raise the number of outstanding shares to around 500M, a fairly large increase of about 39.7%.

LPL has total assets of KRW35,759B and total liabilities of KRW26,989B as of Q4 2023, which means LPL has a book value of KRW8,770B or about $6.57B depending on the exchange rate. If the number of ADS is 943M as of January 26, then book value per depositary share is about $6.97. In comparison, the stock closed at $4.58 per ADS as of January 26.

This gives LPL a market cap of just $4.3B, which stands in contrast to the size of LPL as a company with, for instance, TTM sales of KRW32,331B or $15.97B. LPL trades below book value, which one could argue justifies adding the label undervalued to LPL. On the other hand, a counter argument can be made that while LPL is undervalued in the strictest sense of the word going by the book, LPL still deserves to trade below book value due to persistent losses.

Bleeding red will chip away at book value, especially after raising new capital by issuing new shares. If the number of ADS continues to increase since the end of the December quarter due to the new shares set to be issued, then book value will get closer to the current stock price. Book value is still above the current stock price, but it shows why LPL is not necessarily as undervalued as it may appear at first.

The stock is close to multi-year lows

As one might expect for a company that has reported far more losses than profits, the stock is not far removed from multi-year lows. LPL trades not far from the low for the last ten years, which is the March 2020 low of $3.47. The chart below shows how long LPL has not been all that rewarding for those who took a shot at it, with the exception of the rare few who are adept at consistently buying at the low and selling at the high.

However, there are signs the stock may be showing some underlying strength. Notice how the stock bounced multiple times when it got to the $4.20-4.40 region, in October and then in December. LPL is also coming off a long slide, having spent most of the last 12 months in decline. The stock has spent the last three months or so going sideways, which could be interpreted as a sign the bottom may already be in.

Could the bet on OLED turn out to be a bad bet?

As mentioned earlier, LPL is focusing on OLED going forward. A big reason why LPL has decided to raise cash with new shares is because of the need to strengthen its OLED offerings. The risk here that LPL may only go so far as OLED is able to take it. If OLED falters in some way, the consequences for LPL could be rather severe.

It’s therefore worth reminding that the race to be crowned the king of display technology is very much wide open. LPL is not the only one with an interest in the market for OLED displays. For instance, China’s BOE has recently announced plans to spend close to $9B to build a new 8.6-gen OLED fab with a production capacity of 32,000 substrates per month to supplement its existing 6-gen OLED fabs. This after Samsung announced plans for a similar fab and others may be thinking of jumping in. Competition in the display market is fierce.

There is also no guarantee OLED is the display technology of the future. Recent products utilizing the latest MiniLED screens have gathered positive reviews compared to OLED counterparts with one better in some areas and the other better in other areas. While MicroLED is probably years away, MicroLED offers substantial advantages compared to OLED.

OLED is by no means a sure bet. OLED has its advantages over current competitors, but that might change in the not so distant future. To bet on LPL is essentially to bet on OLED. This may turn out to be a good move if OLED rises to the top, but if OLED loses out to some superior technology, LPL may also go down along with it.

Investor takeaways

LPL was able to achieve its first quarterly profit in nearly two years, but it is very likely to report another loss as soon as the next report, which is the Q1 2024 report. These losses have led to all sorts of consequences for LPL. For instance, LPL has been forced to borrow through loans, which has found its way back to how the balance sheet has deteriorated in the last year. LPL has around $10B of net debt to pay off, which can be quite difficult when you are often in the red.

Most recently, LPL has announced plans to raise over a $1B in cash to finance a range of activities and to pay some of the older debt it has on the books. This time LPL is doing so by issuing a huge amount of shares. It will be difficult for the stock to do well when a large number of new shares are set to hit the market in 2024. The persistent need for additional cash is not likely to appeal to investors.

It also remains to be seen whether going all in on OLED technology will turn out to be the right move or something that should not have been done in hindsight. The market for display panels is far from mature and there is likely a lot left to come in the years ahead. Long LPL does not look like a sound bet in light of the above.

On the other hand, short LPL does not look all that appealing either. LPL already trades way below its book value, which means a lot of future losses are priced in. The stock is already close to decade lows and the charts suggest the stock has stabilized after a long decline. Not much is expected from LPL, which is reflected in its low valuation relative to its size.

With this in mind, I am neutral on LPL. Neither long nor short looks warranted with the way the cards are laid out at the moment. LPL has a number of appealing attributes like its low valuation, but it also has a number of not so appealing attributes like persistent losses. Long LPL may be worth another look at some other time, but now is not that time.