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(News Focus) LG Electronics' corporate value to improve with mobile biz restructuring

10:12 January 23, 2021

By Joo Kyung-don

SEOUL, Jan. 23 (Yonhap) -- LG Electronics Inc. can improve its corporate value by restructuring its money-losing mobile business, analysts here said Saturday, as the South Korean tech giant can better focus on its future growth engines for the post-pandemic era.

LG Electronics on Wednesday announced that its mobile communications (MC) unit is open to "every possibility" for its future operations amid rumors that the company may sell the struggling mobile business.

"We think LG's announcement means they are going to either shut down or sell, or at least scale back on its mobile business," Cho Chul-hee, an analyst at Korea Investment & Securities, said.

Analysts said LG's decision to restructure its mobile business is a positive development for shareholders, considering that the move will boost the company's profitability and eventually its value.

This composite image from Yonhap News TV shows LG Group's headquarters building in Seoul (L) and LG Electronics Inc.'s smartphone with a rollable display. (PHOTO NOT FOR SALE) (Yonhap)

LG's mobile business has been in the red since the second quarter of 2015. Its accumulated operating loss reached nearly 5 trillion won (US$4.5 billion) last year.

"We have to see the final decision from LG, but it became clear that the company is moving towards reducing losses from the mobile business," Park Hyung-wou, an analyst at Shinhan Financial Investment, said.

"The mobile business has been a factor that has been dragging down LG's corporate value."

Shares in LG have spiked since the company hinted at a possible restructuring of the mobile business, surging 12.84 percent on Wednesday and 10.78 percent on Thursday, before cooling down with a 4.05 percent decline on Friday to end at 177,500 won.

In recent days, local brokerage houses have been raising the target price of LG, with many setting it between 190,000 won and 230,000 won.

"If LG decides to pull out from the mobile business, its impact for the company's value will be larger than the numbers on paper," Ko Eui-young, an analyst at Hi Investment & Securities, said.

"Its MC division has been a discount factor for LG because it lowered the credibility of the company's cash flow estimates with frequent one-off costs and prompted inefficient allocation of the company's resources."

This photo taken on Jan. 21, 2021, shows a poster promoting LG Electronics Inc.'s Velvet smartphone at an electronics store in Seoul. (Yonhap)

LG has been striving to make a turnaround in its mobile business in recent years, shifting its smartphone production base to Vietnam, while expanding outsourcing deals. Analysts estimate 60 percent of LG's phones are currently produced through original development manufacturing (ODM).

To boost its premium smartphone sales, LG last year launched the Explorer Project, its new mobile category highlighted by a different form factor.

Under the project, the company released the Wing, a dual-screen smartphone with a rotating form factor. For this year, LG was scheduled to launch a smartphone with a rollable OLED display.

But analysts said such efforts were not enough for LG to turn the tables as they were overshadowed by Samsung Electronics Co. and Apple Inc. in the premium segment, while Chinese brands dominated the budget phone sector.

LG's share in the global smartphone market is estimated to be between 1 and 2 percent.

"The smartphone market is no longer in the era where everyone can grow," said Ko Jung-woo, an analyst at NH Investment & Securities. "The company, which can be considered a niche player in the market, has less potential growth possibility than in the past."

This photo taken on Oct. 6, 2020, shows LG Electronics Inc.'s dual-screen smartphone, the Wing, displayed at a store in Seoul. (Yonhap)

Analysts predicted that LG's first move will be shrinking its mobile division

"Considering its outsourcing deals and contracts with mobile carriers, it will be difficult for the company to withdraw from the mobile business in such a short period of time," said Lee Jong-wook, an analyst at Samsung Securities. "Shrinking the unit also helps the company if it wants to sell the business."

LG may also further shift its mobile business focus to ODM and budget phones, but industry observers said that such a strategy could be risky as it can damage its premium brand image in the TV and home appliance markets.

"In regard to its corporate value, the best scenario will be selling off the business," said Kim Ji-san, an analyst at Kiwoom Securities. "Even if it shuts down or sell the business, the company will keep its core mobile technologies and support its future engines, such as Internet of Things (IoT) solutions for home appliances, robots and autonomous vehicles."

This image provided by LG Electronics Inc. on Dec. 23, 2020, shows a concept for a future vehicle using parts from LG and Magna International Inc. The two sides agreed to set up a joint venture to make auto parts, including e-motors and inverters. (PHOTO NOT FOR SALE) (Yonhap)

LG's announcement regarding its mobile business came after it decided to establish a joint venture with global auto parts maker Magna International Inc. to explore electric powertrain systems for the fast-growing electric vehicle (EV) market.

Analysts said LG's recent moves show the company's future business goals.

"LG is expected to accelerate its business focus on home appliances, which it boasts global competitiveness, as well as automotive and B2B solutions," said Roh Kyoung-tak, an analyst at Eugene Investment & Securities. "It signals that the direction and pace of LG's business strategy has changed from the past in various areas."

kdon@yna.co.kr
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