Apple Inc. (AAPL) Concerns Exaggerated As CLSA Upgrades LG

Apple Inc. (AAPL) Concerns Exaggerated As CLSA Upgrades LG

Apple Inc. (NASDAQ:AAPL) shares are down lately, but worries about the tech giant should not hurt LG, according to analysts at CLSA Asia.  Analysts at CLSA Asia have issued a research report today explaining why they are bullish on LG. The analysts have upgraded LG Display Co Ltd. (NYSE:LPL) (KRX:034220) from outperform to buy as they believe that the concerns over Apple volumes and TV panel prices are overdone and sentiment will soon reverse. They have cut their 1Q13 operating profit forecast from 344bn won to 154bn won, but for the 2Q13 through 4Q13 period their above-consensus estimates have not been materially changed. The analysts expect the company to generate an ROE of 20% in 2H13.

We detail some of the key points in the report:

Two reasons for LG Display’s decline

LG Display’s stock price has declined 21% from its 23 November peak. Two concerns weigh on the stock. First, iPhone and 10” iPad demand disappointed in December, leading Apple Inc. (NASDAQ:AAPL) to sharply cut orders. Second, TV panel prices fell 1% in late December and another 1%-1.5% so far this month. The analysts expect TV panel prices to stabilise in February or March as Chinastar, Panasonic Corporation (NYSE:PC), BOE and LG Display have sharply cut production.

iPad panel shipments will increase in 2Q13

According to DisplaySearch, LG Display sold 12m 9.7” iPad panels in 4Q12. They believe that this may decline to as few as 2m units in 1Q13. An inventory correction, however, they believe is by definition an exaggerated reflection of the underlying demand trend. CLSA expects a recovery to about 6m units in 2Q13. Expectations for the Mini, meanwhile, are  revised up. Mini panel shipments should increase slightly QoQ from 8.6m to 9m units.

Apple operating profit to decline about 100bn won in 1Q13 

CLSA estimates that LGD generated 240bn won of operating profit from the sale of iOS panels in 4Q12. Of the 253bn won operating profit decline forecast from 4Q12 to 1Q13, about 106bn is accounted for by the Apple Inc. (NASDAQ:AAPL) issue, according to the model. The remainder reflects the operating leverage effect from a 20% decline in shipment volume.

Chinese New Year TV sales are the biggest risk

The analysts at CLSA see Apple as a relatively small risk for LG Display. They are more nervous about Chinese New Year TV sales. They see the glass as half-full, but there are certainly risks. This is the more important factor to watch in the coming weeks. They expect that sales will meet expectations and panel buyers will then seek to secure inventory ahead of potential shortages in 2H13. LG’s price target has been raised by CLSA Asia from 34,000 (1.0x 2013 BVPS) to 40,000 won/share (1.2x).