lg display corporation investment research

LG Display Corporation –Investment ResearchAnalyst: Julian Rey Odyssey B. Hernandez

(034220

Target Stock Price: ₩28,660.5452 Week High: ₩41,450.0052 Week Low: ₩17,300.00Industry: DisplayAnalyst Rating: UndervaluedRevenue (12/31/2011): 25,121,347.70(m) Market Capitalization: 9,714,696.26(m) Shares Outstanding: 357,815,700 Free float: 62.1% ROE: -5.00%ROA: 0.00%Major shareholders: LG Electronics INC. - 37.9%

Altman Z-score:2012F 2013F 2014F 2015F1.3579 2.3628 2.2846 3.0613

Valuation Estimates:Actual Price (04/09/2012): ₩27,150.00

Ratio Based ValuationsTrailing P/E(ttm): -19.55xForward P/E: -13.57x P/BV: 0.92P/S: 0.30EV/EBITDA: 10.14EV/Sales: 0.58Enterprise Value: 18,329,622.56(m)

Intrinsic ValuationsDividend Discount Model ₩28,227.73Free Cash flows: 461,402.36(m)

Investment Report

The analyst has forecasted an expected price of ₩ 28,660.54 for the fiscal year ended December 31, 2012 for LG Display Corporation. The expected stock price is based on the Discounted Cash flow Technique method using Free Cash flow to the firm.

Due to the excellent performance during 2009 to 2010, LG Display generated about ₩1,117,778.00 and ₩1,159,234.00 in 2009 and 2010, respectively. However, earnings appear to have bottomed out from July and are trending down. The analyst expects an operating loss of ₩1,025,554.82 and found out that it is due to low EBITDA margin.

Using the Discounted Cash flow Technique, the analyst arrived at the target price of ₩ 28,660.54. The free cash flows from the forecasted years were discounted back to the current year using the weighted average cost of capital (WACC). Meanwhile, the terminal value was computed as the present value of the future cash flows divided by the excess in WACC and growth rate and the result was added up to the present value of the cash flows to arrive at the firm value and by taking out the market value of the debt the analyst arrive at the equity value. To arrive at the target price, equity value must be divided by the outstanding shares.

The analyst also tried to value the stock of the company using Dividend Discount Model (DDM). The DDM is computed by using forecasted dividends divided by the outstanding number of shares to arrive at DPS. After that, future dividends are discounted back to the present value and the summations of these values will be added up to the present value of the terminal value of the perpetuity resulting to the intrinsic value per share of ₩28,227.73 which is 3.96% higher than the actual price.

Additionally, the analyst used the relative valuation method in which the analyst found out that the LG Display’s stock price is undervalued relative to the other comparable assets in the industry. P/BV, P/S, EV/Sales and Trailing P/E models all indicated that LG Display is undervalued relative to the average of the peers and the industry. EV/EBITDA is the only model that indicated that LG Display is fairly valued. However, Forward P/E and P/E indicated that the firm is overvalued. With this in mind, the analyst concluded that LG display is undervalued according to the method of relative valuation models.

Valuation Analysis

Cost of Capital:

The cost of equity was computed using 5-year Korean Government Note of 3.15% and a market return of 4.20%. The data used were retrieved from the Korean Bank and Treasury Management. Meanwhile, the cost of debt used was the YTM of the long term debt issuance of LG Display. The cost of debt and cost of equity were assigned proportioned weights based on the total market value of equity and liabilities. The cost of capital of approximately 7% is the firm’s hurdle rate to be used to reflect the risks.

Intrinsic Valuation Methods:Dividend Discount Model

The first model used in determining the intrinsic share value is the dividend discount model (DDM). The DDM is computed by using forecasted dividends divided by the outstanding number of shares to arrive at DPS. Then, future dividends are discounted back to the present value and the summations of these values will be added up to the present value of the terminal value of the perpetuity resulting to the intrinsic value per share.

Through a thorough analysis, the analyst arrived at a price of ₩28,227.73. And because of this computation, this concludes that the LG Display’s stock price is undervalued.

However, this model has estimation flaws. It is not possible to accurately estimate exact dividends in the future, or whether or not the dividends grow or become stagnant. This leads the analyst to believe that the discounted dividend model has a little to no explanatory power.

Discounted Free Cash Flow Model

The discounted free cash flows model produces an intrinsic value that is based on the cash flows generated by the company’s assets. Similarly to the dividend discount model, the discounted free cash flow method discounts expected future values to the present value based on a discount rate. Unlike the DDM, the free cash flows are discounted using the weighted average cost of capital (WACC). This is because the company’s assets are financed by both debt and equity. The free cash flows of LG Display are approximated by adding net cash flows from investments to the cash flows from operations for a given year. Then it is discounted back to the present value using the WACC.

LG Display Corporation – Investment ResearchAnalyst: Julian Rey Odyssey B. Hernandez

The WACC is computed as the weight of cost of debt and cost of equity. Cost of debt is computed as the after tax cost of 5 year corporate bond. The risk free rate of the 5 year Korean Government note which was retrieved from the Bank of Korea was used to compute for the cost of equity.

After running this valuation model with the intrinsic WACC, the resulting intrinsic share value was higher than the actual price as of April 9, 2012 by about 5.56%.

Valuation Conclusion

After a thorough evaluation of LG Display using many different valuation models, the analyst concluded that the firm is undervalued with the exception of the relative valuation technique using the EV/EBITDA multiple. This assessment includes the dividend discount model and free cash flows. Each of the models, that the analyst deemed accurate, lead to the conclusion that LG Display is undervalued. The analyst rejected the fact that the EV/EBITDA is overvalued relative to the average of the peers because it resulted in an output that was not consistent with the other models. With the valuations resulting in an average price of ₩28,444.14, the analyst confidently confirms the assessment that LG Display is strongly undervalued.

Business Description

LG Display Co., Ltd (LPL) is one of the largest manufacturers of Liquid Crystal Display (LCD) situated in Seoul, Korea and one of the world’s leading suppliers of high-definition television panels in the world. The company manufactures TFT-LCD (Thin Film Transistor Liquid Crystal Display) panels in a broad range of sizes and specifications primarily for use in televisions, notebook computers and desktop monitors. Additionally, they also manufacture TFT-LCDs for other application products, such as mobile phones, certain types of tablet personal computers and industrial applications. According to DisplaySearch, LG Display had a global market share for large-size display panels of approximately 25.4% based on sales revenue in 2010.

The company currently operate a total of twelve panel fabrication facilities (five in Paju, Korea and seven in Gumi, Korea, and including expansions of certain facilities) and a total of nine module facilities (three in Nanjing, China, two in Guangzhou, China and one each in Gumi and Paju, Korea, Yantai, China and Wroclaw, Poland).

LG Display’s product mix reflects strategic capacity allocation among various TFT-LCD product markets, and is continually reviewed and adjusted based on the demand for display panels in different markets and size categories. One of the major and most profitable products of LG Display would be the Television. LG Display’s television panels range from 15 inches to 72-inch wide-format in size. The mass production of television display panels began in 2001. Sales of display panel televisions were (Won) 10,965 billion, which accounted for 54.7% of sales, in 2009 and (Won) 14,079 billion (US$12,453 million), or 55.2% of sales, in 2010. The market for large-size televisions developed later than that for notebook computers and desktop monitors, but it has become the largest product category in terms of sale revenues and volume as consumer demand grew for large-size televisions.

Brand manufacturers of televisions and their distribution channels prefer long-term arrangements with a limited number of display panel suppliers that can offer a full product line, and we believe that we are well positioned to meet their requirements with our strengths in technology, manufacturing scale and efficiency as well as the breadth of our product portfolio.

The desktop monitor display panels range from 15 inches to 30-inch wide-format in size in a variety of display resolutions and formats. LG began mass production of desktop monitor display panels in 1999. Sales of display panels for desktop monitors were (Won) 4,640 billion, or 23.2% of sales, in 2009 and (Won) 5,390 billion (US$4,767 million), or 21.1% of sales, in 2010. Desktop monitor display panels have grown to become the second largest product category of LG Display in terms of sales revenues and volume. In recent years, consumer demand for larger panels for desktop monitors has steadily grown.

In addition to TFT-LCD panels, LG Display also manufactures OLEDs (Organic Light Emitting Diode) and flexible displays. In January 2008, as part of their plan to pursue commercialization of OLED technology, they acquired LG Electronics’ AMOLED (Active Matrix Organic Light Emitting Diode), business by way of taking over its inventory, intellectual property rights and employees related to the AMOLED business. LG Display believes that OLED is the next-generation flat panel display because it is able to display clearer images of fast moving objects than conventional technology.

In December 2009, LG Display launched their Mobile/OLED Business Division in anticipation of future growth in the OLED business. In the first quarter of 2011, they commenced mass production of OLED displays at


their 4.5-generation production lines with an initial monthly input capacity of 4,000 substrates.

As regards the suppliers of LG Display, they provide a stable supply with the company. LG display has a 40% ownership with Paju Electric Glass Company Ltd. which is a joint venture company of LG Display and Nippon Electric Glass Co., Ltd., 60% of which is owned by LG Display. Also, the company has a purchase agreement with HannStar Display Corporation, pursuant to which HannStar agreed to supply it, on a monthly basis, with TFT-LCD modules and cells to be used in its TFT-LCD products.

The company was formerly known as LG Philips LCD Company but Philips sold all its shares in 2008. In December 2008, LG Philips LCD announced its plan to change its corporate name to LG Display upon receiving approval at the company's annual general meeting of shareholders on February 29. The company claimed the name change reflects the company's business scope expansion and business model diversification, the change in corporate governance following the reduction of Philips' equity stake, and LG's commitment to enhanced responsible management. The company has eight manufacturing plants in Gumi and Paju, South Korea. It also has a module assembly plant in Nanjing and Guangzhou in China and Wroclaw in Poland. LG Display became an independent company in July 2004 when it was concurrently listed on the New York Stock Exchange (NYSE) and the Korea Exchange (KRX).

Currently, LG Display’s total sales are derived principally from its customers using their products in televisions, notebook computers, desktop monitors and mobile and other application products with display devices. In particular, a substantial percentage of LG Display’s sales is increasingly derived from end-brand customers and their designated system integrators, who use panels in their televisions, which accounted for 54.7% and 55.2% of the company’s total sales revenues in 2009 and 2010, respectively. Likewise, a substantial portion of its sales is also derived from its end-brand customers and their designated system integrators, who use TFT-LCD panels in their desktop monitors, which accounted for 23.2% and 21.1% of the total sales revenues in 2009 and 2010, respectively, and those who use the panels in their notebook computers, which accounted for 17.8% and 17.3% of total sales revenues in 2009 and 2010, respectively.

The TFT-LCD industry is such a highly competitive market. Due to the capital intensive nature of the display industry and the high production volumes required to achieve economies of scale, the international market for display devices is characterized by significant barriers to

entry, but the competition among the relatively small number of major producers is intense. Currently almost all TFT-LCD manufacturers are located in Asia, and LG Display competes principally with manufacturers from Korea, Taiwan, China and Japan.

The principal elements of competition for customers in the TFT-LCD market include: Product portfolio range and availability, product specifications and performance, price, capacity allocation and reliability, customer service and logistics support and proximity of the regional stocking facilities. LG’s principal competitors in this industry are: Samsung Electronics in Korea, AU Optronics, Chimei Innolux, Chunghwa Picture Tubes and HannStar in Taiwan, Sharp, Hitachi, TMDisplay, Mitsubishi and IPS-Alpha in Japan and SAVIC, Infovision and BOE-OT in China. According to DisplaySearch, in 2010, Korean TFT-LCD manufacturers had a market share of 51% of the 9-inch or larger panel market based on revenue, Taiwanese manufacturers had 34% and Japanese manufacturers had 13%.

PORTER’S FIVE FORCES ANALYSIS

The Bargaining Power of Buyers

The bargaining power of buyers is moderate. There aren't many companies that offer the same quality of products as those of LG Display or have advanced as much technologically. The company’s televisions, monitors, notebook PCs and applications stand out among existing competitors. LG Display reduces the buyer power by designing its products in ways that appeal to and fit the needs of today's customers. Everything from the slim and sleek, wide view, portable and compact designs and display technologies make the products superior to the competing companies.

The Bargaining Power of Suppliers

As far as LG Display's bargaining power of suppliers, the power is on the lower end. The company forms information partnership to create cooperation among supply chain partners for mutual success. It enters into a cooperative relationship with its suppliers by becoming their shareholders. This allows LG Display to promote strategic relationships with equipment and parts suppliers, which enables a stable source of supply at competitive prices. The result is high-quality parts at a lower cost which is done through sharing product concepts with suppliers early in the product development cycle. This kind of cooperation with suppliers has lowered costs by 10% compared to the fourth quarter of


2008. LG Display stands apart from its peers in terms of market share, cost competitiveness and supply capacity.

Threat of Substitute Products or Services

The threat of substitute products is moderately low. Substitutes for LCD are LED (Light-Emitting Diode) and OLED (Organic Light-Emitting Diode), both are newer technologies currently developed by the company. As long as LG Display can maintain its current market share of a quarter percent for the newer products, substitute products would not be considered as threats. The company’s development of new products and technologies that can be differentiated from those of its competitors increases switching cost as well as reduces buyers’ propensity to substitute. In addition, its innovation technology is another switching cost for consumers.

Threat of New Entrants

The threat of new entrants is low in the flat panel display industry (TFT-LCD technology) due to its various entry barriers such as rapidly evolving technology, capital-intensive characteristics, brand equity, expected retaliation among existing competitors and the significant investments required by the economies of scale. In addition, the industry may not be as appealing to potential competitors due to its highly competitive nature. Existing competitors have already experienced pressure on their prices and margins due largely to additional industry capacity from other panel makers in Korea, Taiwan, China and Japan. Other entry barriers also include LG Display’s absolute cost advantage in its supply chain management and learning curve advantage with its years of experience as a leading player in the industry

Rivalry among Existing Competitors

Rivalry among existing competitors is on the higher end. Although the company’s market share increased to 26.4% in 2009 from 20.4% in 2007, there is still intense competition within the industry. Competitions are likely to remain intense not only due to the expected large demand for LCD panels in the market today but also due to additional industry capacity from other Asian LCD panel makers such as Samsung, AU Optronics and Sharp. However, the average selling prices may continue to decline as a result of technology advancements and cost reductions. In order to stay competitive, LG Display strives to differentiate itself with not only cutting-edge technology but also innovative designs. The BusinessWeek article "LG Bets Big on TV Design" clearly demonstrates this business initiative.

Industry Overview and Competitive Positioning of LG Display Corporation

Display Industry

Korea's display industry was ranked first in the world in 2009. Additionally, Korea's global display market share is 46.5%; the market shares for LCD, PDP, and OLED are 45.8%, 52.1%, and 82.6% respectively and because of these successful progress in Korean industry, it has become the largest display producer in the world for the second consecutive year.

Korea has maintained its position as the world's top display manufacturer. Korea has aggressively made investment even during the global economic crisis in order to meet the demand for displays, which has been recovered since the second quarter, 2009. Korea's display production in 2009 was USD 39.05 billion (46.5%), followed by USD 27.73 billion (33.0%) of Taiwan and USD 15 billion (17.8%) of Japan. The world display market is expected to grow by 12% from the year earlier to USD 102.2 billion on the back of the booming demand for IT products and TVs in 2010.

The global LCD market is forecast to expand by 6% on a year-on-year basis thanks to the stable demand for LCD TVs from emerging markets including China. The world PDP market is likely to diminish by 5.7% to USD 4.2 billion because the panel prices have gradually fallen. The world OLED market is expected to grow 53.8% compared to the previous year to USD 1.29 billion, since the smart phone market has remarkably expanded, leading to the expectation that the demand for small mobile devices will soar.

Competitive Positioning

The Industrial Status in the Korean Economy

The share of the flat panel display industry in GDP (Statistics Korea, companies with over 10 employees) was 1.96% in 2005, 1.79% in 2006, and 1.78% in 2007, which are similar figures to the fabricated metal industry. The industry grew rapidly in 2008 and 2009. However, the growth is expected to be about 2% in year 2010. The global standing of Korea's display industry has gone up thanks to the growing global market share, stemming from the industry's improving global competitive. The display industry has developed into Korea's flagship global industry, following the footsteps of the electronics, semiconductor, and cell phone industries. This progress is shown in major macro-indices such as production, employment, capital investment (tangible fixed assets), and export. Especially, the


proportion of tangible assets in the manufacturing industry has gone up from 5.8% in 2005 to 6.9% in 2007, showing that the display industry has constantly made capital investment in order to strengthen the production capacity. The employment contribution of the IT industry has fallen recently. However, the display industry has shown increasing contribution to employment thanks to a rise in its proportion in the manufacturing industry. Export

The display export has soared since 2005, increasing the trade surplus significantly. The main reasons for the booming export are stable sales prices and the increase in the global demand. The global demand for LCD TVs has gone up, contributing largely to the rising demand for LCD panels. Korea's Trade Specialization Index (TSI) has been high at over 0.7 since 2005. On the back of increasing export, the share of displays in Korea's total export has jumped remarkably every year. The industry's proportion in the total export rose from 0.4% in 2003 to 1.7% in 2005 and to 4.4% in 2008. The figure in 2009 (Jan. - Oct.) amounts to 6.9%.

Global Market Share

Korea has maintained the largest global market share in the world display market, since it surpassed Japan, one of the global leaders in the industry, as the largest display producer in 2001.

The global status of the display industry is growing based on the increase in export. Korea has risen as a global producer of flat panel displays, which falls into the category of a high-tech industry, within a short period. This emergence is the result of Korea's efforts to develop excellent information technologies and aggressively respond to the transition from the analogue era to the digital era.

Global market shares show how much Korea's display industry has become stronger. Korea's global market share for LCD panels (over-10-inch panels) has continued to rise from 43.4% in 2007, to 45.8% in 2008, and to 52.2% in the second quarter, 2009. China entered the LCD market in early 2005, and its market share is still less than 3%. However, the country has strengthened its production, heralding its growth.

Market shares by company show that in the LCD sector, Samsung Electronics held 21.9% and LG Display posted 19.7% in 20011. The figures indicate that Korean companies were ranked first and third, boasting the country's status as a LCD powerhouse. The market share of AUO, Taiwan was 19.9%, being the second largest company. CMO, also from Taiwan, was ranked fourth

(13.1%), and Sharp Electronics of Japan came to the fifth (7.2%).

Investment Risks

Since LG Display Corporation was incorporated in Korea and a significant portion of their operations and assets are located in Korea. Therefore, they are subject to legal, political, economic, regulatory and other risks specific to Korea. Any unforeseen deterioration in Korea or in global economy could adversely affect LG Display’s financial condition, as well as business operations.Some of the risks identified are as follows:

POLITICAL RISKGrowing tension between the Northern part of Korea and the Southern part of Korea has an adverse impact on the market value of LG Display’s stock price.

There could be an abrupt increase in tension between the two parts of Korea as a result of the current and future events that could potentially detriment most businesses situated in the country. Lately, in northern part of Korea, there were some heightened security concerns due to the North Korea’s recent nuclear weapon and long-range missile programs. In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In May 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range surface-to-air missiles

ENVIRONMENTAL RISKJapan Earthquake and Tsunami.

On March 11, 2011, the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks. These geological events have caused significant damage in the region, including severe damage to nuclear power plants, and have impacted Japan’s power and other infrastructure. A number of suppliers of LG Display’s raw materials, components and manufacturing equipment are located in Japan. Some of these suppliers were affected by the March 2011 earthquake and tsunami and some continue to be affected by unreliable power, shipping constraints and issues with their suppliers. LG Display had to deal with the reduced demand for their products. As a result, LG Display’s business results of operations or financial condition was materially and adversely affected.

MARKET RISKINTEREST RATE RISKS


Interest rate movements on floating rate borrowings and exchange rate movements on foreign currency – denominated accounts receivables, cash flows and accounts payable for purchases or raw materials.

With regard to market risks, the primary interest rate risks exposure of LG Display relates to its long-term debt obligations, which are typically incurred to fund capital expenditures and repay maturing debt, as well as for working capital and other general corporate purposes. As of December 31, 2010, LG Display had outstanding long-term debt, including current portion, in the amount of (Won) 3,429 billion (US$3,033 million). The company enters into interest rate swapping from time to time to hedge the effects of fluctuations in interest rates of some of their floating rate long term debt. Additionally, interest rate risks due to additional debt financing contribute also to the risk exposure of LG Display.

FOREIGN CURRENCY RISK

LG Display Corporation is primarily exposed to foreign currency risk attributable to the U.S dollar currency. The company is also exposed to a lesser degree of risk to other foreign currencies like Euro and Japanese Yen. Furthermore, LG Display does not only rely on natural hedges provided the by foreign currency payables and receivables because they also enter into short-term, foreign currency forward contracts with major financial institutions to minimize the impact of foreign currency fluctuations on the results of their operations. Consequently, gains and losses on foreign currency forward contracts are periodically recorded in the period of the exchange rate changes as foreign exchange gain or loss or other comprehensive income.

CREDIT RISK

LG Display is also exposed to credit risk in the event of non-performance by the counterparties under their foreign currency forward contracts at maturity. In order for LG Display to minimize this risk, they limit the transaction amount with any one party and continually monitor the credit quality of the counterparties to these financial instruments. The company’s credit policy requires payment within 30 to 90 days, and payments on the vast majority of sales have been collected within 65 days. The management manages its accounts receivable and credit exposure to customers by establishing credit limits for each customer to whom they supply products on an open account basis in accordance with LG Display’s internal credit guidelines. The company assesses credit risk through quantitative and qualitative analysis, and based on this analysis, they establish credit limits.

Inflation in Korea, which was 1.9% in 2009 and 2.9% in 2010, has not had a material impact on their results of operations.

LIQUIDITY RISKLG Display’s approach to managing liquidity is

to ensure immediately that it will always have sufficient liquidity to meet its liabilities when due without incurring unacceptable losses or risking damage to the management’s reputation. It has been historically been able to satisfy its cash requirements from cash flow from operations and debt and equity financing. To the extent that the Group does not generate sufficient cash flow from operations to meet its capital requirements, the company may rely on other financing activities, such as external long-term borrowings and offerings of debt securities, equity-linked and other debt securities. In addition, LG Display maintains a line of credit with various banks.

GLOBAL ECONOMIC RISKA global economic downturn may result in reduced demand for our products and adversely affect LG Display’s profitability

In recent years, difficulties affecting the global financial sectors, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have increased the uncertainty of global economic prospects in general and have adversely affected the global and Korean economies. The recent global economic downturn has adversely affected demand for consumer products manufactured by our customers in Korea and overseas, including televisions, notebook computers, desktop monitors and mobile and other application products utilizing TFT-LCD panels, which has in turn led them to reduce or plan reductions of their production.

INDUSTRY RISKLG Display’s industry is subject to cyclical fluctuations, including recurring periods of capacity increases, that may adversely affect its results of operations.

TFT-LCD manufacturers like LG Display Corporation are vulnerable to cyclical market conditions. Intense competition and demand growth expectations may result in panel manufacturers investing in manufacturing capacity on similar schedules, resulting in a surge in capacity when production is ramped up at new fabrication facilities. During such surges in capacity growth, customers can exert and have exerted strong downward pricing pressure, resulting in sharp declines in average selling prices and significant fluctuations in gross margins. Conversely, demand surges and fluctuations in the supply chain can lead to price increases.


COMPETITIVE RISKLG Display’s financial condition may be adversely affected if it cannot introduce new products to adapt to rapidly evolving customer needs on a timely basis.

New products are developed in anticipation of future demand. The company’s success greatly depends on their ability to respond quickly to emerging customer requirements and to develop new products in anticipation of future demand. Any delay in development of commercially successful products with reliable quality and advanced features may adversely affect its business.

BUSINESS RISKProblems with product quality, including defects, in their TFT-LCD panels could result in a decrease in customers and sales, unexpected expenses and loss of market share.

LG Display’s products are manufactured using advanced and often new technology and must meet stringent quality requirements. Products manufactured using advanced and new technology may contain undetected errors or defects and such defects could cause them to incur significant re-designing costs, divert the attention of its technology personnel from product development efforts and significantly affect its customer relations and business reputation. Additionally, future product failures could cause them to incur substantial expense to repair or replace defective products. If they deliver TFT-LCD panels with errors or defects, or if there would be a perception that its TFT-LCD panels contain errors or defects, their credibility and the market acceptance and sales of their products could be harmed. Widespread product failures may damage LG Display’s market reputation and reduce its market share and eventually will cause its sales to decline.

LEGAL RISKSanctions or judgments against LG Display and other TFT-LCD panel producers for possible anti-competitive activities may have a direct and indirect material impact on their operations.

In December 2006, LG Display received notices of investigation by the Korea Fair Trade Commission, the Japan Fair Trade Commission, the U.S. Department of Justice, and the European Commission with respect to possible anti-competitive activities in the TFT-LCD industry. LG Display subsequently received similar notices from the Canadian Bureau of Competition Policy, the Secretariat of Economic Law of Brazil and the Taiwan Fair Trade Commission. In addition, in July 2009, the Federal Competition Commission of Mexico announced a similar investigation into possible anti-competitive

practices in the LCD industry. In November 2008, LG Display executed an agreement with the U.S. Department of Justice whereby LG Display and its subsidiary, LG Display America, Inc., pleaded guilty to a Sherman Antitrust Act violation and agreed to pay a single total fine of US$400 million.

TECHNOLOGICAL RISKLG Display heavily relies on technology provided by third parties and its business will greatly suffer if they are unable to renew their licensing arrangements with them.

LG Display have obtained licenses for patent, copyright, trademark and other intellectual property rights to process and device technologies used in the production of its display panels. Likewise, they have entered into key licensing arrangements with third parties, for which they have made, and continue to make, periodic license fee payments. In addition, they also have cross-license agreements with certain other third parties. These agreements terminate upon the expiration of the respective terms of the patents.

If they will be unable to renew our technology licensing arrangements on acceptable terms, they may lose the legal protection to use certain of the processes that they employ to manufacture its products and be prohibited from using those processes, which may prevent them from manufacturing and selling certain of their products, including their key products. In addition, they could be at a disadvantage if their competitors obtain licenses for protected technologies on more favorable terms than they do.

SOCIAL AND LABOR RISKLabor unrest may disrupt LG Display’s operations.

As of December 31, 2010, approximately 66% of its total employees, including those of their subsidiaries, were union members, and production employees accounted for substantially all of these members. They have a collective bargaining arrangement with their labor union, which is negotiated once a year. If LG display’s relationship with its employees deteriorates and there is labor unrest resulting in a work stoppage or strike, its production facilities will not be able to continue operations and this will have a material adverse effect on their financial condition and results of operations.


LG Display’s Business Strategy

LG Display Co Ltd uses differentiation strategy as its main business strategy by producing goods and services that are unique to the market. That is products that are used to experience new, rich life of digital display through a variety of TFT-LCD LG Display provides, such as the production and supply of thin-film transistor liquid crystal displays called TFT-LCD panels, principally used for televisions to provide slim and sleek design. It also provides large, wide and high performance screens for notebook computers and wider, brighter and crisper screens for desktop monitors. In addition, it provides TFT-LCDs for handheld products such as mobile phones, and lighter and slimmer products for industrial and other applications such as entertainment systems, automobile navigation systems, portable DVD players, digital photo displays and medical diagnostic equipment. The customers served by LG Display include manufacturers of notebook computers, televisions and desktop monitors.

The customer service center provides product repair and warranty services to customers in the Americas region, where the demand for LCD TVs is rapidly growing, especially in the United States, Canada, Mexico and Brazil. The service center features optimized facilities and analysis equipment to provide warranty services primarily for LCD panels that are 32 inches and larger. In addition, the Company has one sales subsidiary and four representative offices in the U.S. As part of their strategy to improve customer alignment; this enables them to better respond to the needs of their customers in a timely and efficient manner.

Major Business Initiatives & IT Advantages

As a major manufacturer of LCD and other types of electronics screens such as LED and OLED, the company needs to have a strong Supply Chain Management (SCM) system to ensure supplies are in place at the right moment when they are needed (Just-In-Time method). This way cost can stay down while profits rise. Although it is uncertain whether LG Display has any SCM in place, the company employs Inter-Modal

Transportation to move its supplies from origin to destination through the help of Supplier Collaboration System, an ERP system that tracks goods from when they are shipped to the various stores that sell the products.

The Customer Relationship Management (CRM) system is another focus of LG Display since differentiation is its business strategy. The company's Customer Collaboration System serves to strengthen customer collaboration through providing services such as engineering support and market information. The Multi-channel Service Delivery also allows customers to interact with the company by email, phone or the website. Another initiative businesses are increasingly using is E-Collaboration, the use of technology to support workflow, knowledge management, social networking, e-learning and collaboration.

LG most likely uses virtual teams since there are employees in various countries like South Korea, China, Poland and the United States. The integrated collaboration

environments improve work performance and allow sharing and flow of information. Considering the immense amount of technology involved in its industry, LG may also be using knowledge management systems and wiki to capture, organize collaborate and share information.

Finally, a company this size has to have an Enterprise Resource Planning (ERP) system in place to help facilitate the business practices. For LG, this integrated software that controls the various departments in the company is the Supplier Collaboration System. It allows all suppliers, forwarders and customers to review shipment processing, import trade, electronic certification, and price estimation and vendor information management.


Figure 1: Sales, EBIT and NOPLAT from 2009 - 2015

Figure 2: EBIT from 2009 - 2015

Figure 3: Sales contribution by product type

Forecast Report

Fortunately, LG Display expects with high confidence that their earnings will trend upward again beginning in the year 2013 up to 2015 this is due to the: 1) productivity improvement via timely investment in 8G lines; 2) increased proportion of LED in IT panels; 3) diversified customer portfolio; and 4) sourcing of core components from affiliates. Likewise, the TFT-LCD industry is forecast to have a soft landing in 2012 and see a substantial decrease in volatility, in view of: 1) demand growth for corporate-use PCs and LED/3D TVs; 2) continued supply shortages of core components; and 3) sound set and panel inventory levels.

The expected high rising net income of LG Display can be drive by the improved business strategy of the management as seen in figure 1. For TV panel, the LED and 3D TV will have an increase in demand growth due to the advanced technology used in producing these products. Another factor would be the growth in orders from Chinese set makers and lastly, the expansion in share of supplies to LGE and Vizio. In IT panel, LG Display foresees a growing preference for IPS technology, growth in demand for corporate-use PC and new demand from LED monitors and iPad. These improved strategies are expected contribute a lot to LG Display. The company is also expected to engage in new businesses, primary reason is to Targets early mass-production of in-cell touch panels that would allow an increase in demand in panels. Lastly, LG Display will start production of shutter glass- and pattern retard-3D TVs to support the foreseen growing demands for 3-D TVs. The AMOLED products of LG Display are also expected to boost the sales of the company. Thus, the production of handset-use AMOLED panel from 2010 will be intensified also. A corresponding AMOLED capital expenditure will be needed to enable mass production.

According to LG Display, their key earnings determinants are the panel ASP, productivity, and purchase prices. They also have emphasized high-margin products such as LED panels and ISP panels. In addition, their yield is 98%, which is exceptionally high in such a capital-intensive industry. In the long term, LG Display said that they seek to focus more on high-margin products rather than on capacity expansion. They hope to lead the market based on technological leadership in in-cell touch panels and 3D TVs.

The sales for TV are forecasted to yield ₩17,926,294.97 which accounts for about 50% of the total sales as seen in figure 3. On the other hand,


Notebook PC and Desktop monitors are, ₩5,189,142.47 and ₩6,772,397.44 in 2012, respectively.


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