LG Electronics doesn’t understand what value-up means; receives D grade
LG Electronics’ value-up plan lacks essential elements like cost of capital and capital allocation
Structural share re-rating LG promises is not easy; Detail plan is needed
The value-up plan announced by LG Electronics on October 22nd is deeply disappointing. Despite board approval, the plan seriously lacks the detail and sincerity expected of a long-term strategy from a leading Korean corporate. The board and management seem to have a fundamental misunderstanding of the concept of value-up, in our view. The company's plan further reveals a weak commitment to improving corporate governance. When compared to the comprehensive value-up plan unveiled by Hyundai Motor in late August, LG Electronics’ plan appears superficial and lacking in substance. Due to the significant shortcomings of its value-up plan, we issue LG Electronics a D grade and urge BoD Chairman KWON Bong Seok and CEO William CHO announce an enhanced plan in the near future. This is the lowest grade our Forum has assigned to any of the nine listed companies evaluated.
The plan completely lacks any recognition of the cost of capital, a fundamental concept in value-up, and offers no framework for capital allocation. Given the board and management's six-month window to study the Korea Exchange's Value-up Guidelines since May, their lack of understanding and efforts are particularly disappointing. While the plan is adorned with buzzwords such as "2030 Vision", "Vision House", and "Quantitative Target", it ultimately fails to deliver on the specifics of value creation.
We believe the plan offers no concrete details on how the company intends to execute its ambitious goals of boosting operating margin to 7% from current depressed 4% and achieving a significant re-rating of its valuation to an EV/EBITDA multiple of 7x from current 3.2x*. As evidenced by Apple's experience since Tim Cook took over in 2012, a structural re-rating in share valuation requires sustained company efforts and market trust. To achieve this, the company should focus on reducing its significant debt, which is considerable relative to its market capitalization of W17 trillion. A straightforward way would be to buyback and cancel the W800 billion worth of preferred shares, currently trading at half the price of common shares.
Their vague language of "considering cancellation of existing Treasury shares" and "reviewing quarterly dividends" are insufficient. Despite a slight increase in the minimum dividend to W1,000 from W750 average in two years, the resulting dividend yield of a mere 1% appears too low given the current share price of W97,000. The commitment of over 25% dividend payout ratio during 2024-2026 (based on consolidated net income) falls far short of – absolutely and relatively - what is needed to satisfy shareholders. The board and management must recognize that LG Electronics' share price has declined by 8% over the past year, resulting in -7% total shareholder return (TSR) (incl 1% yield). The company's 10-year TSR of only 5% per annum is a clear indication that it has failed to meet shareholder expectations.
The lack of alignment between LG Electronics and its shareholders is evident in the executives' stock ownership and compensation structures. LG Electronics' value-up plan outlines its ambition to rival Silicon Valley companies in various business areas. CEO William Cho's 2023 compensation package consisted solely of a W2.2 billion cash compensation with no stock-based awards. His owns 5,373 LG Electronics shares, worth W500 million only, that’s short of what is typical for mid-level engineers at leading US tech companies. The board must take immediate steps to introduce a comprehensive stock-based compensation plan such as RSU for executives and key employees to ensure long-term alignment with shareholders.
Despite facing substantial criticism for its governance shortcomings following the listing of LG Energy Solution a few years ago, LG Group has shown no meaningful governance reforms. The appointment of Kwon Bong Seok, a former CEO of LG Electronics and currently LG Corp Vice Chairman, as Chairman of LG Electronics board further undermines the BoD’s independence. This raises serious questions about the group's commitment to improving its corporate governance practices.
*Based on Naver Securities consensus calculation
October 28, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
LG Electronics doesn’t understand what value-up means; receives D grade
LG Electronics’ value-up plan lacks essential elements like cost of capital and capital allocation
Structural share re-rating LG promises is not easy; Detail plan is needed
The value-up plan announced by LG Electronics on October 22nd is deeply disappointing. Despite board approval, the plan seriously lacks the detail and sincerity expected of a long-term strategy from a leading Korean corporate. The board and management seem to have a fundamental misunderstanding of the concept of value-up, in our view. The company's plan further reveals a weak commitment to improving corporate governance. When compared to the comprehensive value-up plan unveiled by Hyundai Motor in late August, LG Electronics’ plan appears superficial and lacking in substance. Due to the significant shortcomings of its value-up plan, we issue LG Electronics a D grade and urge BoD Chairman KWON Bong Seok and CEO William CHO announce an enhanced plan in the near future. This is the lowest grade our Forum has assigned to any of the nine listed companies evaluated.
The plan completely lacks any recognition of the cost of capital, a fundamental concept in value-up, and offers no framework for capital allocation. Given the board and management's six-month window to study the Korea Exchange's Value-up Guidelines since May, their lack of understanding and efforts are particularly disappointing. While the plan is adorned with buzzwords such as "2030 Vision", "Vision House", and "Quantitative Target", it ultimately fails to deliver on the specifics of value creation.
We believe the plan offers no concrete details on how the company intends to execute its ambitious goals of boosting operating margin to 7% from current depressed 4% and achieving a significant re-rating of its valuation to an EV/EBITDA multiple of 7x from current 3.2x*. As evidenced by Apple's experience since Tim Cook took over in 2012, a structural re-rating in share valuation requires sustained company efforts and market trust. To achieve this, the company should focus on reducing its significant debt, which is considerable relative to its market capitalization of W17 trillion. A straightforward way would be to buyback and cancel the W800 billion worth of preferred shares, currently trading at half the price of common shares.
Their vague language of "considering cancellation of existing Treasury shares" and "reviewing quarterly dividends" are insufficient. Despite a slight increase in the minimum dividend to W1,000 from W750 average in two years, the resulting dividend yield of a mere 1% appears too low given the current share price of W97,000. The commitment of over 25% dividend payout ratio during 2024-2026 (based on consolidated net income) falls far short of – absolutely and relatively - what is needed to satisfy shareholders. The board and management must recognize that LG Electronics' share price has declined by 8% over the past year, resulting in -7% total shareholder return (TSR) (incl 1% yield). The company's 10-year TSR of only 5% per annum is a clear indication that it has failed to meet shareholder expectations.
The lack of alignment between LG Electronics and its shareholders is evident in the executives' stock ownership and compensation structures. LG Electronics' value-up plan outlines its ambition to rival Silicon Valley companies in various business areas. CEO William Cho's 2023 compensation package consisted solely of a W2.2 billion cash compensation with no stock-based awards. His owns 5,373 LG Electronics shares, worth W500 million only, that’s short of what is typical for mid-level engineers at leading US tech companies. The board must take immediate steps to introduce a comprehensive stock-based compensation plan such as RSU for executives and key employees to ensure long-term alignment with shareholders.
Despite facing substantial criticism for its governance shortcomings following the listing of LG Energy Solution a few years ago, LG Group has shown no meaningful governance reforms. The appointment of Kwon Bong Seok, a former CEO of LG Electronics and currently LG Corp Vice Chairman, as Chairman of LG Electronics board further undermines the BoD’s independence. This raises serious questions about the group's commitment to improving its corporate governance practices.
*Based on Naver Securities consensus calculation
October 28, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee