OREANDA-NEWS. Fitch Ratings has affirmed LG Electronics Inc.'s (LGE) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured rating at 'BBB-'. The Outlook is Stable.

KEY RATING DRIVERS

Maintaining Competitive Positions: Fitch expects LGE to maintain its competitive positions in the global flat panel TV, home appliance and smartphone markets. LG Display Co., Limited (LGD), which is 37.9% owned by LGE, is the world's largest flat panel display manufacturer with a global volume share by panel area of around 25% in 2014, according to DisplaySearch. Strong market presence and product diversification are likely to provide earnings stability.

Improved Dynamics in Panels: Fitch believes that demand outlook for the global panel industry is favourable, driven by shifts towards larger flat panel TV screens in the TV replacement cycle and a recovery in notebook PC and monitor demand. As industry installed capacity will rise only modestly, LGD's profitability and cash generation is likely to underpin LGE's overall credit profile. We proportionally consolidate LGD in our credit assessment of LGE.

Highly Volatile TV Profitability: Fitch believes that the stronger margins in LGD may come at the expense of LGE's TV margins, as panel prices are becoming the biggest factor for TV makers' profitability. Unfavourable currency movements will add further pressure to TV profitability. The current shortage in LCD panels has resulted in higher panel prices, eroding many TV makers' profitability. Although we expect a more balanced supply/demand situation for panels in 2015, high panel prices may put pressure on LGE's TV margins.

Intense Competition in Smartphones: Despite a meaningful recovery in LGE's smartphone margins in 2014, Fitch believes that it remains a challenge for LGE to improve its smartphone profitability in the longer term, due to saturation in developed markets and rising competition from low-cost Chinese brands. We believe that LGE is squeezed between the emergence of Chinese manufacturers, the ecosystem-based business model of Apple, and the significant advantage that Samsung Electronics Co., Ltd. (A+/Stable) derives from its large scale.

Short-Term Macro Threats: We expect LGE to maintain its competitive positions in refrigerators, washing machines and air conditioners. In addition, LGE has increased investments to diversify and strengthen its product portfolio. We expect a steady profitability for its home appliance, and air-conditioning and energy solution divisions over the long term. However, slower economic growth in developed markets and, to some extent, unfavourable currency movements may constrain their short-term profitability.

Comfortable Leverage: Fitch expects LGE to maintain a healthy leverage, though we do not envisage any significant deleveraging. We expect LGE's total adjusted debt/operating EBITDAR, based a proportional consolidation of LGD, to drop below 2.0x in the next one to two years, driven mainly by a stronger financial profile of LGD during the peak cycle of the global display panel market. However, the display panel market is highly volatile. Over the medium term, we expect LGE's total adjusted debt/operating EBITDAR to rebound and be sustained a little higher than 2.0x

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- LGE's revenue to be mostly unchanged in 2015 and 2016, due to stiffer competition, slower economic growth in developed markets and unfavourable currency movements
- favourable industry dynamics in LCD panels to boost LGD's operating EBIT margin to around 6% in 2015 and 2016
- LGE's operating margins at around 3% with cost control measures and focus on higher value products mitigating margin pressure from higher panel prices and intensified competition in smartphones
- LGE's post-dividend free cash flow to be minimal

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- sustained operating EBIT margin below 2.0% (2014: 3.5%)
- total adjusted debt/operating EBITDAR is sustained over 3x (2013: 2.0x)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- sustained operating EBIT margin above 4.0%
- total adjusted debt/EBITDAR is sustained below 2.0x

These financial metrics are based on a proportional consolidation of LGD.