Korea:LG Group seen heading toward crisis as stock prices plunge

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LG Group seen heading toward crisis as stock prices plunge Amid the deepening woes at major conglomerates Hyundai and Daewoo, LG appears to be gradually sinking into troubles. LG watchers at home and abroad started to warn about steep crashes in share prices of almost all LG companies, citing their falling profits, lack of transparency and worsening governance structures.

The expert warnings are already coming close to reality for three flagship firms - LG Electronics, LG Chemical and LG Telecom, with LG Electronics shares diving 26 percent in the first six days of this month.

On Friday, LG Electronics reported a third quarter net profit of 27.1 billion won ($23.9 million), down by an astounding 88.9 percent from a net profit of 245.8 billion won recorded for the previous quarter. The firm's debts also snowballed from 3.2 trillion won at the end of June to 5.7 trillion won, larger than the near bankrupt Hyundai Engineering and Construction's 5.2 trillion won.

MoneyToday analyst Lee Jong-hwan, forecasting a continuing slide in LG Electronics stock price from its yearly high of 58,900 won, warned that it may crash below 10,000 won sooner or later. Friday's closing price was 14,200 won, down 1,100 from the previous day.

As for LG Chemical, the German investment bank Dresdner Kleinwort Benson (DKB) said in a report last week that the company's third-quarter net profit would fall 41 percent from the previous quarter, due primarily to low margins from its polyvinyl chloride (PVC) business. It then issued a sell recommendation for LG Chemical, reasoning that the firm's planned split into three independent units and governance problems associated with the founding Koo family, on top of the deteriorating profits, will seriously harm non-LG shareholders. LG Chemical shares fell to 13,050 won from its 52 week high of 45,800 won.

Stocks of LG Construction, LG International Corporation, LG Industrial Systems, LG Cable & Machinery, LG Telecom and other group affiliates, except for second-tier units LG Home Shopping and LG Capital, have also taken sharp drops so far this year. The nation's third largest chaebol in terms of assets has been generally regarded as safe from a liquidity crisis afflicting Hyundai, Daewoo and other conglomerates.

"A growing number of fund managers and market analysts are already raising concerns that LG Group could be on course to the Hyundai Group-like crisis during next year, unless the current problems are fixed," said Lee.

"The picture of LG sinking into Hyundai-like troubles is extremely worrying," he said, calling on group owners and managers to pay greater attention to the shareholder interests, managerial transparency and restructuring of groupwide finances.

Recently, the DKB and other domestic and foreign brokerages have issued sell recommendations for LG Electronics, LG Chemical and other group firms, painting a dismal picture of their stock price outlook.

UBS Warburg lowered its forecast for LG Electronics' net profits for this and next year by 40 percent and 53 percent, respectively, to 539 billion won and 375 billion won, estimating its stock price value at 9,500 won.

Indosuez WI Carr and SG Securities also recommended sell for LG Electronics, pulling down its stock value to 11,000 won and 14,500 won each, while Merrill Lynch slashed net profit estimates for 2000 and 2001 by 40 percent and 53 percent. Among local brokerages, Samsung Securities and Hyundai Securities also sharply downgraded LG Electronics shares, pointing to its deteriorating profitability and snowballing debts.

"It is very rare that local and foreign analysts simultaneously downgrade a specific stock or issue a sell opinion," said Lee, predicting that the LG company will be plagued by intensive foreign selling for the time being.

SK Securities analyst Chon Woo-jong said that unlike Samsung Electronics, LG Electronics' cell-phone business is heavily dependent on the local market, making it vulnerable to Seoul's ongoing crackdown on "subsidized cell-phone" sales.

In the latest illustration of the company's opaque management, LG Electronics came under fire for its alleged attempt to cover up its sharp profit fall for the third quarter. On Friday morning, LG released its quarterly business results to securities firms, but somehow failed to give notice to news organizations. It belatedly issued a press release later in the day, only after the Yonhap News Agency obtained the relevant data. "The lack of disclosure transparency, as vividly seen in the LG incident, is the biggest factor scaring away potential foreign investors," said an analyst.

In a separate incident, the family of LG Group Chairman Koo Bon-moo were accused of taking irregular stock-transaction profits by letting LG companies buy their LG shares above the market prices. "Apart from the alleged irregularities by the Koo family, foreign analysts raised fears that LG Chemical would be forced to take the bulk of the financial burdens for the group's bid to obtain the third generation wireless service, dubbed IMT-2000," said Lee.

By Yoo Cheong-mo Staff reporter



-- Martin Thompson (mthom1927@aol.com), November 12, 2000

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