Investing.com -- Moody's (NYSE: MCO ) Ratings has affirmed Baa2 issuer and senior unsecured ratings for LG Electronics Inc (KS: 066570 ). (LGE), and also revised its outlook for the firm from stable to positive. The change in outlook is mainly attributed to the enhanced credit quality of LG Display (NYSE: LPL ), an affiliate of LGE.

Sean Hwang, a Vice President and Senior Analyst at Moody's Ratings, indicated that the improved credit quality of LG Display is reducing the credit burden on LGE. He further added that LGE is expected to maintain its steady earnings and strong financial leverage, despite a challenging operating environment.

LG Display, which is 36.7% owned by LGE, had previously reported significant losses due to weak demand and increased competition during 2022-23. However, the company has managed to decrease its debt in 2024 by raising equity and cutting down on capital spending. Furthermore, the sale of its liquid-crystal display (LCD) business in China is expected to further reduce its debt in 2025.

The sale of the LCD business aligns with LG Display's strategic shift towards the organic light-emitting diode (OLED) business, which is less commoditized and more premium. This shift has helped the company reduce its operating losses from KRW2.5 trillion in 2023 to KRW0.6 trillion in 2024. The company anticipates sustained profitability in 2025 from growing mobile OLED sales, despite ongoing uncertainties in demand and competition.

The debt reduction and earnings recovery have helped to lower LG Display's adjusted debt/EBITDA ratio from 12.4x in 2023 to 3.5x in 2024. Moody's expects this ratio to further improve to about 3.3x in 2025 due to continued debt reductions.

LGE's own business and financial metrics are expected to remain solid, with profitability projected to stay steady in 2025. The company's high business and geographic diversity should help it navigate rising uncertainties, including escalating tariffs and sluggish demand for certain product categories. LGE's adjusted debt/EBITDA is expected to improve to around 2.0x in 2025 from around 2.2x in 2024, mainly due to declining equity losses related to LG Display.

LGE's planned initial public offering (IPO) of its Indian subsidiary, which is not yet factored into Moody's projections, could potentially further strengthen the company's financial metrics. LGE's Baa2 ratings continue to include a one-notch uplift from its standalone credit profile, reflecting the expectation of extraordinary support from LG Corp., if needed.

The credit profile of LGE is supported by its well-recognized global brand, leading market position, and high business and geographic diversification. These strengths are balanced by its moderate profitability and the credit drag from LG Display.

In terms of environmental, social and governance (ESG) factors, LGE faces risks inherent in its manufacturing activities. LGE's governance is mainly characterized by its prudent financial management and the concentrated ownership by LG Corp.

Moody's could upgrade LGE's ratings if it maintains its adjusted debt/EBITDA below 2.2x and LG Display's credit quality continues to improve. However, if LGE's adjusted debt/EBITDA remains over 2.2x due to a decline in profitability or high debt-funded investment, or if LG Display's credit quality does not improve, Moody's could return LGE's outlook to stable.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.