April 27th, 2017

LG Display – Quick & Dirty

LG Display (LPL) reported their 1Q results, which were ahead of consensus on an earnings basis.  We summarize the results below and add our comments in red.  On a general basis, the call was a bit more forwardly cautious than we would have expected, and the company continues to hold off making capex decisions as long as possible to better gauge whether there will further panel price increases or positive changes in demand.  In terms of the shift toward OLED, which LG Display champions, the focus was decidedly toward flexible OLED rather than the usual focus on OLED TV.  While we do not think this indicates any change in their attitude toward OLED TV, OLED capex is likely to shift toward small panel, flexible OLED, as the company is one of the few that can seriously compete with small panel OLED market leader, Samsung Display (pvt).  That said, we would not expect too much out of LG Display on the small panel flexible OLED front, as they are still in the early stages of high volume manufacturing ramp and have to balance low yields and negative EBITDA against the need to gain traction against Samsung Display.  All in it was a good quarter, but hopefully not the best of the year.
1Q Results

• Sales down 11% q/q – up 18% y/y – small panel seasonality and lack of additional capacity limit q/q sales – easy comparison vs. last year
• ASP generally up but ASP per m2 down as small panel volume declines – mobile mix from 31% in 4Q to 26% in 1Q confirms this
• Best operating profit ever on strong margins
• Strong margins due to better panel pricing on TV – TV mix up from 38% (4Q) to 43% in 1Q offsets loss of higher ASP/m2 small panel mix shift
• Capacity down 6.1% q/q – Up 5.1% y/y – Closings of Gen 5 and smaller LCD fabs and OLED conversions influencing capacity
• Industry inventories flat q/q – Industry tight for large panel – Size specific but no comment on small panel industry levels

Construction

• E4-2 – Expansion complete in 2Q – A bit behind our original estimates but actual production in-line as we built in an extended ramp schedule
• E5 – Flex line – On schedule for 2H production – Also behind our original estimate (end of 1Q) but we built in an extended ramp schedule here also
• G1 – OLED Lighting – Evaluating 15k production in 2H – We estimated 1/1/2018 for initial 15k production -  2H would be a bit ahead of schedule
• Capex could increase from expected levels – too early to tell – Likely no decision until end of 2Q
• 70% of capex to OLED – focus on small panel/flex this year – Apple (AAPL), Apple, Apple…
• Noted a more conservative view of spending on OLED this year – OLED capex is initially higher/m2 than LCD

2Q Guide

• Area Shipments Flat q/q – Capacity limited – Will remain so in 2Q
• TV Shipments Flat to down q/q – Pulled some 2Q TV demand into 1Q
• ASP by Area – down single digit – small panel seasonality
• Capex – Additional comments
  • Will continue to move from LTPS LCD to OLED but still opportunities in LCD Automotive, Ultra Hi res – Same as most other large panel producers
• LCD Panel Pricing – Demand still shifting to larger panel sizes but potential resistance to higher pricing – Brands unable to be profitable at higher panel price levels

OLED TV

• Optimistic internally about OLED TV profitability being better than expected – exceeding expectations – Hard to evaluate ‘optimism’
• Production ratio 3x – 1H to 5x – 2H – As expected
• 55”, 65”, 77” reached ‘golden level’ – The dollars in my wallet have reached ‘golden level’ – Does that mean I have $5 or $5,000?  This refers to OLED TV panel yield which continues to improve but no specifics were given

General

• “Is high LCD profit margin justified?” – Technical differentiation and reliability justifies it – Good until its not, but it pays for OLED capacity expansion now
• 8K in 2019 – Panel producer perspective – Maybe not the same as consumer perspective after slow 4K content ramp
• What about sluggish smartphone growth? – Growth is limited but hi-end growing and capacity tight – Capacity tight at high end but expanding – move to OLED more important than higher resolution

This was a good quarter for LG Display, but not unexpected.  On a general basis profitability was better than expected.  LG Display should remain at relatively high fab utilization levels (LCD) at capacity reductions limit sales upside and OLED conversions will not replace LCD capacity on a one to one basis.  That said, the shift toward small panel and flexible OLED, while obviously motivated by Apple, will take some time to produce revenue and profitability benefits.  Near-term, much rests on LCD panel pricing because of the limited capacity and the growth of ultra-large TV sizes, where the company expects greater than 10% growth and will expand its offerings in 2H for the holiday season.
LG Display has yet to decide about much of its longer-term construction plans, with such decisions not likely before July/August.  Overall capex, LCD/OLED ratios, Gen 10 fab possibilities and the rate of OLED conversions are all up for grabs, as the company and industry gains have been based more on rising panel prices and less on improving demand as TV brand sales struggle.  Stable large panel pricing should give LG Display at least another quarter of strong results, but the risk of lower panel pricing is higher now than in the previous quarter and the loss of Apple demand has to be offset by increased sales to Samsung as small panel flexible OLED capacity and yields are still at low levels.  Still a good quarter, and in the panel space, you take them when you can and hope the cycle is sustainable…