LG Display – 2Q Notes on LCD & OLED
LG Display (LPL) reported 2Q results of 5.607t won ($4.278b US), down 13.4% q/q and down 19.5% y/y. Operating income was a loss of 488b won ($372.4m US), the first quarterly operating loss since 2Q 2020. Gross margins declined from 12.6% in 1Q to 4.9% in 2Q, against 20.8% in 2Q last year as volumes decreased and panel prices declined. Little in the basic numbers was a surprise although for the first time in the last 4 quarters, the percentage of revenue generated by the production of TV panels increased, although likely as a result of IT panel shipments and prices slowing more rapidly. On an area basis LG Display saw both shipments and capacity decline, which has been the case since 4Q 2021, with the area utilization rate rising slightly from last quarter’s low of 70.4%. We note this is not full fab utilization, meaning against the total capacity of the fab, but against the area currently being used.
LG Display Sales &Cumulative Average - 2018 - 2022 YTD - Source: SCMR LLC, Company Data
LG Display - TV Revenue Share - 2018 - 2022 YTD - Source: SCMR LLC, Company Data
LG Display Shipment/Capacity, Utilization by Area - 2018 - 2022 YTD - Source: SCMR LLC, Company Data
The company attributed the weakness to soft demand, weak LCD panel prices, and disruptions in the supply chain in China, resulting in lower LCD panel utilization and shipments, although OLED TV shipments were up in the quarter, a ray of hope for OLED emitter supplier Universal Display (OLED) that derives material sales and unit price royalties from LGD. OLED TV sales were up ~25% y/y in the 1st half, however the company is forecasting that while there will be OLED TV shipment growth in 2H, it will be at a slower pace than in 1H,, likely closer to 13% to 17% as retailers are expected to order more cautiously in 2H.
In that same vein, inventory levels increased in 2Q by 11.6%, which is concerning considering the company is forecasting continued soft demand at both TV set manufacturers and retailers as a result of excessive inventory levels at those points in the supply chain. The rational, despite the company’s expected further reductions in utilization were based on new model introductions and the potential need for higher inventory levels heading into the holiday build period, although Figure 4 would indicate that such levels are out of line with historic norms, with the company indicating it expects to return to more normal inventory levels by the end of the year. We expect some of the inventory build in 3Q is related to the company’s display supply contracts with Apple (AAPL) for the upcoming iPhone, but no specifics were given.
Guidance for 3Q was a bit more specific, with area shipments projected to be up between 4% and 6% q/q as IT and OLED shipments recover, and ASPs (Area basis) increase as the share of smartphones and wearables, which carry higher profitability on an area basis, increase in 3Q, but at the same time the company was forecasting IT panel prices to continue to decline and TV panel prices to also continue to decline, but at a more gradual rate as other LCD panel producers continue to lower utilization rates.
In that same vein, inventory levels increased in 2Q by 11.6%, which is concerning considering the company is forecasting continued soft demand at both TV set manufacturers and retailers as a result of excessive inventory levels at those points in the supply chain. The rational, despite the company’s expected further reductions in utilization were based on new model introductions and the potential need for higher inventory levels heading into the holiday build period, although Figure 4 would indicate that such levels are out of line with historic norms, with the company indicating it expects to return to more normal inventory levels by the end of the year. We expect some of the inventory build in 3Q is related to the company’s display supply contracts with Apple (AAPL) for the upcoming iPhone, but no specifics were given.
Guidance for 3Q was a bit more specific, with area shipments projected to be up between 4% and 6% q/q as IT and OLED shipments recover, and ASPs (Area basis) increase as the share of smartphones and wearables, which carry higher profitability on an area basis, increase in 3Q, but at the same time the company was forecasting IT panel prices to continue to decline and TV panel prices to also continue to decline, but at a more gradual rate as other LCD panel producers continue to lower utilization rates.
LG Display - Sales vs. Inventory - Source: SCMR LLC, Company Data
As the risk levels for panel manufacturers rises most companies indicate a desire to expand their product lines away from more generic LCD IT and TV panels and to more value-added displays that are both less competitive and carry higher margins, and LGD indicated the same mantra, with a focus on expanding its already market leading automotive display penetration while increasing both its OLED TV penetration rate and expanding what it calls a ‘made to order’ business, which we assume to mean more product co-development with large customers.
Much of this is the same corporate speak that appears when the macro environment begins to sour, and should be addressed more closely when things are going well, but LG Display, along with Samsung Display (pvt) has been in the camp of winding down its large panel LCD production for the last few years, although at a much slower pace than their rival. This brought up the question of the company’s plans for that process, with LGD being a bit more open about plans for their LCD large panel business. The company’s largest production line known as P7 is a Gen 7.5 a-Si LCD line that was built to produce 225,000 sheets/month. The company has already brought capacity down to 150,000 sheets and plans to reduce that by another 60,000 during 2H and another 30,000 in the 1st half of next year. The original plan was to end all production by the end of next year but the company has indicated that they will likely accelerate that process now that large panel prices have been declining.
While we understand that LGD has supply contracts with customers that it must fulfill, and certainly does not want to maintain fabs that run at a small portion of stated capacity, we have been surprised as to how long it took for the company to make the decision to accelerate the wind-down process, with the company stating that the fab had been running at high utilization rates, but as of last July (2021) large panel prices began to decline at a rapid pace and it seemed inevitable that the high utilization rates of 1H 2020 were not sustainable, at which point the push to cut large panel exposure should have been made. The company did indicate that its Gen 8 fab in Guangzhou China will not be closed but will be converted to the production of smaller IT panels, rather than larger TV panels, for which 10% - 15% has already been completed, with the remainder by the end of 2H next year, which will reduce the company’s exposure to large panel production by 40% (their number). Other company fabs in Korea, which are Gen 5 and Gen 6 are already oriented toward IT panel production. The company indicated that the profitability of its IT panel production declined in 2Q but saw less impact than the overall market due to its focus on high-end products.
While the question was asked about plans for expansion of the company’s OLED TV capacity, no answer was given other than the general reference to the development of new OLED oriented products (including automotive), but more importantly when asked about the on-again off-again negotiations with Samsung Electronics (005930.KS) concerning that company’s purchase of multiple millions of OLED TV panels, management indicated that such negotiations had taken place but there was nothing in progress, followed by the more general comment that the company would negotiate with any major customer ‘as long as they recognized value’, which would seem to indicate that price negotiations between the two did not end well.
The circumstances under which panel producers such as LG Display had to operate in 2Q were difficult, but not unexpected and we are always surprised at how slowly pane producers react to what seemed an inevitable conclusion as to panel prices, both TV and IT, and now that the inevitable has occurred panel producers seem a bit surprised at how rapidly things deteriorated, although few were complaining when pane prices were rising rapidly and hitting unprecedented heights. Now it seems everyone, LGD included, have gained ‘religion’ and are looking at a more conservative approach to production and longer-term plans. Of course it is easy to me an arm-chair quarterback but there is one consistency in the CE space and that is history repeats itself, so when things like prices get far out of line with historic norms, the elastic band always snaps back, so we wonder if those being ‘snapped’ really thought things were really at ‘a new normal’ or they just did not want to think about anything other than near-term prospects. Its actually not that hard to answer.
Much of this is the same corporate speak that appears when the macro environment begins to sour, and should be addressed more closely when things are going well, but LG Display, along with Samsung Display (pvt) has been in the camp of winding down its large panel LCD production for the last few years, although at a much slower pace than their rival. This brought up the question of the company’s plans for that process, with LGD being a bit more open about plans for their LCD large panel business. The company’s largest production line known as P7 is a Gen 7.5 a-Si LCD line that was built to produce 225,000 sheets/month. The company has already brought capacity down to 150,000 sheets and plans to reduce that by another 60,000 during 2H and another 30,000 in the 1st half of next year. The original plan was to end all production by the end of next year but the company has indicated that they will likely accelerate that process now that large panel prices have been declining.
While we understand that LGD has supply contracts with customers that it must fulfill, and certainly does not want to maintain fabs that run at a small portion of stated capacity, we have been surprised as to how long it took for the company to make the decision to accelerate the wind-down process, with the company stating that the fab had been running at high utilization rates, but as of last July (2021) large panel prices began to decline at a rapid pace and it seemed inevitable that the high utilization rates of 1H 2020 were not sustainable, at which point the push to cut large panel exposure should have been made. The company did indicate that its Gen 8 fab in Guangzhou China will not be closed but will be converted to the production of smaller IT panels, rather than larger TV panels, for which 10% - 15% has already been completed, with the remainder by the end of 2H next year, which will reduce the company’s exposure to large panel production by 40% (their number). Other company fabs in Korea, which are Gen 5 and Gen 6 are already oriented toward IT panel production. The company indicated that the profitability of its IT panel production declined in 2Q but saw less impact than the overall market due to its focus on high-end products.
While the question was asked about plans for expansion of the company’s OLED TV capacity, no answer was given other than the general reference to the development of new OLED oriented products (including automotive), but more importantly when asked about the on-again off-again negotiations with Samsung Electronics (005930.KS) concerning that company’s purchase of multiple millions of OLED TV panels, management indicated that such negotiations had taken place but there was nothing in progress, followed by the more general comment that the company would negotiate with any major customer ‘as long as they recognized value’, which would seem to indicate that price negotiations between the two did not end well.
The circumstances under which panel producers such as LG Display had to operate in 2Q were difficult, but not unexpected and we are always surprised at how slowly pane producers react to what seemed an inevitable conclusion as to panel prices, both TV and IT, and now that the inevitable has occurred panel producers seem a bit surprised at how rapidly things deteriorated, although few were complaining when pane prices were rising rapidly and hitting unprecedented heights. Now it seems everyone, LGD included, have gained ‘religion’ and are looking at a more conservative approach to production and longer-term plans. Of course it is easy to me an arm-chair quarterback but there is one consistency in the CE space and that is history repeats itself, so when things like prices get far out of line with historic norms, the elastic band always snaps back, so we wonder if those being ‘snapped’ really thought things were really at ‘a new normal’ or they just did not want to think about anything other than near-term prospects. Its actually not that hard to answer.
Aggregate TV/IT Panel Pricing - 2019 - 2022 YTD - Source: SCMR LLC, IHS, Witsview, Company Data
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