LG Display – 2Q – The Details
As LG Display (LPL) is the only high volume supplier of OLED TV panels and is the 2nd largest volume producer of LCD TV panels on a global basis, so we take particular note concerning the company’s performance and outlook. That said, LG Display also faces some unusual challenges concerning their small panel OLED business as their parent LG Electronics (066570.KS), has exited the smartphone business, making a dent in LGD’s volumes. Offsetting that issue is Apple’s (AAPL) increasing confidence in LGD’s small panel production abilities placing them in a position to compete directly with Samsung Display (pvt) for volume orders for the iPhone and other products. With the massive LCD panel price increases seen over the last 12 months and Samsung Display’s tacit exit from large panel LCD production, LG Display’s biggest competitor is China’s BOE (200725.CH) who has added considerable capacity over the last few years, making LGD Display’s perspective and performance all that more important.
Below we review LG Display’s 2Q performance and commentary. Please note that we have paraphrased some of the questions and responses in the Q&A section to get to the important points, but the intent of bot questions and answers has been preserved. Our commentary is in red.
LG Display reported 2Q revenue up 1% q/q and up 31% y/y, while operating profit was up 34% q/q against a loss in 2Q 2020. Gross margin was 20.8%, the highest since 2Q 2017, up from 17.9% last quarter and 2.4% last year. On an overall basis, the revenue strength came from strong TV shipments, particularly OLED TV and the operating margin strength came from increasing LCD TV panel prices and improving OLED TV profitability as the company continues to gain OLED panel production scale. TV panels represented 38% of revenue this quarter, a 7% share increase over 1Q and a 15% share increase over 2Q ’20 and the highest share since 2Q 2019.
There was a downside to the increasing share of TV revenue in the total mix as even though area shipments were up 4.7% and overall capacity was up 3.6%, ASP (m2 basis) declined 4.5% (m2 basis) as more TV and IT panels reduced the share of small panel product, which carries the highest ASP on an m2 basis. Net Debt to Equity ratio declined from 75% in 1Q to 69% in 2Q and 91% in 2Q last year, while inventories rose 15.8%, similar to the 15.3% increase seen in 1Q. LGD notes that an increasing percentage of high value products and inventory building for the 2nd half are responsible for the increase, although we see this as an area to monitor closely as TV set price increases slow demand.
Below we review LG Display’s 2Q performance and commentary. Please note that we have paraphrased some of the questions and responses in the Q&A section to get to the important points, but the intent of bot questions and answers has been preserved. Our commentary is in red.
LG Display reported 2Q revenue up 1% q/q and up 31% y/y, while operating profit was up 34% q/q against a loss in 2Q 2020. Gross margin was 20.8%, the highest since 2Q 2017, up from 17.9% last quarter and 2.4% last year. On an overall basis, the revenue strength came from strong TV shipments, particularly OLED TV and the operating margin strength came from increasing LCD TV panel prices and improving OLED TV profitability as the company continues to gain OLED panel production scale. TV panels represented 38% of revenue this quarter, a 7% share increase over 1Q and a 15% share increase over 2Q ’20 and the highest share since 2Q 2019.
There was a downside to the increasing share of TV revenue in the total mix as even though area shipments were up 4.7% and overall capacity was up 3.6%, ASP (m2 basis) declined 4.5% (m2 basis) as more TV and IT panels reduced the share of small panel product, which carries the highest ASP on an m2 basis. Net Debt to Equity ratio declined from 75% in 1Q to 69% in 2Q and 91% in 2Q last year, while inventories rose 15.8%, similar to the 15.3% increase seen in 1Q. LGD notes that an increasing percentage of high value products and inventory building for the 2nd half are responsible for the increase, although we see this as an area to monitor closely as TV set price increases slow demand.
LG DIsplay Sales & ROC (Smoothed) - 2018 - 2021 YTD - Source: SCMR LLC, Company Data
Guidance for 3Q was that area shipments will increase 4% to 6% q/q and area price (not product ASP) will also increase by 4% to 6%, however the company indicated that there is the possibility that component shortages could limit shipments despite the better seasonality in 3Q and 2H. The increase in Area Price is being driven by growth in large shipments, according to the company. That said, the implication is that going forward the share of revenue from small panel product, which carries a higher price on an m2 basis, will increase, even as large panel shipments also increase.
We make the supposition that this is reflecting the panel production for the Apple iPhone 13 series, which is not only higher in total than last year, but LGD has seen its share of the total order also increase. Since ASP here is based on area, it is influenced by mix more than product price, so a potential flattening of large panel price increases will have less effect on this metric, but would slow the top line growth seen in recent quarters, should that be the case. Fig. 1 shows LG Display’s sales since 2018 and an upward sloping trend line. The dotted red line shows the q/q rate of change, which has been smoothed to eliminate typical seasonality. Given the strength in LCD panel prices and LGD’s increasing OLED TV production, the ROC trend line is a bit steeper.
LGD indicated that it shipped 3.5m OLED TV panels in the 1st half, ~80% of what was shipped the entire year in 2020, a result of the ramp of the Guangzhou OLED TV fab, improving yields, and the implementation of MMG (Multi-mode Glass), a process that allows for multiple size panels to be cut from an single substrate sheet, increasing the efficiency of the substrate. The company expects to ship a bit over 2m units in 3Q, as they continue to ramp production and MMG allows for a higher unit count[1], which puts them in-line to meet expectations of between 7m and 8m units this year. While not specific to OLED, the company again cautioned that both COVID-19 and shortages could increase the volatility in 2H, but we expect much of that caution is geared toward LCD TVs rather than OLED TVs, as panel prices for LCD TVs have been rising for a year, narrowing the gap between OLED TV panels and LCD TV panels. With LCD set pricing rising to compensate for increased panel prices, the gap between LCD set prices and OLED TV set prices has also narrowed.
LGD did mention that they hope to bring the large panel OLED business to profitability this year, with the goal of achieving 4% to 6% operating margins in 2022 and double digit margins in the longer-term. With company operating margins averaging 8.8% this year, we had assumed that the large panel OLED business was at breakeven in 1Q, but that seems not to have been the case, although it seems that the company expects profitability at the volume levels its has now reached. It was mentioned that LGD is also looking for OLED applications outside of TV to expand that business, which implies OLED monitors and notebooks, which we have highlighted as growth areas for the OLED space going forward.
LGD also indicated that its mobile OLED business has been stabilized, which we assume to mean that the company has reallocated small panel OLED resources from its parent, LG Electronics to Apple and other customers, as LG has ended its mobile business. The increased order from Apple mentioned above will certainly go toward that end, but it is necessary for LGD to broaden its small panel OLED customer base to avoid the potential ‘Japan Display’ effect, where a change in Apple’s display modality almost put Japan Display out of business.
On a more general basis there was the usual ‘strengthening of the long-term relationships with customers to reduce sales volatility’, and ‘continued reduction of borrowing’ which are always present in panel producer calls when they have negotiating leverage, and the company did mention that it was formulating a dividend policy, but had not yet come up with a policy that would be stable under all circumstances.
Q&A
Will expansion of OLED business (large and small panel) lead to a postponement of profitability of that business?
We will examine any potential investment as to whether we can see an immediate return based on customer feedback and industry outlook, which leads us to believe that any such capacity investments in OLED will not postpone the path to segment profitability.
One big question, “Was that not the case before this?” Apple’s investments in LGD should give them a good idea as to what to expect from Apple from a volume standpoint, but other customers are much harder to pin down as they do not usually make advanced payments against dedicated capacity. This makes new OLED capacity investments fall a bit outside of the ‘immediate return’ philosophy, so we don’t put that much reliability in the statement.
What are your expectations for LCD panel prices?
For IT products we expect demand to remain strong through the end of this year. In 2022 it is hard to predict given the influence of COVID-19 and potential component shortages. We are operating under the assumption that IT panel prices will be stable or down until we know more.
For smaller TVs (32” – 43”) we are seeing demand slow, likely a result of COVID-19 resurgence in emerging markets where smaller sets are most popular (India, etc.). We are unsure whether this is a structural change or a result of the pandemic but we are working under the assumption that pricing in this category will decline faster than IT panel pricing.
As we have previously noted, there is evidence that TV panel prices have reached a peak and there is increasing risk that they will no longer contribute to the growth in panel producer revenue, so the company’s admonition that they expect weakening in smaller TV panel sizes is no surprise. However, as indicated below, they have shifted and continue to shift more LCD TV panel capacity to IT products, so the risk of weakening IT panel products continues to rise, and their unwillingness to predict where IT panel prices might go next year is also not surprising given the resurgence of COVID-19. They do have a bias toward large panel LCD pricing as they are far more focused on 65”+ panel production than smaller sizes, so they might have a modicum of early cycle protection if those sizes see a slower decline toward flat or weaker prices, but at least they were able to give some relatively honest thoughts on panel pricing.
What about your plans for your LCD exit strategy?
It is not an exit strategy but a realignment of our LCD business. We have shifted much LCD TV capacity to IT and will continue that trend and will continue to strengthen our relationships with IT customers, as we have both resources (fab capacity) and expertise in the space. LCD TV capacity is about 50% of what it was at peak, but we remain flexible to market conditions.
While this is really semantics, LGD has made a shift away from more commoditized large panel TV production, looking to focus on more premium priced LCD panel applications. Most of the large LCD panel producers have been doing the same, with Samsung Display the most aggressive and Chinese producers generally the least. Call it what you want, but it is an exit strategy.
What about plans for Small panel flexible OLED expansion?
As we expect to keep capex within EBITDA, with D&A at ~₩4.5t and if we expect ₩1.1t in operating profit this year, EBITDA would be ~₩5.7t although we cannot predict actual profitability in 2H. That said, small panel OLED expansion is still under review at this time, but that philosophy does not mean we will spend the entire EBITDA on capex, some of which we have used to reduce borrowing. Aside from some more aggressive ESG spending this year, we still are being careful in our facilities spending, even with the increased EBITDA, but we also need to plan for new initiatives that will generate profitable results and other financial eventualities.
The gist of the question was “we think you are spending too much on capex because your EBITDA has expanded”, which the company obviously disagreed with. While they have emphasized (particularly in this quarter) that they are being very judicious about spending, they still have some potentially ambitious capital spending plans (see below), which some are concerned might slow the path toward OLED profitability. The company seems to be passed the ‘spend in advanced’ stage, having acknowledged that their original OLED profitability timelines were delayed, but spending for capacity adds for Apple and for OLED TV are still essential to the OLED story.
If large panel LCD prices decline how will the company deal with such a change?
First to understand, when large panel prices were declining (2019), it was not the LCD business that pushed the company into a loss position, even as sales declined, it was large panel OLED TV and the flexible OLED segments where investments had been made but we were unable to meet sales and production timelines, resulting in losses. As far as our response to potential LCD panel price declines, as we mentioned we have already reduced TV capacity at out fab and are strengthening our relationships with customers to maintain a stable production scenario.
While a bit defensive, in previous large panel cycles LGD’s LCD business was their lifeboat, but that focus has changed a bit with the enlarged emphasis on IT products and OLED. Almost every panel producer has given the ‘strengthen relationship ‘ argument as an offset to the potential for declining panel prices, but even with those relationships, demand is the driver for panel buyers and regardless of the relationships, when demand is weak they back off and sell out of inventory. In our view the risk level for LG Display to weakening panel prices remains similar to what it has been with the increasing OLED exposure a small offset to that risk.
If large panel LCD prices do decline would you expect any pressure on OLED panel prices?
While LCD TV panel prices have double over the last year, the price of OLED TV panels has not. This is because the OLED TV panel price is based on our market research (“sweet spot”) and discussions with set makers, rather than a tie to LCD panel prices. We do expect some effect on OLED TV panel prices if LCD prices weaken, but we expect to be able to manage such an impact.
OLED TV panel pricing has been far more stable than LCD panel prices, and regardless of the ‘market research’ that LG Display does to determine the right price for OLED TV panels, there are only two factors that make a difference currently. The first is that LG Display is the only supplier and the second is that OLED TV is a premium product that competes in a fast growing category (premium TV products). Until that changes OLED TV panel prices should remain relatively unconnected to LCD TV panel prices.
What will be your OLED TV panel target for next year and would you expand capacity in Guangzhou?
We do have the ability to add an additional 30,000 sheets/month to our capacity in Guangzhou, and based on that we would have the capacity to produce 10m units as some have speculated, and with some productivity improvements, that number could reach 11m.
While not quite official guidance, the company was upfront about what they expect for OLED TV panel shipments next year, albeit dependent of the expansion of capacity at the Guangzhou fab. 10m to 11m is in keeping with most forecasts for 2022.
What is the status of the company’s automotive display business in light of issues facing that industry this year?
There have been semiconductor component issues, especially among OEM and 1st tier suppliers and it is a risk, but so far there have been no disruptions to our production due to those shortages. In the past we have been producing automotive LCD displays using a-Si but have begun producing with LTPS backplanes as most of the orders we are receiving are for LTPS. Over the next 2-3 years we expect that we will continue to increase automotive LTPS products and will end a-Si automotive display production over that period.
We believe that flexible OLED is the optimum display for electric vehicle automotive applications and we are working with OEMs toward developing such products, at which point we will work toward improving profitability. This is our plan for automotive displays.
While LCD for automotive does have some advantages, particularly brightness, OLED automotive displays can be conformed to almost any shape, making them the darling of automotive designers, but the automotive display product cycle is very different than those for most CE devices. In this case developing long-term relationships with OEMs is the right way to go although the payoff might be years away, as the margins are considerably higher for automotive displays on an m2 basis.
Unusual in that this was a long call and one where the company was willing to give at least a small peek behind the curtain as to its plans. Excluding the usual generic statements as to some of the more difficult questions to answer, LG Display was a bit more transparent about its business, particularly it OLED business. Whether this was due to coming off of a strong quarter or a change in management’s style, it was certainly welcome. That said, other than the improvement in the company’s financials, we still see the risk level increasing as panel prices near or are at peak levels. If they can actually bring their large panel OLED business to a sustained profitability level, the very big OLED bet that the company has made will pay off, but it will probably be later in 2022 before that really becomes apparent. As with most panel producers in 2Q we say, “It was a good quarter and an easy compare, so what have you done for me lately?”
[1] MMG’s higher substrate efficiency also gives the producer the opportunity to produce a higher volume of smaller panels along with large panels, increasing the overall panel count.
We make the supposition that this is reflecting the panel production for the Apple iPhone 13 series, which is not only higher in total than last year, but LGD has seen its share of the total order also increase. Since ASP here is based on area, it is influenced by mix more than product price, so a potential flattening of large panel price increases will have less effect on this metric, but would slow the top line growth seen in recent quarters, should that be the case. Fig. 1 shows LG Display’s sales since 2018 and an upward sloping trend line. The dotted red line shows the q/q rate of change, which has been smoothed to eliminate typical seasonality. Given the strength in LCD panel prices and LGD’s increasing OLED TV production, the ROC trend line is a bit steeper.
LGD indicated that it shipped 3.5m OLED TV panels in the 1st half, ~80% of what was shipped the entire year in 2020, a result of the ramp of the Guangzhou OLED TV fab, improving yields, and the implementation of MMG (Multi-mode Glass), a process that allows for multiple size panels to be cut from an single substrate sheet, increasing the efficiency of the substrate. The company expects to ship a bit over 2m units in 3Q, as they continue to ramp production and MMG allows for a higher unit count[1], which puts them in-line to meet expectations of between 7m and 8m units this year. While not specific to OLED, the company again cautioned that both COVID-19 and shortages could increase the volatility in 2H, but we expect much of that caution is geared toward LCD TVs rather than OLED TVs, as panel prices for LCD TVs have been rising for a year, narrowing the gap between OLED TV panels and LCD TV panels. With LCD set pricing rising to compensate for increased panel prices, the gap between LCD set prices and OLED TV set prices has also narrowed.
LGD did mention that they hope to bring the large panel OLED business to profitability this year, with the goal of achieving 4% to 6% operating margins in 2022 and double digit margins in the longer-term. With company operating margins averaging 8.8% this year, we had assumed that the large panel OLED business was at breakeven in 1Q, but that seems not to have been the case, although it seems that the company expects profitability at the volume levels its has now reached. It was mentioned that LGD is also looking for OLED applications outside of TV to expand that business, which implies OLED monitors and notebooks, which we have highlighted as growth areas for the OLED space going forward.
LGD also indicated that its mobile OLED business has been stabilized, which we assume to mean that the company has reallocated small panel OLED resources from its parent, LG Electronics to Apple and other customers, as LG has ended its mobile business. The increased order from Apple mentioned above will certainly go toward that end, but it is necessary for LGD to broaden its small panel OLED customer base to avoid the potential ‘Japan Display’ effect, where a change in Apple’s display modality almost put Japan Display out of business.
On a more general basis there was the usual ‘strengthening of the long-term relationships with customers to reduce sales volatility’, and ‘continued reduction of borrowing’ which are always present in panel producer calls when they have negotiating leverage, and the company did mention that it was formulating a dividend policy, but had not yet come up with a policy that would be stable under all circumstances.
Q&A
Will expansion of OLED business (large and small panel) lead to a postponement of profitability of that business?
We will examine any potential investment as to whether we can see an immediate return based on customer feedback and industry outlook, which leads us to believe that any such capacity investments in OLED will not postpone the path to segment profitability.
One big question, “Was that not the case before this?” Apple’s investments in LGD should give them a good idea as to what to expect from Apple from a volume standpoint, but other customers are much harder to pin down as they do not usually make advanced payments against dedicated capacity. This makes new OLED capacity investments fall a bit outside of the ‘immediate return’ philosophy, so we don’t put that much reliability in the statement.
What are your expectations for LCD panel prices?
For IT products we expect demand to remain strong through the end of this year. In 2022 it is hard to predict given the influence of COVID-19 and potential component shortages. We are operating under the assumption that IT panel prices will be stable or down until we know more.
For smaller TVs (32” – 43”) we are seeing demand slow, likely a result of COVID-19 resurgence in emerging markets where smaller sets are most popular (India, etc.). We are unsure whether this is a structural change or a result of the pandemic but we are working under the assumption that pricing in this category will decline faster than IT panel pricing.
As we have previously noted, there is evidence that TV panel prices have reached a peak and there is increasing risk that they will no longer contribute to the growth in panel producer revenue, so the company’s admonition that they expect weakening in smaller TV panel sizes is no surprise. However, as indicated below, they have shifted and continue to shift more LCD TV panel capacity to IT products, so the risk of weakening IT panel products continues to rise, and their unwillingness to predict where IT panel prices might go next year is also not surprising given the resurgence of COVID-19. They do have a bias toward large panel LCD pricing as they are far more focused on 65”+ panel production than smaller sizes, so they might have a modicum of early cycle protection if those sizes see a slower decline toward flat or weaker prices, but at least they were able to give some relatively honest thoughts on panel pricing.
What about your plans for your LCD exit strategy?
It is not an exit strategy but a realignment of our LCD business. We have shifted much LCD TV capacity to IT and will continue that trend and will continue to strengthen our relationships with IT customers, as we have both resources (fab capacity) and expertise in the space. LCD TV capacity is about 50% of what it was at peak, but we remain flexible to market conditions.
While this is really semantics, LGD has made a shift away from more commoditized large panel TV production, looking to focus on more premium priced LCD panel applications. Most of the large LCD panel producers have been doing the same, with Samsung Display the most aggressive and Chinese producers generally the least. Call it what you want, but it is an exit strategy.
What about plans for Small panel flexible OLED expansion?
As we expect to keep capex within EBITDA, with D&A at ~₩4.5t and if we expect ₩1.1t in operating profit this year, EBITDA would be ~₩5.7t although we cannot predict actual profitability in 2H. That said, small panel OLED expansion is still under review at this time, but that philosophy does not mean we will spend the entire EBITDA on capex, some of which we have used to reduce borrowing. Aside from some more aggressive ESG spending this year, we still are being careful in our facilities spending, even with the increased EBITDA, but we also need to plan for new initiatives that will generate profitable results and other financial eventualities.
The gist of the question was “we think you are spending too much on capex because your EBITDA has expanded”, which the company obviously disagreed with. While they have emphasized (particularly in this quarter) that they are being very judicious about spending, they still have some potentially ambitious capital spending plans (see below), which some are concerned might slow the path toward OLED profitability. The company seems to be passed the ‘spend in advanced’ stage, having acknowledged that their original OLED profitability timelines were delayed, but spending for capacity adds for Apple and for OLED TV are still essential to the OLED story.
If large panel LCD prices decline how will the company deal with such a change?
First to understand, when large panel prices were declining (2019), it was not the LCD business that pushed the company into a loss position, even as sales declined, it was large panel OLED TV and the flexible OLED segments where investments had been made but we were unable to meet sales and production timelines, resulting in losses. As far as our response to potential LCD panel price declines, as we mentioned we have already reduced TV capacity at out fab and are strengthening our relationships with customers to maintain a stable production scenario.
While a bit defensive, in previous large panel cycles LGD’s LCD business was their lifeboat, but that focus has changed a bit with the enlarged emphasis on IT products and OLED. Almost every panel producer has given the ‘strengthen relationship ‘ argument as an offset to the potential for declining panel prices, but even with those relationships, demand is the driver for panel buyers and regardless of the relationships, when demand is weak they back off and sell out of inventory. In our view the risk level for LG Display to weakening panel prices remains similar to what it has been with the increasing OLED exposure a small offset to that risk.
If large panel LCD prices do decline would you expect any pressure on OLED panel prices?
While LCD TV panel prices have double over the last year, the price of OLED TV panels has not. This is because the OLED TV panel price is based on our market research (“sweet spot”) and discussions with set makers, rather than a tie to LCD panel prices. We do expect some effect on OLED TV panel prices if LCD prices weaken, but we expect to be able to manage such an impact.
OLED TV panel pricing has been far more stable than LCD panel prices, and regardless of the ‘market research’ that LG Display does to determine the right price for OLED TV panels, there are only two factors that make a difference currently. The first is that LG Display is the only supplier and the second is that OLED TV is a premium product that competes in a fast growing category (premium TV products). Until that changes OLED TV panel prices should remain relatively unconnected to LCD TV panel prices.
What will be your OLED TV panel target for next year and would you expand capacity in Guangzhou?
We do have the ability to add an additional 30,000 sheets/month to our capacity in Guangzhou, and based on that we would have the capacity to produce 10m units as some have speculated, and with some productivity improvements, that number could reach 11m.
While not quite official guidance, the company was upfront about what they expect for OLED TV panel shipments next year, albeit dependent of the expansion of capacity at the Guangzhou fab. 10m to 11m is in keeping with most forecasts for 2022.
What is the status of the company’s automotive display business in light of issues facing that industry this year?
There have been semiconductor component issues, especially among OEM and 1st tier suppliers and it is a risk, but so far there have been no disruptions to our production due to those shortages. In the past we have been producing automotive LCD displays using a-Si but have begun producing with LTPS backplanes as most of the orders we are receiving are for LTPS. Over the next 2-3 years we expect that we will continue to increase automotive LTPS products and will end a-Si automotive display production over that period.
We believe that flexible OLED is the optimum display for electric vehicle automotive applications and we are working with OEMs toward developing such products, at which point we will work toward improving profitability. This is our plan for automotive displays.
While LCD for automotive does have some advantages, particularly brightness, OLED automotive displays can be conformed to almost any shape, making them the darling of automotive designers, but the automotive display product cycle is very different than those for most CE devices. In this case developing long-term relationships with OEMs is the right way to go although the payoff might be years away, as the margins are considerably higher for automotive displays on an m2 basis.
Unusual in that this was a long call and one where the company was willing to give at least a small peek behind the curtain as to its plans. Excluding the usual generic statements as to some of the more difficult questions to answer, LG Display was a bit more transparent about its business, particularly it OLED business. Whether this was due to coming off of a strong quarter or a change in management’s style, it was certainly welcome. That said, other than the improvement in the company’s financials, we still see the risk level increasing as panel prices near or are at peak levels. If they can actually bring their large panel OLED business to a sustained profitability level, the very big OLED bet that the company has made will pay off, but it will probably be later in 2022 before that really becomes apparent. As with most panel producers in 2Q we say, “It was a good quarter and an easy compare, so what have you done for me lately?”
[1] MMG’s higher substrate efficiency also gives the producer the opportunity to produce a higher volume of smaller panels along with large panels, increasing the overall panel count.
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