LG Display – 3Q Result Overview
As a ‘pure’ display supplier and the de facto supplier of large panel OLED displays, LG Display (LPL) gives a good picture into the broad display space, albeit with a bias toward OLED over LCD. While OLED displays have price characteristics that are different from LCD panels, especially large panel OLED, LG still has over 80% of its total capacity producing LCD displays, which means to a large degree it is affected by the same characteristics that affect LCD only panel producers. This is reflected in such metrics as area shipped, which declined 5.6% q/q as TV panel demand waned in 3Q and to a smaller degree by component shortages, which began to affect shipments later in 3Q. ASP/m2 increased by 6.7%, although the smaller shipment base likely accounted for much of that increase, along with less exposure to LCD TV panel production, which saw the biggest price drop in the quarter. While hard to quantify absolutely, OLED TV panels likely saw less price pressure than LCD panels.
4Q Guidance was for area shipments to increase ~15%, based on a recovery in supply chain component issues. Roughly one month into the quarter we have seen display driver shortages abate, likely a function of lower LCD TV panel orders and that will help to alleviate some of the supply issues that LGD has said limited shipments in 3Q. There is some credibility to their 4Q area shipment confidence, although some of the improvement coming from IT product shipments that were deferred in 3Q and the growth in OLED TV based on the increased production at the Guangzhou fab and the generally stronger OLED TV shipments that occur in 2H. 4Q guidance for ASP/m2 is for growth of 2% to 3%, despite continuing LCD large panel price decreases. This is more of a function of orders for OLED mobile devices, which we expect will increase for LGD in 4Q, as such have a higher ASP/m2 than large panel products. We note that this metric is not absolute unit ASP but is based on area.
OLED TV saw 90% y/y growth as the company’s Guangzhou fab ramped additional capacity, which helped to improve the OLED segment’s profitability and is now expected to become profitable for the 2021 year. OLED TV shipments are expected to increase in 4Q and to reach 8m units by year end, and with the additional Guangzhou capacity the company target for 2022 remains at 10m units. We expect a more varied OLED display product line next year with specialized products for gaming and IT and profitability for OLED TV, but the risk for LGD’s OLED business is more in the small panel OLED space as success with Apple (AAPL) becomes more important as parent LG Electronics (066570.KS) ends this year. One of the two small panel OLED fabs that LG Display has in production is running profitably while the 2nd is facing some utilization issues and is generating losses, however management is expecting the combined operation to reach profitability next year, based on “customer and product structure”, which means Apple and their ability to produce LTPO small panel displays for same.
In the LCD space LGD is doing what other LCD manufacturers are doing, pushing LCD production away from TV and more toward IT products, where pricing has been more stable. With little alternative other than to shutter low utilization LCD fabs, potentially converting them to OLED as Samsung Display (pvt) has done, demand for IT products, meaning notebooks, monitors, and tablets, must stay robust to offset the increased production focus. There have been a few hints that some demand weakness in the IT space has been seen this month, with a few display producers citing a renewed focus on commercial customers rather than retail customers, but such monthly ‘bumps’ do happen. If there is a more visible trend toward slower demand in the IT space, LG and others will have little choice but to reduce utilization. The company has depreciated most of their current producing assets and believes that gives them a 5% to 10% cost advantage over their competition and has moved away from most generic production, giving them a higher ASP than others, but those are all concepts that need a positive or at least stable pricing environment, for which the industry is not known.
The company was questioned about the overall plans for large panel LCD production, particularly at the company’s Gen 7 fab (P7) in Paju, which is one of the few (AU Optronics (AUOTY) also has one) Gen 7 fabs globally. Such fabs are efficient at producing smaller panels for monitors and TV up to 47” but become less efficient for larger TV panel, other than ultra-large 85” displays. LGD has been using that fab for such ultra-large panels (80”+) but is considering how to operate that fab over the long-term. Samsung Display has converted its Gen 7 LCD fabs into small panel OLED production lines, which might become an alternative for LGD in the future if it decides to transition further away from the LCD TV production space.
The company did admit that it expects demand for IT products to decline in 2022 as COVID-19 restrictions are lifted, but expects that B2B demand will increase to offset the decline and goes further to predict a decline in monitor panel prices in 1Q and for notebooks in 2Q. However they added the “…it’s going to be different this time…”clause, suggesting that premium IT product pricing will not be closely linked to commodity IT pricing and will not depend on supply and demand dynamics but more on customer TAM. Since display price is based on demand, if commodity panel prices are falling, one would expect that overall demand was also falling, and while customers requesting premium display specifications would be willing to pay more for such panels, their overall demand would likely also be declining, so hoping that laws of supply and demand will not be in effect next year seems a bit of a stretch. Such a scenario might keep things a bit better for those that cater to premium oriented customers, but the overall industry supply/demand undercurrents always win out.
All in it was a reasonable quarter for LG Display’s LCD business considering the pricing and component supply environment and a strong quarter for their OLED business. With some of the shortages easing, the company should be able to grow, at least in area shipments in 4Q, with lower LCD TV revenue being offset by higher IT, OLED TV and OLED mobile sales. While we are not expecting a record 4Q, with a bit of positive order flow LGD could generate another good quarter, but our fear is that 2022 will be a more difficult year, with the company facing decisions on how much LCD capacity it needs to meet customer demand and whether to increment large panel OLED capacity going into the 2023 production year. Much will depend on IT product demand, basically the same issue that other display producers face, although LGD does have an improving small panel OLED business (as long as they are able to attract new customers) and a growing OLED TV business to offset some of the potential downside, a better place to be if things deteriorate.
Basics:
3Q Sales +3.7% q/q
+7.2% y/y
Op Inc. -25.1% q/q
+220.1% y/y
Op Margin 7.3% Prev. Q 10.1% 3Q 20 2.4%
Capacity +2.6%
Area Shipped -5.6%
ASP/m2 +6.7%
Sales Share TV 32% Prev. Q 38% 3Q ’20 28%
IT 45% Prev. Q 39% 3Q ’20 43%
Mobile 23% Prev. Q 23% 3Q ’20 29%
Dividend Under review
4Q Guidance was for area shipments to increase ~15%, based on a recovery in supply chain component issues. Roughly one month into the quarter we have seen display driver shortages abate, likely a function of lower LCD TV panel orders and that will help to alleviate some of the supply issues that LGD has said limited shipments in 3Q. There is some credibility to their 4Q area shipment confidence, although some of the improvement coming from IT product shipments that were deferred in 3Q and the growth in OLED TV based on the increased production at the Guangzhou fab and the generally stronger OLED TV shipments that occur in 2H. 4Q guidance for ASP/m2 is for growth of 2% to 3%, despite continuing LCD large panel price decreases. This is more of a function of orders for OLED mobile devices, which we expect will increase for LGD in 4Q, as such have a higher ASP/m2 than large panel products. We note that this metric is not absolute unit ASP but is based on area.
OLED TV saw 90% y/y growth as the company’s Guangzhou fab ramped additional capacity, which helped to improve the OLED segment’s profitability and is now expected to become profitable for the 2021 year. OLED TV shipments are expected to increase in 4Q and to reach 8m units by year end, and with the additional Guangzhou capacity the company target for 2022 remains at 10m units. We expect a more varied OLED display product line next year with specialized products for gaming and IT and profitability for OLED TV, but the risk for LGD’s OLED business is more in the small panel OLED space as success with Apple (AAPL) becomes more important as parent LG Electronics (066570.KS) ends this year. One of the two small panel OLED fabs that LG Display has in production is running profitably while the 2nd is facing some utilization issues and is generating losses, however management is expecting the combined operation to reach profitability next year, based on “customer and product structure”, which means Apple and their ability to produce LTPO small panel displays for same.
In the LCD space LGD is doing what other LCD manufacturers are doing, pushing LCD production away from TV and more toward IT products, where pricing has been more stable. With little alternative other than to shutter low utilization LCD fabs, potentially converting them to OLED as Samsung Display (pvt) has done, demand for IT products, meaning notebooks, monitors, and tablets, must stay robust to offset the increased production focus. There have been a few hints that some demand weakness in the IT space has been seen this month, with a few display producers citing a renewed focus on commercial customers rather than retail customers, but such monthly ‘bumps’ do happen. If there is a more visible trend toward slower demand in the IT space, LG and others will have little choice but to reduce utilization. The company has depreciated most of their current producing assets and believes that gives them a 5% to 10% cost advantage over their competition and has moved away from most generic production, giving them a higher ASP than others, but those are all concepts that need a positive or at least stable pricing environment, for which the industry is not known.
The company was questioned about the overall plans for large panel LCD production, particularly at the company’s Gen 7 fab (P7) in Paju, which is one of the few (AU Optronics (AUOTY) also has one) Gen 7 fabs globally. Such fabs are efficient at producing smaller panels for monitors and TV up to 47” but become less efficient for larger TV panel, other than ultra-large 85” displays. LGD has been using that fab for such ultra-large panels (80”+) but is considering how to operate that fab over the long-term. Samsung Display has converted its Gen 7 LCD fabs into small panel OLED production lines, which might become an alternative for LGD in the future if it decides to transition further away from the LCD TV production space.
The company did admit that it expects demand for IT products to decline in 2022 as COVID-19 restrictions are lifted, but expects that B2B demand will increase to offset the decline and goes further to predict a decline in monitor panel prices in 1Q and for notebooks in 2Q. However they added the “…it’s going to be different this time…”clause, suggesting that premium IT product pricing will not be closely linked to commodity IT pricing and will not depend on supply and demand dynamics but more on customer TAM. Since display price is based on demand, if commodity panel prices are falling, one would expect that overall demand was also falling, and while customers requesting premium display specifications would be willing to pay more for such panels, their overall demand would likely also be declining, so hoping that laws of supply and demand will not be in effect next year seems a bit of a stretch. Such a scenario might keep things a bit better for those that cater to premium oriented customers, but the overall industry supply/demand undercurrents always win out.
All in it was a reasonable quarter for LG Display’s LCD business considering the pricing and component supply environment and a strong quarter for their OLED business. With some of the shortages easing, the company should be able to grow, at least in area shipments in 4Q, with lower LCD TV revenue being offset by higher IT, OLED TV and OLED mobile sales. While we are not expecting a record 4Q, with a bit of positive order flow LGD could generate another good quarter, but our fear is that 2022 will be a more difficult year, with the company facing decisions on how much LCD capacity it needs to meet customer demand and whether to increment large panel OLED capacity going into the 2023 production year. Much will depend on IT product demand, basically the same issue that other display producers face, although LGD does have an improving small panel OLED business (as long as they are able to attract new customers) and a growing OLED TV business to offset some of the potential downside, a better place to be if things deteriorate.
Basics:
3Q Sales +3.7% q/q
+7.2% y/y
Op Inc. -25.1% q/q
+220.1% y/y
Op Margin 7.3% Prev. Q 10.1% 3Q 20 2.4%
Capacity +2.6%
Area Shipped -5.6%
ASP/m2 +6.7%
Sales Share TV 32% Prev. Q 38% 3Q ’20 28%
IT 45% Prev. Q 39% 3Q ’20 43%
Mobile 23% Prev. Q 23% 3Q ’20 29%
Dividend Under review
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