LG Display – Notes & Comments
LG Display (LPL) sales of 6.88t won ($6.175b US) were slightly above consensus of 8.83b won, down 8% q/q but up 46% y/y, while operating profit was 523b won ($469.45m US), down 8% q/q, although above consensus of 510b won. Shipments were down 2.3% on an area basis, and ASPs, also on an area basis, were down 6.8%. While it might seem unusual that LG Display saw lower ASPs during a period when panel prices were rising, we believe it had more to do with mix, which saw a seasonally lower component of small panels, which carry a higher ASP on an area basis. In terms of overall capacity LPL saw a 3.7% increase q/q and a 15.5% increase y/y with much of that y/y gain coming from the OLED fab in Guangzhou.
Guidance
2Q Shipments up mid to high single digits - As we would expect on a seasonal basis
ASP down mid to high single digits – Likely due to continued weakness in small panel demand, which seems a bit more pronounced at LPL than with others. We would assume both declining orders from Huawei (pvt) and the further wind down of LG’s (0665709.KS) mobile business are the reason for the weakness.
Component Supply – “Close eye on the market” – A non-answer – Inventory was up 8.3% q/q in 1Q on lower sales, although full inventory breakdown was not released (yet), but we would expect that raw materials would be up as the company would likely have begun to stockpile as many components as possible. We believe LPL was affected by the NEG (5214.JP) power outage in December, which would likely have caused the company to build as much substrate inventory as possible as a cushion.
OLED – Goal to improve yield & productivity – Push to premium to increase profitability – While utilization is high at LGD’s large panel OLED fabs, yield is still low and is key for bringing the segment into profitability, likely with the Guangzhou fab ( the newest) having the lowest yields.
Mobile – Preparing for mass production of new models in 2H – Means 2Q could also see weak mobile sales
LCD TV – Remain Flexible within the available resources – No change in view. With rising panel prices, we expect no change again in 2Q.
>>>>>Note: “Notably, in the second half (of) this year, we anticipate changes in people’s consumption patterns following vaccination campaigns and the subsequent improvements in the COVID situation. In particular, changes in people’s lifestyles such as growing outdoor activities, could lead to changes in product demand.” – The most significant comment in the call. While timing will be key, it seems the company has the notion that 2H might not be as robust as 1H this year. Surprisingly specific.
OLED TV shipments were 1.6m units – Flat with 4Q (typically down) – Outpacing overall TV market growth - Price reductions and a 48” model will help this year
Q&A
OLED Capacity Expansion?
Positive outlook for OLED TV but due to above, will watch 2Q and 3Q carefully – OLED TV capacity plans are based on long-term prospects for the technology and the market, but it seems the company is unsure as to whether it should build out additional large panel OLED capacity. More likely it is a timing issue as a commitment to a new large panel OLED fab is an expensive proposition and would likely need a round of public financing. If the company’s attitude (above) is that there is a possibility for a weaker than expected 2H, raising capital would consequently be harder in 2H. Tough decision that will likely not be made until early 4Q.
Small panel OLED (Flexible) – Currently have 45,000 sheets/month capacity – Will maximize productivity – No decision on expanding capacity
OLED TV Profitability? Trying to improve yield & quality – No timeframe but moving in right direction – As demand is strong now, it is all on improving yield.
OLED Targets for 2022? Depends on capacity expansion (above) – Given the more cautious nature of the company’s 2H outlook, not surprising.
OLED adoption in IT products? LG Display has been in both large and small OLED production for many years. IT OLED products is the ‘last frontier’. Ready to leverage that expertise – This is a new but slow to develop market and adoption is hinged on relative panel price. The good news is that LCD IT panel prices have been rising quickly, which works toward closing the spread between LCD and OLED displays, but price still keeps OLED at the top of the price range for IT products. OLED notebooks are becoming more commonplace but it has been a slow process in past years. We expect a more rapid migration this year because of the smaller gap, but the difference in display quality and performance must be made more apparent to consumers, other than those who work directly with media production.
Automotive? Hard hit due to COVID and semi shortage but increased orders by 15.8% q/q, including flex OLED – Note that references orders not sales as this is a long cycle business
If EV sales recover expect automotive flex OLED to expand on LT basis – Again, orders not sales
OLED is ~30% of automotive orders – This is a good thing as LPL needs to fill small/medium OLED panel gaps, but we do not expect meaningful sales this year.
Automotive revenue recognition? Once orders are received it takes 1 to 1.5 years for development and then more for production and delivery but will see 4 to 6 years of production. – Too early in what is a long cycle business to tell when product will be released and recognized.
What about LCD production? P7 fab will continue through this year and possibly into 2022, depending on the market – Right up until panel prices decline.
All in it was a good quarter, especially when one compares against last year, but the cautionary 2H ‘guide’ is likely to keep estimates from getting out of control, as well as continuing component shortages. With Op Margins in positive territory for the last three quarters, investors should rejoice while they can. Other than the 2H forecast, LG Display rarely makes big decisions this early in the year, so we are not concerned as to the lack of expansion plans, but would expect at least an idea of both small and large panel OLED expansion plans by the next call, especially with a bigger commitment from Apple (AAPL) and the need to ramp up OLED TV sales next year. Given that our expectations were in line with the strength of the display market, the quarter met our expectations.
Guidance
2Q Shipments up mid to high single digits - As we would expect on a seasonal basis
ASP down mid to high single digits – Likely due to continued weakness in small panel demand, which seems a bit more pronounced at LPL than with others. We would assume both declining orders from Huawei (pvt) and the further wind down of LG’s (0665709.KS) mobile business are the reason for the weakness.
Component Supply – “Close eye on the market” – A non-answer – Inventory was up 8.3% q/q in 1Q on lower sales, although full inventory breakdown was not released (yet), but we would expect that raw materials would be up as the company would likely have begun to stockpile as many components as possible. We believe LPL was affected by the NEG (5214.JP) power outage in December, which would likely have caused the company to build as much substrate inventory as possible as a cushion.
OLED – Goal to improve yield & productivity – Push to premium to increase profitability – While utilization is high at LGD’s large panel OLED fabs, yield is still low and is key for bringing the segment into profitability, likely with the Guangzhou fab ( the newest) having the lowest yields.
Mobile – Preparing for mass production of new models in 2H – Means 2Q could also see weak mobile sales
LCD TV – Remain Flexible within the available resources – No change in view. With rising panel prices, we expect no change again in 2Q.
>>>>>Note: “Notably, in the second half (of) this year, we anticipate changes in people’s consumption patterns following vaccination campaigns and the subsequent improvements in the COVID situation. In particular, changes in people’s lifestyles such as growing outdoor activities, could lead to changes in product demand.” – The most significant comment in the call. While timing will be key, it seems the company has the notion that 2H might not be as robust as 1H this year. Surprisingly specific.
OLED TV shipments were 1.6m units – Flat with 4Q (typically down) – Outpacing overall TV market growth - Price reductions and a 48” model will help this year
Q&A
OLED Capacity Expansion?
Positive outlook for OLED TV but due to above, will watch 2Q and 3Q carefully – OLED TV capacity plans are based on long-term prospects for the technology and the market, but it seems the company is unsure as to whether it should build out additional large panel OLED capacity. More likely it is a timing issue as a commitment to a new large panel OLED fab is an expensive proposition and would likely need a round of public financing. If the company’s attitude (above) is that there is a possibility for a weaker than expected 2H, raising capital would consequently be harder in 2H. Tough decision that will likely not be made until early 4Q.
Small panel OLED (Flexible) – Currently have 45,000 sheets/month capacity – Will maximize productivity – No decision on expanding capacity
OLED TV Profitability? Trying to improve yield & quality – No timeframe but moving in right direction – As demand is strong now, it is all on improving yield.
OLED Targets for 2022? Depends on capacity expansion (above) – Given the more cautious nature of the company’s 2H outlook, not surprising.
OLED adoption in IT products? LG Display has been in both large and small OLED production for many years. IT OLED products is the ‘last frontier’. Ready to leverage that expertise – This is a new but slow to develop market and adoption is hinged on relative panel price. The good news is that LCD IT panel prices have been rising quickly, which works toward closing the spread between LCD and OLED displays, but price still keeps OLED at the top of the price range for IT products. OLED notebooks are becoming more commonplace but it has been a slow process in past years. We expect a more rapid migration this year because of the smaller gap, but the difference in display quality and performance must be made more apparent to consumers, other than those who work directly with media production.
Automotive? Hard hit due to COVID and semi shortage but increased orders by 15.8% q/q, including flex OLED – Note that references orders not sales as this is a long cycle business
If EV sales recover expect automotive flex OLED to expand on LT basis – Again, orders not sales
OLED is ~30% of automotive orders – This is a good thing as LPL needs to fill small/medium OLED panel gaps, but we do not expect meaningful sales this year.
Automotive revenue recognition? Once orders are received it takes 1 to 1.5 years for development and then more for production and delivery but will see 4 to 6 years of production. – Too early in what is a long cycle business to tell when product will be released and recognized.
What about LCD production? P7 fab will continue through this year and possibly into 2022, depending on the market – Right up until panel prices decline.
All in it was a good quarter, especially when one compares against last year, but the cautionary 2H ‘guide’ is likely to keep estimates from getting out of control, as well as continuing component shortages. With Op Margins in positive territory for the last three quarters, investors should rejoice while they can. Other than the 2H forecast, LG Display rarely makes big decisions this early in the year, so we are not concerned as to the lack of expansion plans, but would expect at least an idea of both small and large panel OLED expansion plans by the next call, especially with a bigger commitment from Apple (AAPL) and the need to ramp up OLED TV sales next year. Given that our expectations were in line with the strength of the display market, the quarter met our expectations.
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