LG Display - Notes
LG Display (LPL) reported official 4Q and full year results of 7.3t won ($5.92b US) and 26.15t won ($21.21b US), with the 4th quarter up 7.8% q/q but down 17.1% y/y, while the year was down 12.5%. Things got a bit stickier at the operating level with operating income of -875.7b won ($-710.2m US) for the quarter, down 13.3% q/q, against a positive 4Q last year, resulting in a -12.0% operating margin. The full year operating income was -2.085t won ($1.69b US), also against a positive 2021 full year result, with the full year operating margin of -8.0%. The company took a 1.33t won ($1.06b US) non-operating impairment loss in the quarter.
LG Display - Sales & Operating Income - 2019 -2022 - Source: SCMR LLC, Company Data
LG Display Inventory - Source: SCMR LLC, Company Data
That said, management gave relatively little in terms of forward guidance, other than the very general ‘better 2H than 1H’ line, that area shipments will fall more sharply than the seasonal norms, and to expect that TV panel sales will again be lower than TV set sales. Here is our take…
According to the first point of guidance, the second half will see better sales than the first half, which seems logical, if not a bit simplistic, as with LG Display, and most other display companies, the 2nd half is sweasonally better than the first. LGD’s 5 year average (2H/1H) shows that 1H is typically down 16% over the previous 2H, and 2H is typically up 20% over 1H on average. We expect there has, and later wording confirms, much hope in that prediction, as there is little hard evidence on which to base it thus far this year.
According to the second point of guidance, the decline in area shipments between 4Q ’22 and 1Q ’23 will be greater than normal. Based on our data, using a 5 year average including 2022, the typical decline in area shipments in 1Q is 11.9%, with the guidance implying a greater than normal decline in the current quarter. Typically (5 yr avg.) sales also decline from 4Q to 1Q, and for LG Display that decline averages 19.4%. if LG Display’s area shipments track to sales (they track within 2.7% over 5 years when normalized to 1Q 2017), the implication would be for a greater than 19.4% decline in 1Q sales. A 20% decline, only slightly greater than average would imply sales of 5.84t won (down 9.7% y/y), while a 25% decline (10% over the norm) would imply sales of 5.476t won (down 15.4% y/y), and a 30% decline, only 10% below the seasonal baseline, would imply sales of 5.11t won for the 1st quarter (down 21.0% y/y), all of which point to a weak quarter and more difficult y/y comparisons.
The third point, that TV panel shipments will again be lower than TV set shipments indicates the company’s continuing push to match inventory levels with orders, a difficult task at best given the volatility seem over the last few years. That said, such ‘contract-based’ inventory management is possible in a less volatile environment, one which we seem to be falling into as the threat of COVID 19 decreases and Russia’s invasion of Ukraine becomes more normalized (not saying it should be, only that it seems headed that way). LGD’s contracts with Apple (AAPL), which are currently oriented toward small panel OLED production, help, as Apple has been the most sucessful brand in maintaining relatively stable sales (and increasing share) during the last few quarters, and lower generic LCD TV panel inventory (see below) demands all work in that direction. That said, increasing the JIT portion of their business substantially above the ~30% seen last year is an ongoing process that will see smaller incremental gains going forward, although the company has an optimistic target of 40% for this year. If Apple maintains realistic targets this year it would facilitate LGD’s ability to move the JIT needle higher, but lots of ifs still remain.
One point that management made was toward the acccelleration of the company’s plan to exit the LCD TV panel business. The company confirmed the closing of the company’s Gen 7 large panel LCD fab and plans for a 50% capacity reduction at its Gen 8.5 fab in China, and given the lack of traction on the demand side, and the excess capacity available to buyers, particularly in China, this continues to be a logical path. However LGD does have customer contracts that are volume related, meaning they have an obligation to deliver display area targets, essentially access to production capacity as needed by customers. Existing capacity commitments under those contracts must be met or penalties and ill-will could be generated, which means the capacity reductions targeted for the China fab could take time to implement as contracts are worked down this year.
On the more positive side, the company was a bit more forthcoming about their prospects for OLED, particularly small panel OLED, not usually the company’s focal point for OLED. Management has separated the company’s large panel OLED business (OLED TVs) into a ‘separate cash-generating unit’, to be better able to monitor its progress, and manage the balance between margins on OLED TV displays and those on small panel OLED smartphone displays, such as the ones they produce for the iPhone. Given that on a /m2 basis, small panel OLED devices have a higher ASP, it is essential that LGD manage those two segments of their OLED business separately, particularlyt as the TV business remains weak. LGD, while maintaining that capex (3t won or $2.43b US) will not entail more than “minimum ordinary investment other than order-based projects”, will have to gear up ‘IT’ OLED production for Apple’s 2024 further infiltration into OLED displays, which will take at least some of that ‘project-oriented’ capex this year. Perhaps some of the 5.2t won ($4.22b US) spent in 2022 has included some of that build spending (We note that LGD mentioned that last year’s capex was higher than expected), but we expect that LGD will increment capex later in the year.
LGD gave some detail about its OLED business, other than asserting that it is capable of producing 10m units this year, which is certainly a positive, as they broke out OLED as a percentage of sales for the last 5 quarters. While it lacks the detail that would isolate the small panel OLED business (smartphones, tablets) from the large panel business (TV), it does show that the trend in LGD’s OLED business is more a function of its mobile OLED sales than its OLED TV sales. When looking at Figure 3 LGD’s overall OLED share of sales (red) tracks closely to the company’s share of mobile dispay sales share (blue), while relatively poorly to the company’s TV sales share (yellow), which indicates that while the OLED TV panel business can, at times, generate a larger portion of company revenue, the small panel OLED business seems to be what is driving growth We do note that the TV share shown in the chart also includes LGD’s LCD TV large panel business, which continues to shrink, so there is some play in that category, but the close tracking between total OLED share of sales and mobile share of sales is noticeable, along with the general weakness seen in the TV space.
According to the first point of guidance, the second half will see better sales than the first half, which seems logical, if not a bit simplistic, as with LG Display, and most other display companies, the 2nd half is sweasonally better than the first. LGD’s 5 year average (2H/1H) shows that 1H is typically down 16% over the previous 2H, and 2H is typically up 20% over 1H on average. We expect there has, and later wording confirms, much hope in that prediction, as there is little hard evidence on which to base it thus far this year.
According to the second point of guidance, the decline in area shipments between 4Q ’22 and 1Q ’23 will be greater than normal. Based on our data, using a 5 year average including 2022, the typical decline in area shipments in 1Q is 11.9%, with the guidance implying a greater than normal decline in the current quarter. Typically (5 yr avg.) sales also decline from 4Q to 1Q, and for LG Display that decline averages 19.4%. if LG Display’s area shipments track to sales (they track within 2.7% over 5 years when normalized to 1Q 2017), the implication would be for a greater than 19.4% decline in 1Q sales. A 20% decline, only slightly greater than average would imply sales of 5.84t won (down 9.7% y/y), while a 25% decline (10% over the norm) would imply sales of 5.476t won (down 15.4% y/y), and a 30% decline, only 10% below the seasonal baseline, would imply sales of 5.11t won for the 1st quarter (down 21.0% y/y), all of which point to a weak quarter and more difficult y/y comparisons.
The third point, that TV panel shipments will again be lower than TV set shipments indicates the company’s continuing push to match inventory levels with orders, a difficult task at best given the volatility seem over the last few years. That said, such ‘contract-based’ inventory management is possible in a less volatile environment, one which we seem to be falling into as the threat of COVID 19 decreases and Russia’s invasion of Ukraine becomes more normalized (not saying it should be, only that it seems headed that way). LGD’s contracts with Apple (AAPL), which are currently oriented toward small panel OLED production, help, as Apple has been the most sucessful brand in maintaining relatively stable sales (and increasing share) during the last few quarters, and lower generic LCD TV panel inventory (see below) demands all work in that direction. That said, increasing the JIT portion of their business substantially above the ~30% seen last year is an ongoing process that will see smaller incremental gains going forward, although the company has an optimistic target of 40% for this year. If Apple maintains realistic targets this year it would facilitate LGD’s ability to move the JIT needle higher, but lots of ifs still remain.
One point that management made was toward the acccelleration of the company’s plan to exit the LCD TV panel business. The company confirmed the closing of the company’s Gen 7 large panel LCD fab and plans for a 50% capacity reduction at its Gen 8.5 fab in China, and given the lack of traction on the demand side, and the excess capacity available to buyers, particularly in China, this continues to be a logical path. However LGD does have customer contracts that are volume related, meaning they have an obligation to deliver display area targets, essentially access to production capacity as needed by customers. Existing capacity commitments under those contracts must be met or penalties and ill-will could be generated, which means the capacity reductions targeted for the China fab could take time to implement as contracts are worked down this year.
On the more positive side, the company was a bit more forthcoming about their prospects for OLED, particularly small panel OLED, not usually the company’s focal point for OLED. Management has separated the company’s large panel OLED business (OLED TVs) into a ‘separate cash-generating unit’, to be better able to monitor its progress, and manage the balance between margins on OLED TV displays and those on small panel OLED smartphone displays, such as the ones they produce for the iPhone. Given that on a /m2 basis, small panel OLED devices have a higher ASP, it is essential that LGD manage those two segments of their OLED business separately, particularlyt as the TV business remains weak. LGD, while maintaining that capex (3t won or $2.43b US) will not entail more than “minimum ordinary investment other than order-based projects”, will have to gear up ‘IT’ OLED production for Apple’s 2024 further infiltration into OLED displays, which will take at least some of that ‘project-oriented’ capex this year. Perhaps some of the 5.2t won ($4.22b US) spent in 2022 has included some of that build spending (We note that LGD mentioned that last year’s capex was higher than expected), but we expect that LGD will increment capex later in the year.
LGD gave some detail about its OLED business, other than asserting that it is capable of producing 10m units this year, which is certainly a positive, as they broke out OLED as a percentage of sales for the last 5 quarters. While it lacks the detail that would isolate the small panel OLED business (smartphones, tablets) from the large panel business (TV), it does show that the trend in LGD’s OLED business is more a function of its mobile OLED sales than its OLED TV sales. When looking at Figure 3 LGD’s overall OLED share of sales (red) tracks closely to the company’s share of mobile dispay sales share (blue), while relatively poorly to the company’s TV sales share (yellow), which indicates that while the OLED TV panel business can, at times, generate a larger portion of company revenue, the small panel OLED business seems to be what is driving growth We do note that the TV share shown in the chart also includes LGD’s LCD TV large panel business, which continues to shrink, so there is some play in that category, but the close tracking between total OLED share of sales and mobile share of sales is noticeable, along with the general weakness seen in the TV space.
LG Display - Tracking OLED Sales - Revenue Share - Source: SCMR LLC, Company Data
The Q&A served little, as most of the few questions asked were not directly answered by management, although when pressed they indicated that the company was, in addition to all mentioned above, working toward developing three new business segments, Hi-end gaming monitors, transparent OLED displays, and thin-film speakers. The most attractive of the group is the gaming monitor business, and given that the space is one that is already recognizable and fits the company’s emphasis on OLED (high response time, high contrast, wide color gamut), we expect this category has the most chance for near-term success, and the company indicated that it was in discussions with 8 or 9 potential customers and expects to be in production this year.
Transparent OLED displays are, in our view, a bit more problematic, and when the company called the potentiual products ‘a solution product, not a standalone product’, it seems they have already faced the more unusual circumstances that limit the use of transparent OLED displays. We do believe they are practical and viable in retailing, and can be a better alternative to more typical opaque signage, but applications in retail tend to be customized, and while that leads to higher margins, it is less condusive to mass production.
While LGD has been in what is loosely called the speaker business, we did not expect the company to promote its thin-film speaker technology, one that it has been using in its OLED TVs for a number of years. Given our extensive background in the audio business, we have strong opinions as to this product category, which we will not get into here, but have difficulty understanding how LG Display will create a mass market product here.
All in, while much of the 4Q call was of little consequence, and at this early point in the year, especially given the poor economic environment, we expected little. We had hoped that LGD would write off as much as possible, which they seem to have done, and was happy for the bits of insight into the company’s OLED business, but a bit more on the company’s thoughts about how the CE business might play out would have been helpful. As noted above, the CE space seems to be settling into what we consider a more ‘normal’ mode, where sensativity comes from the fine balance between normalize supply and demand, without the exogenous factors that have run the CE show since 2020. While most in the space do not look forward to sweating over the small stuff again, we look forward to a year that might not see spectacular changes but a more steady and measured progression toward better CE products, more rational planning, and less frenetic start-up investing. Maybe we should be careful what we wish for but every environment has its opportunities.
Transparent OLED displays are, in our view, a bit more problematic, and when the company called the potentiual products ‘a solution product, not a standalone product’, it seems they have already faced the more unusual circumstances that limit the use of transparent OLED displays. We do believe they are practical and viable in retailing, and can be a better alternative to more typical opaque signage, but applications in retail tend to be customized, and while that leads to higher margins, it is less condusive to mass production.
While LGD has been in what is loosely called the speaker business, we did not expect the company to promote its thin-film speaker technology, one that it has been using in its OLED TVs for a number of years. Given our extensive background in the audio business, we have strong opinions as to this product category, which we will not get into here, but have difficulty understanding how LG Display will create a mass market product here.
All in, while much of the 4Q call was of little consequence, and at this early point in the year, especially given the poor economic environment, we expected little. We had hoped that LGD would write off as much as possible, which they seem to have done, and was happy for the bits of insight into the company’s OLED business, but a bit more on the company’s thoughts about how the CE business might play out would have been helpful. As noted above, the CE space seems to be settling into what we consider a more ‘normal’ mode, where sensativity comes from the fine balance between normalize supply and demand, without the exogenous factors that have run the CE show since 2020. While most in the space do not look forward to sweating over the small stuff again, we look forward to a year that might not see spectacular changes but a more steady and measured progression toward better CE products, more rational planning, and less frenetic start-up investing. Maybe we should be careful what we wish for but every environment has its opportunities.
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