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JDI’s Collapse Avoided by Ichigo Trust Rescue
March 22, 2020
Japan Display (JDI)’s ability to receive financing as planned even in current market conditions and at its recent share price appears to be a big step toward its survival. Considering the assumptions under which Ichigo Trust extended all financing, JDI does not have any major issues with its balance sheet or cash flow through the next year. The company was close to collapse, just as the financing was announced on 31 January. But it is unlikely to turn profitable in FY21, given current demand conditions and JDI's cost structure. The major issues are: 1) the need to restructure their production base (reverting to primarily G4 in Tottori and G4.5 in Ishikawa) and further improving cost structure (both fixed and variable costs); 2) addressing the D3 Hakusan plant in Ishikawa (whether to sell to Sharp and on what terms); 3) reassessing business strategies for new businesses including mobile (main customer is Apple), automotive (mainly Tier 1 and OEM), and sensors; and 4) increasing production and yield to achieve profitability for OLEDs (for Apple Watch), of which mass production has finally begun. The impact from COVID-19 needs to be considered, including a) the risk of production for existing devices falling short of plans due to the Apple value chain being disrupted (especially in February through May); b) risk of delayed restarts at back-end production plants in China (both the company’s and outsourcing facilities); c) weakening demand for end products that use the company’s displays, like smartphones, automobiles, and smart watches, as the impact of COVID-19 reaches all corners of the world; and d) risk of LCD/OLED panel prices falling as customer (completed product brands) profits slump or as demand for displays weakens. JDI must be able to maintain some degree of financial strength and further cut fixed costs given the risk of weakening demand in order to address these issues. The management team’s competence appears promising.
The company on 13 March announced that it had reached a basic agreement with Ichigo Trust for additional financing and also held a web-based press conference. Ichigo Trust will increase financing by ¥10.0b (from ¥100.8b to ¥110.8b) and lower the average price for conversion to common shares from ¥50 to ¥35.
March 22, 2020
Japan Display (JDI)’s ability to receive financing as planned even in current market conditions and at its recent share price appears to be a big step toward its survival. Considering the assumptions under which Ichigo Trust extended all financing, JDI does not have any major issues with its balance sheet or cash flow through the next year. The company was close to collapse, just as the financing was announced on 31 January. But it is unlikely to turn profitable in FY21, given current demand conditions and JDI's cost structure. The major issues are: 1) the need to restructure their production base (reverting to primarily G4 in Tottori and G4.5 in Ishikawa) and further improving cost structure (both fixed and variable costs); 2) addressing the D3 Hakusan plant in Ishikawa (whether to sell to Sharp and on what terms); 3) reassessing business strategies for new businesses including mobile (main customer is Apple), automotive (mainly Tier 1 and OEM), and sensors; and 4) increasing production and yield to achieve profitability for OLEDs (for Apple Watch), of which mass production has finally begun. The impact from COVID-19 needs to be considered, including a) the risk of production for existing devices falling short of plans due to the Apple value chain being disrupted (especially in February through May); b) risk of delayed restarts at back-end production plants in China (both the company’s and outsourcing facilities); c) weakening demand for end products that use the company’s displays, like smartphones, automobiles, and smart watches, as the impact of COVID-19 reaches all corners of the world; and d) risk of LCD/OLED panel prices falling as customer (completed product brands) profits slump or as demand for displays weakens. JDI must be able to maintain some degree of financial strength and further cut fixed costs given the risk of weakening demand in order to address these issues. The management team’s competence appears promising.
The company on 13 March announced that it had reached a basic agreement with Ichigo Trust for additional financing and also held a web-based press conference. Ichigo Trust will increase financing by ¥10.0b (from ¥100.8b to ¥110.8b) and lower the average price for conversion to common shares from ¥50 to ¥35.
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