Musing on Financials
LGD 2nd Quarter Financials – Still Struggling with LCD Price Reductions, Paju Gen 6 and Margins
July 29, 2019
LG Display reported 2Q sales of 5.35t won ($4.54b US), down 8.95% sequentially and down 4.6% Y/Y. Gross margin was 8.9% vs 10.8% last quarter and 8.3% last year. The operating loss, however, was 369b won ($313m US) and the operating margin declined to -6.9% vs. -2.2% sequentially and -4.1% a year ago. The key focus for 3Q guidances are: 1) a mid-single digit percentage increase sequentially for total shipped surface area; and 2) a sequential rise of about 10% for blended ASP thanks to an improved product mix.
- Shipped almost the same panel area as in the previous quarter, the impact of price declines, particularly TV, which was a larger percentage of sales (41% vs. 36% last Q), was significant, ~13.6% on an area basis.
- Capacity – up 2% - Maintenance completed. ~2.3% more capacity (utilization)than in 2Q 2018.
- Mix – Small panel declined from 25% of sales to 19% of sales – A bit larger than normal due to the TFE issues with the Paju Gen 6 fab
- Large OLEDs: In the North American market, LG Electronics and Sony’s OLED TVs are struggling following Samsung Electronics’ strategic price reductions for high-end models. Lowering prices for OLED panels is not a shortterm option as they just turned profitable.
- Small/medium OLEDs: Following approval for the (6.46”) iPhone (with production likely to take place at E6-2), expect supply of panels 5m and demand of 7m panels this year. At the E5 plant, which produces panels for non-Apple clients, production expanded for automotive and smart watch applications, while ending smartphone- related (non-iPhone) production.
- TV Shipment share increased from 36% to 41% - Based on increasing OLED sales and steady OLED TV pricing, but insufficient to offset LCD price declines
- Inventory – Down slightly – Will ‘manage conservatively going forward’
- Debt – Liability to Equity up 11bps – Net debt to equity up 5bps – Will likely continue to rise through 1Q 2020
- Capex – 8t won ($6.8b US) this year – A bit higher than expected, but not out of line with fab progress
- Expected to declining to 4t ($3.4b) in 2020 and 2021 – but could increase with 2nd Gen 10.5 OLED fab
- Area Shipments up mid-single digits – In line with last year (up 4.8% sequentially)
- Blended Area ASP – Price declines to moderate. Typical 3Q TV pricing is typically down just under 2%.
- Increased small panel flex OLED shipments – LGD adding smartphone contracts and should participate in the next iPhone release (2019).
- Expect results of improvement in unit volumes as new fabs come on line, but relatively slowly.
- Capex almost completely for OLED, so LCD remains the burden.
- Guangzhou fab ready to start operation
- Will double OLED TV capacity by year end
- MMG (Multi-mode glass) – Start with Guangzhou fab in 2020 and then apply to other fabs –--Mentioned that other fabs were also using MMG but did not answer a direct question about which fabs. Possibly the ‘intension’ of upgrading other TV fabs to MMG.
- Focus on 65” and 77”
- Small panel
- Gumi flex OLED supplying to multiple clients
- Paju fab ready for operation – No mention of dedicated (customer) output
- Both will contribute to growth in 2H
- Converted one OLED fab from mobile only to mobile and auto
- Design, weight, space” key selling points –
- Gen 10.5
- Total investment will be KRW7.64t (around ¥700.0b).
- Invest an additional KRW3t (which will raise production capacity at the P10 plant to 45,000 panels/month, the investment will go toward additional TFT production equipment (to boost capacity by 15,000 panels/month) and OLED deposition equipment, from YAS
- Production to start in 1H 2022 with an initial capacity of 30,000 panels/month and the remaining 15,000 panels/month to be produced starting 1H 2023.
- Dedicated to large OLED panels (white OLED) for 65” or larger TVs.
- MMG to be used
- Idemitsu Kosan and Nippon Electric Glass will benefit (the former will supply blue fluorescent emitting materials; the latter will be the sole supplier of glass substrates).
- LCD fabs
- Likely to replicate Samsung and convert much of their LCD large panel capacity to OLED. Not overnight, but in the foreseeable future.
- Three Gen 8 LCD fabs:
- 1 converted to OLED
- 1 High-end IT and commercial
- 1 questionable
Table 1: OLED TV Shipments by Brand
Figure 1: OLED Panel Shipment
- No current impact – Other than making buyers and retailers even more nervous than they were.
- Could lead to a bit of a rush to place orders in early 3Q, as some buyers become concerned that LGD might come up short on components, but the diversify sources
- Uncertainty and extreme competition in LCD US/China trade and Japan export issues increase uncertainty at all levels
Figure 1: OLED Panel Shipment
Source: Mizuho, OLED-A
- Could capex for Gen 10 fab be ‘shared’ with customer? No need, will be financed through EBITDA.
- Would entertain strategic funding source. Not only TV related, as the Gen 10 fab is oriented toward ultra-large panel displays, it would be unusual for a different application to be produced, but certainly not out of the question.
- Rumors of MMG delays at Guangzhou fab? No delays for MMG – Ready for production
- MMG for Gen 10? Not an issue – The big issue for LGD Gen 10 was stabilizing the oxide backplane at this larger size, which was not an easy task
- QLED discounting pressure & OLED TV targets. Target for 2020 remains 7m units –
- Company saw 30% growth in TV sales over 5mos – excluding North America
- Decision timing on Gen 8 LCD fab? Current cash flow indicates no change yet. Decision will be based on future CF – If prices continue to decline and competition keeps increasing, it is inevitable.
- Flexible OLED update?
- Gumi – Mobile, automotive and foldable
- Increasing output for ‘clients’ – This might indicate a participation in the upcoming iPhone
- Paju – Mobile – 30k Will start up lines based on ‘reliability’
- Adjustments to utilization? Have made some utilization adjustments to manage inventory – Likely LCD related
- Idle lines for 1-2 days – Still expensive but better than writing off excess inventory
- Bottlenecks at Gen 10 fab? Oxide backplane preparation completed Now preparing for evaporation equipment – Not easy, but they have a great deal of experience at the Gen 8 level. From: SCMR