Large panel: 8K TV, improving features (QD, local dimming), and PID. On
8K,AUO demonstrated an 85” bezel-less curve 8K TV and Innolux showcased
a 65” 8KTV panel. We believe 8K TV will likely focus on the 65” and
above TV market asviewers may not tell the difference between an 8K and
a 4K TV below 65-inch innormal viewing distance. Nonetheless, we believe
cost is still too high for 8K TV dueto lower production yield rates,
higher component costs such as more driver ICs,brighter backlight, and
more complex heat-sink design. Other improvements arebetter colour gamut
via QD (quantum dots) solutions and higher contrast ratio andHDR (high
dynamic range) via more local dimming areas.
2Q17 miss on weaker smartphone and TV: LG Electronics (LGE) released
2Q17preliminary results with OP of KRW664bn (down 28% q-o-q, up 14%
y-o-y), whichmissed recently lowered consensus. Home appliance and air
solution (H&A; 62% OPcontribution for 2017e) margin seems to be higher
than our estimate (OPM 10.1% vs.
Mid/small panel: 18:9 and automotive. 18:9 aspect ratio panel is the
HSBCe 9.1%) on a better product mix with strong domestic sales.
However, despite thesolid H&A margin, we estimate smartphone and TV to
have eroded overall profitabilitydue to weaker flagship model (G6) sales
and strong panel prices, respectively. Also,the impact of normalization
of marketing costs (to c4% of total sales in 2Q17e fromunusually low
2.4% in 1Q17) seems to be bigger than the Street’s expectation (Chart
However, comment on pricing is relatively soft with rising supply.
Automotive panelcould be an area with potential solid demand and should
be a focus for AUO andInnolux to focus. Free form design and no urgent
need for higher resolution.
Earnings momentum to slow down: Even smoothing out volatility in
marketing costs,we expect earnings momentum to lose steam heading into
2H17e due to cost pressureon TVs and lingering losses from smartphones.
We see LGE’s TV margin decliningsequentially until 4Q17e due to higher
panel costs (Charts 2-3). We believe product miximprovement driven by
OLED TV will not be enough to offset LCD cost pressure as weestimate LCD
still makes a >70% OP contribution. For the smartphone
business,despite the positive restructuring effect, we see the product
mix improvement as slowerthan market expectations due to weaker sales of
flagship models (Chart 5). We alsoexpect more competition in the
high-end smartphone segment due to the spec upgraderace by top-tier
brands, which could weigh on LG Electronics.
e-Paper and Corning’s solutions for semiconductors are other
highlights. E-Inkdemonstrated coloured solution which attracted lots of
traffic. Corning showssolutions for application such as DOE (diffractive
optical element) for 3D sensing andalso aim to penetrate into IC
substrate core layer market.
Downside coming from too much optimism: Consensus 2017e EPS has
beenraised by 131% YTD with a steeper upward revision after the strong
preliminary1Q17 earnings. In particular, the 1Q17 earning beat seems to
have raisedexpectations for 2H17 (Chart 9). However, given that 1Q
strength was mostly due topreloaded costs in 4Q16 and there was
normalization of costs from 2Q17e, weexpect consensus earnings cuts
after the 2Q17 results, factoring in cost pressure.
Cautious on Taiwan panel makers and positive on Korean AMOLED
Reiterate Reduce but raise PB-based TP to KRW46,000 from KRW45,000
as weraise our 2017 net profit estimate by 13% to reflect a higher
margin assumption for H&A(up 0.8%pt) and the preliminary 2Q results. Our
estimates are still far lower than theStreet’s; our 2017e/18e OP are
below consensus by 19%/33% based on our morecautious stance on margin.
Amid continued earnings increases in the Street, even atrivial glitch
could trigger a share correction, in our view. Valuation has expanded
to1.0x 2017e PB, which we view as stretched given its still lower margin
profile vs. peers(Chart 12). In our coverage, we prefer component makers
such as LG Innotek (011070KS, KRW159,500, Buy) and Samsung Electro
Mechanics (009150 KS, KRW99,800,Buy) based on their exposure to secular
growth in dual camera and 3D sensor.
1) 8K TV too early to contribute and other improvements not enough
to compete withOLED TV; 2) lack of exposure in OLED for mobile panel;
and 3) oversupply risk in 2018will continue to exert pricing and margin
pressure. See table below for our preferences.