Key Takeaways from 6 Leading Panel Suppliers' Q1’18 Results
Last week we saw 6 different display suppliers release their earnings results. In general, we saw Chinese suppliers outperform Taiwan and Korean suppliers helped by government subsidies, lower labor and fab costs and the exclusion of interest payments in odd quarters. We saw flexible OLED smartphone panel shipments drop rapidly and LTPS LCDs take share from OLEDs. Smartphone panel volumes were weak, especially at the high end, which boosted blended unit ASPs and reduced area ASPs as smartphone panels carry higher prices on an area basis. While OLED volumes fell faster than LTPS volumes, OLED margins continued to outperform LCD margins. Panel makers are optimistic about TV volumes in the rest of 2018 despite experiencing above average channel inventories in Q1’18. We did see LG reporting OLED TVs in shortage and reveal they may convert even more LCD capacity to OLED TV capacity. Let’s start with some comparisons.
As shown in Figure 1, Tianma had the highest revenue growth at 75%. This was due to the company acquiring one of its subsidiaries in the quarter, Xiamen Tianma, with its 5.5G and 6G LTPS LCD fabs. This resulted in significant revenue growth, despite shipments declining Q/Q for the Tianma group overall as Xiamen’s results were not in their Q4’17 results. Every other supplier experienced sequential revenue declines ranging from -5% for AUO whose unit shipments were down just 1% with area shipments down just 2% to Samsung Display’s OLED business, which fell 35% on a 34% decline in flexible OLED shipments. AUO experienced full loading in its fabs and experienced significant area growth Y/Y in small/medium displays up 26% as it added and ramped significant LTPS LCD capacity last year. AUO is also seeing strong growth in gaming monitors and has a larger commercial/industrial position than most suppliers, which has less seasonality. BOE, which saw double-digit Q/Q declines in both large-area and small/medium shipments, indicated that a driver IC shortage in Q1’18 worsened their small/medium panel business. Due to gains at larger panel sizes, BOE did experience gains in unit ASPs and declines in area ASPs. Conversely, Samsung saw the worst performance in its OLED panels after experiencing the best performance a quarter earlier. This can of course be attributed to weakness in its flexible OLED shipments for the iPhone X. SDC’s shipments to Apple which were down 58% Q/Q to 15M, more than offsetting a 10% increase in SDC’s shipments to the Galaxy brand. While Samsung’s OLED shipments were down 17% Q/Q, flexible OLED smartphone shipments were down 34% with rigid OLED smartphone shipments down just 1% Q/Q. OLEDs fell from 80% of SDC’s Q4’17 revenues to 74% of its Q1’18 revenues. Samsung guided to continued weakness in flexible OLED smartphones and we do expect another sequential decline in Q2’18. On the other hand, based on improvements in rigid OLED fab utilization in April, we will likely see sequential growth for rigid OLEDs in Q2’18, but it won’t likely be enough to offset the continued weakness in flexible OLEDs. However, they should come back in Q3’18 and Q4’18 for iPhone and other new product launches.
Figure 1: Panel Supplier Sequential Revenue Growth
Gross margins are compared in Figure 2. BOE maintained the highest margins of these companies for the 6th consecutive quarter at 21%. Tianma Micro., also a Chinese supplier, had the second highest gross margins at 16% with LG Display the lowest at 10%. LG Display experienced a 35% sequential decline in mobile revenues which significantly impacted the quarter and weighed on their blended ASPs, which fell 11% Q/Q. Mobile displays have higher ASPs per square meter, so a drop like we saw in Q1’18 impacts their blended ASPs. Area shipments were down 9% for LG with capacity down 5% as they took capacity down for maintenance and R&D. LG expects capacity to rebound by a similar percentage in Q2’18 and also indicated it expected ASPs to stabilize in Q2. TV panel prices are not going to stabilize in Q2 relative to Q1, but could stabilize in July relative to June if demand picks up to erase existing channel inventories in TVs which are currently at above market averages.
Figure 2: Panel Supplier Gross Margin Comparisons
Operating margins are compared in Figure 3. As indicated, operating margins ranged from -2% to LG Display to +9% for BOE. We believe China’s local and national government subsidies are reflected on BOE’s income statement in 3 ways – Other Income, Asset Allowance and R&D Allowance. While Other Income is not reflected in Operating Income, it is likely that R&D Allowance is included. In any case, BOE had the highest operating margins in Q1’18. Its significant scale, subsidized fabs and lower cost labor boosted its financial performance relative to its competition. BOE did indicate that their small/medium business was somewhat limited by a driver IC shortage. SDC’s OLED operating margins fell to 7% on the weakness in flexible OLEDs, its lowest OLED operating margin since Q2’15. With flexible OLED fab utilization down significantly, revenues fell and costs rose. Its OLED operating income was down 72% Q/Q to $342M. LCD operating income of just $38M was the lowest since Q2’16. As a result, OLED’s contribution to its operating income fell from a 96% share in Q4’17 to a 90% share in Q1’18. LGD experienced its first operating loss in over 5 years. It pointed to growing price competition from Chinese suppliers in large-area markets, weakness in mobile markets and continued losses in OLED TV panels due to their limited scale. It pledged to reduce its costs and reduce its capex target for 2018. LG intends to implement a flexible capex strategy to be more responsive to market demand and technical readiness, which translates to flexible OLED fab delays and uncertainty regarding its 10.5G plans which we believe involve OLEDs only with its current implementation of WOLEDs, at least for its first phase. LG wisely intends to remain conservative regarding flexible OLED capex due to the high capital intensity along with demand volatility as we have seen this year with Apple and Samsung. However, it acknowledges that growth in flexible OLED supply and demand is inevitable due to both the smartphone and automotive markets moving towards OLEDs as well as demand for foldable displays from its customers.
Looking at net margins as shown in Figure 4, we see the benefits of being a Chinese manufacturer. BOE’s net profit was above its operating profit as it enjoyed $77M in Other Income in Q1’18. It also recognized Asset Allowance and R&D Allowance of $115M. Another benefit is that it only recognizes Interest Expenses 2X per year, so it avoided around a $195M expense in Q1’18.
Speaking of debt, how large is BOE’s debt? Amazingly, it has grown to $16B as shown in Figure 5 with its debt/equity over 100% for the 3rd straight quarter at 118%. However, with significant government support, customers and suppliers do not seem concerned with BOE’s liquidity.
In terms of capex, based on the 6 suppliers reporting so far, capex is down 20% Q/Q for Q1’18 with BOE holding a slight edge over LG Display. The largest spender of 2017, Samsung, saw its capex fall 61% Q/Q and 80% Y/Y to $746M in Q1’18, the lowest value since Q1’15. Samsung’s capex has declined for 3 consecutive quarters and will likely continue to fall throughout 2018.
For more details on company specific performance and comparisons with all data in an easy to manipulate pivot table, please see our Quarterly Display Supply Chain Financial Health Report. Also, leading panel suppliers BOE, Tianma and Visionox will be presenting at the upcoming SID/DSCC Business Conference on May 21st in Los Angeles. To register, please visit http://www.displayweek.org/2018/Attendee/Registration.aspx.
Figure 3: Panel Supplier Operating Margin Comparisons
Figure 4: Panel Supplier Net Margin Comparisons
Figure 5: BOE’s Quarterly Debt, Debt Issued and Debt/Equity