This article is an excerpt from the May 1st issue of The Display Supply Chain Monitor.
As revealed in our Quarterly Display Supply Chain Financial Health Report, which includes a pivot table of all the key results released by publicly traded companies in the display supply chain along with 5-20 slides per company consisting of charts and analysis, a significant number of companies released their Q1’17 earnings results last week. Two companies, BOE and TCL/CSOT, released both Q4’16 and Q1’17 results last week. As a result, it has been a busy past few days for DSCC digesting all this info.
Q1’17 revenues were 3% ahead of consensus and earnings were 45% ahead of consensus Pre-tax profit, net profit and EBITDA margins were all the highest in at least 4 years. AUO management said on the call that this upward business cycle for the display industry may be the longest in the history of the display industry resulting in elevated margins through the year. We made similar comments in a February 13th blog in response to sharp downgrades by Bernstein and JP Morgan, indicating results would grind higher.
AUO guided to 95% utilization, and reported greater than that. They also guided to large-area shipments down mid to single digits and they were down 4%, but average size increased. They guided to low single digit increases in ASPs and they wre up 2.5%. They guided to flat small/medium shipments and they were up 2%. Their component costs were down 1.8%.
For Q2’17, AUO guided for utilization to remain high, similar to Q1 which was over 95%. They guided large-area panel shipments to be down low to mid single digits on capacity limitations and demand for larger sizes. They indicated small/medium panel shipments would remain flattish. Bullish BoAML indicated Q2’17 revenues would be up 1% Q/Q.
For 2017, expect supply/demand growth to be tight all year. Expecting 5% demand and 3% supply growth on an area basis. Their CapEx expected to be up 24% Y/Y to $1.77B. Supply very tight for bezel-less and 65”/75”. For LTPS, although pricing pressure is significant in smartphones, they are allocating LTPS capacity to 13.3” NBs as well. They expect in-cell to rise from 20% - 30% to 40%-50% of their smartphone panel shipments.
On OLED wearables, traditional watch volumes down past 2 years, Swiss watch exports down. 11 types of smartwatches recently introduced at BaselWorld Watch conference. AUO was designed into 9 of those smartwatches. New smartwatch has a narrower bezel. Expects smartwatch shipments to ramp to 1M units per quarter in 2H’17.
BOE’s revenues reached a new record high of $3.4B in Q4’16 and fell 6% Q/Q in Q1’17 to $3.2B, which was up 69% Y/Y. Gross profits fell slower than revenues on higher prices, allowing gross margins to rise to a new high of 29%. Operating income reached a new high of $429M, up 36% Q/Q and over $632M higher than Q1’16. Operating margins also reached a new high of 14%. Net profits of $350M in Q1’17 were also a new high, up 37% Q/Q and over 2000% Y/Y with net margins at 11%.
In addition to displays, BOE also has a monitor and TV OEM business as well as an Intelligent System and Health Services division and has been continuously making investments. Display devices (includes OEM business) was 88% of 1H’16 revenues and 89% of CY 2016 revenues. However, just looking at the panel business, panel revenues 78% of Q4’16 revenues at $2.64B and 71% of Q1’17 revenues at $2.25B. Based on DSCC surveys, BOE’s #1 application on a revenue basis is mobile phones with a 34% share in Q4’16 and a 35% share in Q1’17. TVs were flat at 28% with ASPs rising 2% to $81.3. BOE’s TV panel shipments are around 75% at 32”. On an area basis, TVs dominate with a 54% share in Q1’17, down from 56% in Q4’16. Monitors and tablets gained share in Q1’17 with TVs weaker in Q1.
BOE’s Capex was over $2B per quarter in both Q4’16 and Q1’17. Free cash flow was -$1.7B in Q4’16 and -$1.1B in Q1’17 due to the high capex. The net change in cash was also down over $1B in each of these quarters. It had to issue debt to cover the Capex, amounting to $2.4B in Q4’16 and $1.04B in Q1’17. Fortunately, BOE Technology has a large cash position, over $7B, and a large market cap, over $20B. However, its debt continues to rise causing it debt to equity position to reach a new high of 89%. However, due to its cash position, its net debt/equity ratio is just 26%. BOE Technology also benefits from local co-investors to share the burden of these investments. BOE has often bought these companies out as the business becomes profitable. It has also received around $100M per year in asset and R&D subsidies from the central government and receives even larger subsidies from local governments.
Canon’s revenues rose 24% Y/Y in Q1’17 to $8.6B, its fastest annual growth in years. While its office business rose just 2% and its camera business rose 5%, its Industry/Other business rose 129%. This business consists of its lithography, evaporation, network camera and newly acquired Toshiba Medical Systems businesses and a host of other smaller industrial businesses as well. Operating margins also jumped for this division from 2% to 6%. It sold 20 litho tools in Q1’17, up from 12 in Q4’16 which we believed generated around $310M in revenues. For evaporation, we believe they sold over $400M worth in Q1’17 resulting in total display equipment revenues of $725M and the #1 spot in display equipment. For 2017, they are expecting to sell 86 litho tools v. 37 in 2016.
China Star (CSOT)
China Star is a subsidiary of TCL and only limited information is made available to the public.
China Star’s revenues rose 11% in Q4’16 to $1.03B, its first quarter over $1B. In Q1’17, revenues were down 8% Q/Q while rising 44% Y/Y to $950M. It reported EBITDA results for the first time in Q1’17 which were $376 million producing EBITDA margins of 40%. The company expects its 2017 net profits to rise 50% over 2016.
In Q4’16, its T2 8.5.5G factory reached full production and it began small volume shipments from its new LTPS fab in Wuhan, T3.
Note, it has spun Wuhan off into a separate company that is now publicly listed in Hong Kong. In Q1’17, Wuhan did $118M in revenues, up 30% Q/Q. Wuhan T3 is expected to reach full production by the end of 2017.
CSOT also indicated its 10.5G project started in November and T6 is expected to begin mass production of 43”, 65”, 70” and 75” panels in Q2’19. Its flexible OLED fab, T4, has been launched and will begin production in 2020.
Jusung Engineering announced its preliminary Q1’17 results last week. Revenues were $65.7M, up 46% Y/Y while falling 6% Q/Q and 6% ahead of consensus. Operating income was $10.9M resulting in 17% operating margins, the highest in at least 4 years. Pre-tax profits were $12.8M, resulting in pre-tax margins of 19%, also the highest in years and likely a record. Revenues were led by displays at $35.8M or 54.5% of revenues. According to Dongbu Securities analyst Hul Kwon, Jusung should win LGD’s E6 encapsulation business in Q2’17. For Q2’17, Jusung’s revenues are expected to be $69.7M, up 6% Q/Q and 17% Y/Y. Operating income is expected to be $11.8M, up 8% Q/Q and 50% Y/Y.
LG Display’s revenues fell 10% Q/Q while rising 23% Y/Y to $6.1B. Its revenues were 12% ahead of consensus. Gross margins rose from 20% to 24%, the highest in at least 4 years. With their ASPs declining Q/Q, it appears that the shift in gross margin was largely a result of a mix shift, with lower margin mobile phone shipments down on seasonal weakness and higher margin TV panels up. Operating margins reached 15% with operating income a record high of $891M. EBITDA did rise 8% Q/Q and 113% Y/Y with EBITDA margins rising from 20% to 25%. Growth was certainly impressive Y/Y, but without the non-operating gains EPS was down 17% to $1.65. Net income was $589M, 36% above consensus.
LG guided to ~5% decline in panel shipments on an area basis, and they were down 6.5%. However, producible capacity was down 6.1%, higher than expected, due to allocating capacity to R&D, converting 8.5G and 6G LCD lines to OLEDs, etc. Utilization of that capacity was flat at 82%. They also guided to an increase in blended ASPs. However, blended ASPs were down 5% on smartphone panels under pricing pressure and lower than expected smartphone volumes which carry higher ASPs on an area basis. It is also more difficult for LG Display to raise prices on its LCD and OLED TV panels to its largest customer LGE.
We believe LG sold 12.5M TV panels in Q1’17, making it the #1 TV panel supplier. In terms of revenues by applications, TVs rose 5% and mobile fell 5%, with monitors gaining 1% vs. notebooks/tablets. The shift in mix between TVs and mobile explains the changes in ASPs/area.
LGD generated over $1B in cash flow from operations for the second consecutive quarter. Its cash position fell by $364M.
In terms of guidance for Q2’17, it expects Q1’17 shipments on an area basis to be similar to Q1’17 with TV panel shipments flat to down on trends towards larger panels. Prices are expected to remain stable.
For all of 2017, we believe they are targeting 52M TV panels. They indicated their 60”+ panel volumes will grow 30%. They are targeting more than 10M flexible OLED panels in 2017. CapEx is expected to rise more than expected, they have not yet published their 2017 CapEx data. However, ~70% will go to OLEDs. They expect OLED TV panels to show positive EBITDA in 2017 and positive EBIT in 2019. OLED TV panel production is expected to be 300K/qtr. in 1H’17 and 500K qtr. In 2H’17. OLED TV input capacity is expected to reach 60K substrates/month in 2017. Flexible OLED production at E5 is expected by the end of Q2’17. Flexible OLED production at E6 is expected to start in 2H’18. LG also announced it will start production of OLED lighting panels on an old 5th gen line at 15K substrates/month in 2H’18. LGD’s ADR stock fell 8% on the day earnings were released. Unfortunately, the day earnings were released, a story came out that indicated LGD’s flexible OLED quality was poor and would not be designed into Apple until 2019. In addition, CLSA downgraded the stock after earnings from market perform to underperform.
Revenues fell 1% Q/Q while rising 26% Y/Y to $6.3B. OLEDs drove the quarter with OLED revenues up 12% Q/Q and 32% Y/Y. LCDs were down 17% Q/Q while rising 17% Y/Y. OLEDs were 61% of revenues. Operating income fell with revenues, down 2% Q/Q, and up $1.35B vs. Q1’16. Operating margins were maintained at 18%, vs. -4% in Q1’16. OLEDs accounted for 65% of operating margins.
DSCC believes SDC sold 80M rigid OLEDs and 17M flexible OLEDs for smartphones in Q1’17. Despite seasonal weakness in the smartphone market, OLED revenues continue to grow on strong demand as brands look to sell more OLED-based smartphones which command higher ASPs and generate higher margins. OLEDs appear to be the only display category growing in Q1’17 in smartphones. Samsung’s OLEDs have achieved double-digit Y/Y revenue growth for at least the last 5 quarters and are expanding into more markets. We also showed SDC’s Q1’17 shipments for smart watches, touch bars, VR glasses, tablets, notebooks and digital cameras.
We also believe Samsung sold 8.8M LCD TV panels. LCD revenues were strong Y/Y as Samsung’s yield issues are in the past and prices are significantly higher for large-screen TVs which are also in high demand, although Q1’17 was seasonally weak compounded by a sluggish Q1 Chinese market.
Samsung’s OLED operating profits were up 1% Q/Q and 86% Y/Y in Q1’17 on higher revenues and Samsung’s dominant position in this market. On the other hand, LCD operating profits were down 8% Q/Q in Q1’16 on lower revenues. OLEDs accounted for a 65%/35% share advantage of Samsung’s operating income. OLED operating margins did decline from 21% to 19% on some seasonal weakness while capacity expanded, leading to lower utilization. LCD operating margins are approaching OLEDs at 19% vs. 16% as large-screen, high end TV panel prices continue to rise. In the figure below, we see that OLEDs have accounted for greater than a 50% share of Samsung's operating margins since Q3'15. In Q4'15 - Q2'16, LCDs suffered operating income losses while OLED operating income remained in the black.
Samsung's Display's Revenues and OLED Share
Samsung’s Q2’17 CapEx rose 7% Q/Q and 143% Y/Y to $3.6B. Samsung is outspending the competition in OLEDs, at least in 2017, widening its capacity advantage. Samsung has not yet announced its 2017 target, but is on pace for $14-$15B.
In Q2’17, we believe SDC will produce 15-16M flexible OLED smartphone displays for Apple, but may not be able to ship them due to fingerprint technology issues. Non-Apple shipments are expected to be 80M (15M flex/65M rigid) in Q2’17, down from 97M in Q1’17 due to reductions in orders from Chinese brands Oppo and Vivo where the market has slowed. SDC guided to intense competition in mid-range and lower price categories with LTPS LCD in oversupply. In LCDs, we expect LCD TV panel volumes to rise to 9.2M units in Q2’17 as demand improves. Strong focus on most profitable categories - large-size, UHD and curved.
For all of 2017, for LCDs Samsung will continue to focus on UHD, large sizes, bezel free, etc. DSCC expects Samsung to ship TV 37.8M LCD TV panels in 2017, down 20% from 2016 on the closure of L7-1. In the case of OLEDs, SDC will continue to focus on flexible OLEDs and expanding OLEDs into new applications. For smartphones, rigid target is 350M, flexible target is 160M. Shipment targets for other applications are revealed in this report. With utilization down in Q2’17, there maybe some opportunity to increase other applications more.