Panel Maker Comparison Shows Winners and Losers in Q2

Published September 16, 2019

With all the financial results of panel makers for Q2 2019 now available, we have compiled a comparison view as part of DSCC’s Quarterly Display Supply Chain Financial Health Report. The report allows a direct comparison of the companies in the industry on a common currency (US$) on the important metrics for business success. The comparison highlights the dominant position of Samsung in terms of industry profits, as well as some of the challenges faced by the industry. ​The first chart below shows the revenue totals of the twelve panel makers we track (it was 13 before CPT dropped off – I guess they were the unlucky one). The seasonal pattern weighted to the 2nd half is clear on the chart. Panel maker revenues eked out a 1% increase in revenues Q/Q, and a 4% increase Y/Y to $24.7 billion, on the strength of Samsung’s increase. Samsung’s revenue increased 20% Q/Q and 24% Y/Y, but it was boosted by a large payment from Apple for underperformance of iPhone panel orders. We estimate the payment at $771 million; if you remove that figure, then panel maker revenues were down 2% Q/Q and flat Y/Y.

Nine of the 13 panel makers (including CPT) had Y/Y revenue declines; the exceptions were Samsung and three of the Chinese panel makers - BOE, CSOT, and Visionox – all of whom have taken on substantial capacity increases in the last year. Samsung holds the top revenue share with 26%, and opened up the gap with 2nd place LGD at 19%, while BOE edged closer to 2nd place with 17%. The battle for 2nd place is likely to be close in the coming quarters as BOE records new revenues from its Gen 10.5 LCD plant and flexible OLED lines, while LGD starts getting revenues from its OLED TV expansion in Guangzhou.

Panel Maker Revenues, 2Q17 – 2Q19

Source: DSCC Quarterly Display Supply Chain Financial Health Report

Turning to operating profit, we can clearly see the winners and losers in the current display landscape. With many of the panel makers losing money, the industry in total recorded only a net of $272 million in operating profit in Q2. Without the large payment from Apple, Samsung would have lost money, and the industry total would have been a loss of almost $500 million. Including the Apple payment, Samsung’s operating profit represented 236% of industry profits in the quarter, while BOE’s profit of $221 million gave it 81% of industry profits. As we reported last week, government subsidies account for almost the entire amount of BOE’s profit.

Comparing Q2 results with Q1 was a mixed bag, with six companies improving their operating profits and the other six getting worse. The three Taiwanese panel makers all improved their results; although AUO and Innolux both continued to record losses in Q2, the losses narrowed from Q1. Hannstar managed to squeeze out a tiny ($4 million) profit.

Panel Maker Operating Profit, 2Q17 – 2Q19

Source: DSCC Quarterly Display Supply Chain Financial Health Report

On a margin basis, Samsung’s operating margin of 10% of sales beat out every company except Visionox, who recorded a fantastic 102% operating margin as a % of sales. Profit can only be higher than sales if the net costs are negative, and Visionox hit the jackpot with China government subsidies in Q2.

LGD has regained the industry lead in area shipments, but BOE keeps getting closer. In the first half of 2019, BOE shipped a total of 18 million square meters of panels, compared to 19.7 million for LGD. BOE increased 22% Y/Y in the first half while LGD declined 3%

While we frequently think of LCD panels as commodities, and panel makers can switch between different products, the area prices reported by the panel makers show dramatic differences. Among the large players who report area prices, LGD captures higher prices than its competitors, as shown in the chart, but here again BOE is closing the gap, getting a Y/Y increase while LGD declined. While LGD’s price in Q4 was nearly 2x as high as BOE (admittedly, a low point for BOE), in Q2 2019 the gap was only 7% as BOE has increased its sales of small/medium displays, especially OLEDs, which give a much higher area price. Still, Tianma far outpaces all others, not shown on the chart because it was so much higher at $2256, nearly 5x as high as 2nd place LGD. Tianma’s exclusive focus on smaller panels for smartphones and automotive displays allows them to command a dramatically higher average price than large-area panel makers.

Panel Maker ASP per Square Meter, 2Q17 to 2Q19

Source: DSCC Quarterly Display Supply Chain Financial Health Report

Product mix is a major driver of the differences in ASP. In particular, CSOT prices are especially low because their sales are primarily TV panels, which have the lowest area prices, and because CSOT sells LCD cells almost exclusively, rather than selling modules complete with the backlight unit. We did not get CSOT area shipment figures for Q2.

While shareholders are concerned with operating profits, the investors that hold panel maker debt may be more concerned with cash generation or EBITDA. Most of the companies in the industry continued to generate positive cash in the 2nd quarter, with CEC Panda and JDI being the exceptions. Total industry EBITDA (excluding Samsung, which does not publish detailed financials by business segment) dropped by 28% Y/Y to $1.4 billion, with big Y/Y declines at LGD (-38%), AUO (-36%) and Innolux (-49%)

EBITDA by Panel Makers, 2Q17 – 2Q19

Source: DSCC Quarterly Display Supply Chain Financial Health Report

While the industry as a whole does manage to generate some cash from its operations as shown by the EBITDA numbers, for every $1 in EBITDA, the industry spent nearly $3.50 in capex, driving free cash flow sharply negative for nearly all panel makers and for the industry as a whole, as shown in the next chart. Among the nine companies reporting this metric, only CEC Panda and Hannstar recorded tiny positive FCF of $7 million and $5 million, respectively, and the collective FCF of these nine panel makers was a negative $2.3 billion. Over the last 18 months, the industry has racked up a whopping $16.3 billion in negative free cash flow, with the largest contributions from BOE (-$6.3 billion) and LGD (-$6.0 billion)

The free cash flow chart excludes Samsung because Samsung does not break out depreciation & amortization by division, but we can say confidently that with $643 million in operating profits, plus what is likely to be about $1 billion in depreciation per quarter, and only $428 million in capital expenditures for the quarter, Samsung Display is generating positive free cash flow. Still, if we exclude the Apple payment, Samsung’s FCF would have been negative in the quarter.

Free Cash Flow for Panel Makers, 2Q17 to 2Q19

Source: DSCC Quarterly Display Supply Chain Financial Health Report

As these comparisons illustrate, this is a challenging time in the panel industry, but there are some bright spots. Companies with clever strategies, and/or with strong government support, can continue to be profitable. Hannstar’s strategy of focusing on niche applications has kept that company at the top of the charts in operating margin and free cash flow. Tianma’s approach of focusing on high value smartphone and automotive panels allows that company to sustain prices 3-6x that of its competitors and it continues to record profits. It’s a tough business, but clever companies are finding a way to succeed.

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Written by

Bob O'Brien