Panel Maker Q4 Earnings Show Diverging Results
LG Display is usually the first flat panel maker to release earnings each quarter, and in many ways they have been a bellweather for the industry. They always give guidance on the upcoming quarter, and historically their guidance has not always been accurate. For Q4, though, LGD’s guidance given at the end of October was spot on, and included a phrase that captured the industry dynamic in Q4, and perhaps for some time to come.
In October, LGD said that they expected that panel ASPs will diverge by company, product, and size as company specific pricing and profitability affects the price (emphasis added). As we look at the results of the first three panel makers reporting Q4 results this week, that’s exactly what we’ve seen.The first chart of this article shows the operating profit margins of the top five flat panel display makers from 2013 through 2018. It’s easy to see the crystal cycle in this chart, as panel maker profitability rises and falls with average selling prices, which are driven by the cycles from oversupply to shortage.
Panel Maker Quarterly Operating Margins, 2013-2018
There are several important points to note about this chart:
- Panel maker margins are highly correlated. The correlation between each individual panel maker and the group average is between 72% (for BOE) and 95% (for Innolux).
- Up to 2016, LGD had consistently above-average margins, but in 2H’17 and 1H’18 LGD ran much lower margins than the group, because of substantial losses on OLEDs.
- Since 2015, Samsung has had consistently higher margins than the group, driven by their higher profitability on OLEDs.
- In Q4, divergence appeared between AUO and the Korean panel makers. AUO margins dropped substantially, while LGD and Samsung margins increased.
To the extent that flat panel products are commoditized, we should expect high correlation between the players – that’s what we would see if we looked at earnings for oil companies, or steel companies. The divergence stems from OLED, as the leaders in OLED (Samsung and LGD) are profitable while the laggards in OLED (AUO) face losses.
Divergence was most easily seen in the average price reported by LGD and AUO (see the next charts). The ASP difference, of course, flows directly to profits and accounts for the diverging results. The ASP difference, in turn, was driven by product mix. LGD’s share of revenue from the higher-ASP mobile panels increased from 21% to 28%, while AUO’s share of revenue from <10” panels was stable at 17%. This allowed LGD to record a revenue increase of 13% Q/Q, while AUO revenue declined 5% Q/Q.
ASPs per Square Meter for LGD (left) and AUO (right), 4Q16 to 4Q18
With respect to the upcoming quarter and year, both AUO and LGD have a cautious or negative outlook, as shown in the following table:
Some additional notes from the earnings calls:
- AUO’s value enhancement approach pushes to some niche market segments: gaming monitors, auto displays, public information displays
- AUO noted that very large size TV is selling well. >75” TV sales in 2019 expected to increase 40+% Y/Y, and AUO expects to grow faster than the market driven by 8K products
- AUO did not announce any new developments in OLED and said they are capacity limited. While they pursue MiniLED, this is a very small share of their business.
- AUO does not expect any big supply/demand impact from Samsung G8.5 closure to convert to QD OLED.
- LGD will have 8K OLED, but also premium form factors in OLED such as Wallpaper TV and Rollable TV.
- LGD WOLED capacity is 70k/month now, to increase to 130k/month in Q3’19 with China expansion, and will add another 30k/month in 2020