TV Brand Profits Signal an Upswing in LCD

In my recent blog posts, I’ve given several signs that the TV market is pulling the LCD industry out of its slump (see “Can 4K Drive Replacement Cycle Growth in TV?” and comments in “Corning’s 2nd Quarter Earnings…”).  Recently we’ve seen yet another strong sign: strong profits from the major TV brands.

With several LCD makers (LGD, AUO, Innolux) quarterly financial statements give a complete picture of the health of the LCD panel-making industry, because these companies are LCD “pure plays”.  At the brand level, though, none of the leading global brands is reliant mainly on TV, but in each case the results of the TV business are reported in divisional results.  Samsung reports sales and operating profit for Consumer Electronics, and reports sales only (not OP) for Visual Display, which is mainly TV and comprises ~60% of CE revenue.  Similarly, LG reports sales and operating income of Home Entertainment, and Sony reports revenue and OI of Home Entertainment & Sound.  The businesses including TV account for 21%, 30%, and 15% of the revenues of Samsung, LG, and Sony, respectively.

Because we don’t get full financial results for the TV business, it can be difficult to evaluate the health of the business.  TV is a relatively low-margin business, as judged by return on sales, but it is also a low-asset business.  A TV assembly factory requires an investment of the order of $100 million (for a vertically integrated player like Samsung; some TV makers like Sony outsource most of their TV production), compared to the $ billions required for the latest LCD fabs (with OLED even more expensive).  Consequently, the biggest part of assets for the TV business is working capital, and asset turnover (sales / net assets) of 6x, 8x or even 10x is achievable.  Thus a 5% operating margin represents 30% or higher return on assets, a very attractive return.

With the combination of healthy end-market demand and low panel prices, the three top brands achieved record-setting operating margins in Q2 2016.  This chart shows the margins for these businesses since 2013:

Because of changes in division structure, longer-term comparisons are awkward: for example, prior to 2013 Sony included TV in a Consumer Products & Services division, which also included its substantial (at that time) PC business.  However, the product division including TV at Sony last achieved margins like this in 2007, in the initial surge of LCD TV.  For Samsung and LG, these operating margins are unprecedented in the flat-panel TV era.

So what are the implications of this strong profitability for the wider display industry?  First, it eases the pressure on cost reduction and opens the door to panel price increases.  When considering how much room panel prices can increase, consider that the Q2 profits of TV makers are based largely on Q1 panel prices, when the industry hit bottom.  Although panel prices have increased 5-20% from their low points, they are still less than 1/3 the corresponding TV prices, so I think they’ve got room to increase further.  Second, expect a spillover effect on IT panel prices, as panel makers shift capacity to TV.  Third, expect an acceleration of expansion plans from the Chinese to take advantage of higher prices. 

Finally, expect increasing competitive pressure in the TV space to push down TV prices, especially for sets with higher-end features.  The TV business has historically been one with relatively low barriers to entry, and the global leaders will face competition from established Chinese brands like TCL, Hisense, Haier, and Skyworth.  Further, we may see a new global player emerging with LeEco’s recent acquisition of Vizio.  The combined entity has a strong position in the two largest and most competitive markets, and a track record in both companies of innovative business models and aggressive prices of high-featured TV sets.