OLED Utilization Growth to Drive Earnings Improvement
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
In LG Display’s 1Q20 earnings call, some positive signals were confirmed. In 2Q20, increasing demand for IT panels should prevent earnings decline, and OLED utilization growth should drive earnings improvement through 2H20. We maintain a Buy rating on the firm.
Investment points evident in 1Q20 earnings call
We maintain a Buy rating and TP of W16,000 for LG Display (LGD). In 2Q20, increasing panel demand for IT (laptop + tablet + monitor) should prevent earnings decline, and in 2H20, the effect of new product releases by clients and normalization of operations at new 8G OLED facilities in China should drive earnings improvement.
In its earnings call, LGD said it expects TV panel shipments to decline in 2Q20 due to the cancellation of major sports events. As such, we predict that the IT panel portion of large-sized LCD and OLED panel shipments will increase from 68% in 1Q20 to 73% in 2Q20. We estimate LGD’s 2Q20 sales at W4.97tn (+5% q-q) and operating loss at W0.34tn (RR q-q).
LGD’s OLED sales strategy should remain relatively unchanged in 2H20, with shipments of small/mid-sized OLED panels likely concentrating in 2H20. Of note, the company also mentioned the addition of OLED TV customers such as Huawei in China and Vizio in the US. We expect the OLED business to enjoy earnings growth in 2H20, with sales rising to W5.26tn and OP climbing to W0.8bn (vs 1H20 sales of W2.43tn and an operating loss of W0.6tn).
1Q20 review: Records operating loss, as expected
LGD recorded 1Q20 sales of W4.72tn (-26% q-q) and an operating loss of W3.6bn (RR q-q). Affected by weak seasonality, the small and mid-sized OLED panel business likely endured sluggish facility utilization, with the utilization rate at the flagship E6 facility estimated at around 16% (vs 43% in 4Q19). And, weighed upon by delays in operation of its new 8G facilities in China, the large-sized OLED business likely saw no improvement in earnings. On the other hand, increased demand for IT panels likely resulted in improved profitability at the LCD business. We estimate the IT panel portion of large-sized LCD panel shipments in 1Q20 at close to 70%.