TFT-LCD – Korean fabs in China are officially approved:: Macquarie

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TFT-LCD – Korean fabs in China are officially approved

Event
 Samsung (005930 KS, OP) and LG Display (034220 KS, OP) confirmed their
receipt of official approval to build LCD fabs from China. This is positive but
not totally unexpected, in our view, as media had reported the likelihood since
early Nov (see our 5 Nov note, LCD investments got greenlight from China?).


Impact
 Korea panel makers get China approval. LGD (8.5G) and Samsung (7.5G)
both confirmed the approval to build LCD fab in China. We see this as positive
for access to the fast-growing China TV market; it also avoids any potential
tariff issues. Timing for mass production is likely to be at end-2012 or 1H13
from our checks, so there should be no impact on 2011 supply (even 2012
impact would most likely be limited).
 Taiwan waiting for local government. While Taiwan panel makers could
see short-term sentiment hurt (Korea gains approval but Taiwan still waiting),
our checks show that AUO (2409 TT, OP) has received assurances from the
Chinese government over its proposed 7.5G fab in Kunshan, China.
Accordingly, it is now just awaiting approval from the Taiwan government
before proceeding, which we believe could come shortly. Thus, AUO’s
position in China remains on track but Taiwan’s slower-moving government
approval is the bottleneck.
 US Black Friday early signs are ok. While single-day BF retail sales were
only +0.3% YoY (ShopperTrack), total four-day sales were +6.4% YoY (NRF).
Our industry checks show for LCD TV, Samsung’s sell-through was okay –
not too bad but not massively better than its expectations. Samsung’s strategy
will be to step up and increase LED promotions in December and into the
New Year to drive the sell-through, in our view. By contrast, our industry
checks also indicate Vizio’s sell-through was quite strong, while preliminary
results from LGE on TV sales (value terms) were also well ahead of its plan.
 Retail cycle becoming elongated. With the advent of more promotions and
retailer competition and strategy, the retail cycle is moving from a BF-specific
focus to a more elongated and stretched out overall holiday cycle, in our view.
According to checks, October NPD TV data (excluding discount channel) was -
9% YoY, but adding back WMT/Costco/Sam’s Club, it was +13% YoY. For TVs,
we see the initial wave of promotion in BF/Thanksgiving more concentrated on
CCFL TV, but expect a second wave in mid-December to focus on LED TVs.

Outlook
 The sharp ASP declines witnessed in key components (ie, DRAMs/LCDs) in
2H10 are a key enabler for the current attractive retail price points, in our
view. Coupled with TV brands’ vested interest to protect/gain share and the
retailer channels’ own competition (WMT vs AMZN vs BBY), continued
promotions should drive unit volumes/demand elasticity and help deplete
inventory in the holiday peak season. With a decent sell-through, we see a
bottoming out and recovery in highly cyclical sectors such as TFT-LCD in
1H11. We are positive on LGD and Samsung and we like AUO as well. In the
supply chain, our top picks are Radiant, Novatek (Jimmy Hsu), JPN glass and
Chipbond (Michael Liu).