LCD – May 1st sell-through is fine ::Macquarie Research

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LCD – May 1st sell-through is fine
Event
 We provide an update on China’s 5/1 labour day LCD TV sell-through.
Despite conflicting data points, our checks indicate holiday sell-through was
generally good, with double-digit YoY growth. More importantly for panel
makers, inventory levels exiting the holiday period for both TV brands and
retail channels were clean/healthy, leading to re-stocking demand in 2Q from
China TV brands, which is supportive of panel price hikes. Overall, we retain a
positive view on AUO/LGD on the recovery of panel makers from the bombedout
base in 1Q and pickup in TV into 2H11 amid low expectations. We also
like Radiant, Coretronic, Asahi Glass, NEG and Chipbond in supply chain.
Impact
 Good May 1 sell-through. Per our checks with panel makers (AUO, CMI, LGD,
Samsung) and TV brands (TCL, Skyworth), China 5/1 TV sell-through was
generally good with around double-digit YoY growth, and both TV brands and
retail channels exited 5/1 with healthy inventory levels. Some market confusion
has arisen as AVC data shows -4.7% YoY for the three-day period, creating
negative sentiment. However, we believe this is misleading as: 1) AVC 5/1 data
captures mostly urban and does not include rural demand, which is a major
portion of China TV sales currently, 2) week prior to 5/1 (week 17) was +38%
YoY, week after 5/1 (week 19) was +45% YoY, and 3) AVC data is inconsistent
with feedback from both LCD panel makers and China TV brands.
 Positive read-through from TV brands. Both Skyworth and TCL see AVC
data as incomplete as it does not reflect rural demand during 5/1, which is a
large portion of the China TV market. Skyworth’s April sell-in units grew +20%
YoY, and it noted rural demand as the key driver. During the holidays, mgmt
noted some shortage in certain models (large size, 3DTV), and thus sees post-
5/1 inventory as clean. TCL expects at least double digit (+10-20% YoY) growth
during the 5/1 period with low inventory exiting the holidays, and thus will look to
re-stock panels in May/June with some TV panel price hike (consistent with
panel side). Strong April 2011 units from TCL over the next few days and
continued momentum in May/June should support and confirm this view.
 Recovering order flow and panel pricing. The consistent message from all
our checks is that overall 5/1 sell-through was good, and exiting 5/1 holidays,
inventory levels (which impact panel makers the most right now) at both the
TV set side (3-4 weeks) and retail channel (2-3 weeks) are at slightly below
normal levels. Panel makers are thus seeing consistent order flow from China
TV brands post 5/1 (and also why we think the AVC numbers are low); this is
also supportive of TV panel price hikes, which our checks indicate is already
being accepted in May. Both of these are positive for LCD panel makers.
Outlook
 We see limited downside and retain OP on AUO and LGD regionally, and like
Radiant, Coretronic, Asahi Glass, NEG and Chipbond in supply chain. We see
sequential improvement in 2Q from a bombed-out 1Q base in terms of units and
pricing for panel makers as inventory levels are healthy, with China being
supportive. TV cost structure should start to re-set in 2Q as TV brands can (for
the first time in almost one year) finally start to incorporate lower panel prices
into their cost structure, helping to improve margins (already seen in 1Q) while
also lowering the retail price premium. Our forward view into 2H11 would be for
elasticity to kick in against a backdrop of low expectations for end demand.