Weakening outlook for LCD glass ::Macquarie Research,

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Weakening outlook for LCD glass
Event
 DisplaySearch said TFT LCD glass input (by panel makers) will fall 14% q/q in
the September quarter to 12.2m sq. meters per month after peaking in the
June quarter at a record 14.2m sq. meters per month. It sees input flat a
t~12m sq. meters per month in the December quarter.
 Corning (GLW, $14.36, Not rated) cut its September quarter glass shipment
targets, saying it expects volumes at its wholly-owned business to be flat q/q
(vs. up mid- to high-single digits q/q previously) and it expects volumes at it
Samsung-Corning Precision (“SCP”) joint venture to be down 30% q/q (vs.
down mid-single digits q/q previously). It also cut its cover glass target.
Impact
 Corning’s SCP joint venture is facing weakness at key customers Samsung
(~64% of SCP’s volume) and LG Display (~32% of volume). Nippon Electric
Glass (5214 JP, ¥747, Underperform, ¥660 target price) also has high
exposure to LG Display (>40% of NEG’s volume) and will be hurt as LG
Display brings down utilization to 65% in order to reduce record high inventory
levels. We recently cut our assumption for NEG’s September quarter glass
volume to -1% q/q (guidance was for up mid-single digits), but we see
downside risk. We model OP margin of 21.9%, down 7.4 percentage points
q/q and below consensus, which is too conservative.
 Corning’s wholly-owned glass business is running below expectations but is
faring better than SCP. As it relates to Asahi Glass (AGC) (5201 JP, ¥715,
Outperform, ¥925 target price), where we model September quarter glass
volume up 1.5% q/q, we see less risk vs. NEG for three reasons: (i) its
customer mix has a profile similar to Corning’s wholly-owned business, (ii) it
had relatively conservative guidance to begin with (volumes flattish q/q); and
(iii) limited June quarter growth meant that the September quarter started from
a reasonable base (ie, not having to digest excess prior shipments).
 Based on current data we believe 2011 global glass volume will be up 0-5%
y/y (Corning’s last issued guidance, in July, was for market volumes up 6%)
and that glass revenue will decline (given annual price declines of 10-15%).
With flat TVs now >90% of TV unit mix, flat TVs are likely to converge to longterm
TV growth of ~3%. The risk is that glass-makers face a future of revenue
and profit declines.
Outlook
 At current valuations (below book), the glass stocks look to have priced in
near-term weakness at panel makers and set makers. Our problem with
getting positive too early is we do not see the typical historical cyclical uptick:
glass volumes are likely to be flattish sequentially in the December quarter,
then in the March quarter face weak seasonality. Instead we see a structural
downshift tied to TV growth dropping to a sub 5% annual rate. We see further
headwinds (at the margin) from LG Chem ramping glass production over the
next six months.