MacqTech Express Corning C3Q results implications::Macquarie Research,

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MacqTech Express
Corning C3Q results implications
Event
 Corning (GLW, $13.72, Not rated) on 26 October before the US market open
announced September quarter results and December quarter guidance.
Notably, the company (i) said it expects December quarter pricing pressure to
be significant (it will lower pricing to a greater degree than in the past), (ii) said
it will gain market share in Korea and (iii) cut its forecast (again) for 2011
global LCD glass volumes (it now expects just 2% y/y growth for the market).
Impact
 Results. Sales in Corning’s Display Technologies segment were up 7% q/q
and 26% y/y. These top line figures reflect results at Corning’s wholly-owned
glass business (volume up mid-single digits q/q), which has exposure to
Taiwan (AU Optronics, Chi Mei) and Japan (Sharp). There were benefits from
share gains and from Sharp’s strong utilization ramp back to normalized
levels after running at ~40% in the June quarter. Results at the joint venture,
SCP, were weaker, with volume down >20% q/q as SCP lost share to NEG.
Overall glass volumes (wholly-owned plus JV) fell 10% q/q, in line with the
market. Corning said September quarter pricing was in line with expectations.
 Guidance. For the December quarter, Corning said its wholly-owned
business would see volume flat to down q/q (utilization higher in Taiwan,
lower in Japan) and that its SCP JV would see volume up >20% (higher panel
maker utilization plus market share gains). It said pricing pressure would be
more significant (due to excess supply) and that it would lower pricing to a
greater degree than in the past. It also lowered its forecast for 2011 global
LCD glass volume to 3.2bn sq. meters, just 2% y/y growth after initially
projecting 3.7bn sq. meters (17% growth). Finally Corning said inventory in
the supply chain fell to 14 weeks at the end of C3Q from 17 weeks at the end
of C2Q, a significant contraction, and now at the lowest level since early 2009.
 Glass implications. Corning’s commentary about glass pricing is clearly
negative for NEG and Asahi Glass. We expect NEG to suffer more as it loses
share in Korea. For Asahi, we see a little more stability on volumes. Pricing
and margin risk exists for both, though. Corning said in the past price
weakness has been temporary (suggesting this will repeat), but we worry that
there will not be a meaningful demand uptick, so this time is different:
oversupply will persist and pricing/margin dynamics will remain poor. Last
year TV sales benefited from elasticity-driven demand but we think at this
point lower TV pricing has limited power to drive stronger sales.
 Silver lining? Corning estimates supply chain inventory will exit 2011 at 14
weeks (low relative to 15-20 week norm) and that TV demand growth will be
healthy in 2012. This would imply improvement in fundamentals for glass and
panel makers – positive, given low expectation levels. The bull case for glass
in particular is that with glass volume under-growing end-demand in 2011 (2%
vs. 13% by Corning’s estimates), as inventories stabilize or grow, glass
volume will show much stronger growth in 2012. The three risks, though, are
(i) a mature market (5% growth vs. >30% in the past) could probably operate
with lower inventory levels, (ii) even if volumes do pick up, with prices falling
>10% on an annual basis, it may be unlikely that glass revenue grows, and
(iii) glass supply already exceeds demand during what should be a seasonally
strong period; as demand drops off and as supply increases from the shift to
thin glass, margin structures could get worse before they get better.