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China Display Sector 27 February 2017 Asia Pacific/Hong Kong Equity Research Electronic Components & Connectors China Display Sector Research Analysts INITIATION Kyna Wong 852 2101 6950 [email protected] Ambitions to lead displays Keon Han 82 2 3707 3740 [email protected] Figure 1: Share gain from China display makers with aggressive Jerry Su capacity expansion 886 2 2715 6361 30 (M sq. m) 35% [email protected] 30% Sam Li 25 25% 852 2101 6775 20 [email protected] 20% 15 15% 10 10% 5 5% 0 0% 2012 2013 2014 2015 2016E 2017E 2018E WW capacity China capacity % China share Source: Company data, Credit Suisse estimates ■ We initiate coverage on the China Display sector. We expect China display sector to outgrow global peers in 2017/18 (China: 17%/9% vs global 14%/3%), given growing demand from Chinese brands, the government policy on localisation and mid-term supply ease. China's display industry is underway to improve its profitability and sustainability with better utilisation and mix. ■ Mid-term supply ease extends into 2H17. We estimate global display panel demand-supply (in terms of display area) would remain healthy (5% vs 3%) in 2017, thanks to limited new capacity and size upgrade. We see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp and size migration from China players. ■ China ambitions in display sector. (1) China display makers continue to expand capacity for scale capabilities. We expect China capacity to grow at a 25% CAGR over 2016-18E and account for 33% of worldwide capacity in terms of display area by 2018. (2) China is also aggressively moving to OLED, surpassing Japan and Taiwan, due to abundant capital resources, government policies and ambition in technology leadership. ■ Stock calls. We initiate coverage on BOE with a NEUTRAL rating as we see mid-term upcycle already priced-in, but limited downside due to improving earnings and OLED theme. Our TP of Rmb3.28 is based on mid- to-up-cycle P/B of 1.4x and 2018 BPS. We maintain NEUTRAL on Truly, given that its delaying OLED ramp-up remains a near-term overhang. Our target price of HK$3.3 is based on 10.3x P/E and 2018E EPS. Among regional peers, we prefer AUO and Innolux on cyclical upcycle and Samsung on its OLED leadership. Key risks: slowing demand, pricing pressure, oversupply, policy change, OLED replacement, FX risks. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 27 February 2017 Focus charts and tables Figure 2: Global display demand (area) to grow Figure 3: Overall, supply/demand will become 5%/3% in 2017/18 balanced/tight in 2H16-2017 250 (M sq. m) 15.0% 35% 200 30% 10.0% 25% 150 20% 100 15% 5.0% 10% 50 5% - 0.0% 0% 2014 2015 2016E 2017E 2018E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Mobile Phone Tablet NB Monitor Area demand growth Area capacity growth TV Others %YoY Source: Credit Suisse estimates Source: Credit Suisse estimates Figure 4: Global OLED capacity growth accelerating Figure 5: China is expanding display capacity… 14,000 (K m2) 30 (M sq. m) 35% 12,000 25 30% 10,000 25% 20 8,000 20% 15 6,000 15% 10 4,000 10% 5 5% 2,000 0 0% - 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Samsung LG Display Taiwan China Japan WW capacity China capacity % China share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Revenue share gain from China players Figure 7: BOE closing capex gap from global leader 100% 4500 (US$M) 4000 80% 3500 3000 60% 2500 40% 2000 1500 20% 1000 500 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 0 2011 2012 2013 2014 2015 2016E 2017E 2018E AUO Innolux JDI SEC LGD BOE Tianma CSOT AUO Innolux JDI LGD BOE Tianma Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 8: China peers backed by government subsidy Figure 9: P/B vs ROE 2017 350.0 (US$M) 2.0 Tianma 1.8 300.0 1.6 BOE 250.0 1.4 Truly SEC 200.0 1.2 150.0 1.0 P/B 0.8 LGD 100.0 AUO 0.6 JDI 50.0 0.4 Innolux 0.0 0.2 2011 2012 2013 2014 2015 2016E 2017E 2018E 0.0 -10% -5% 0% 5% 10% 15% BOE Tianma ROE Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates China Display Sector 2 27 February 2017 Ambitions to lead displays We initiate coverage on the China Display sector, and on BOE Technology with a NEUTRAL rating; we also have a NEUTRAL rating on Truly. We expect the China display sector (BOE, Tianma, CSOT) to outgrow global peers in 2017/18 (China: 17%/9% vs global 14%/3%), given growing demand from China brands, government policy on localisation and mid-term supply ease. China's display industry is underway to improve its profitability and sustainability with better utilisation and mix. Mid-term supply ease extends into 2H17 We estimate global display panel demand-supply (in terms of display area) would remain healthy (5% vs 3%) in 2017, thanks to limited new capacity and size upgrade. We believe supply in 2017 will see a slow growth, as several large-sized new fabs from China will not ramp up until 2H17. In 2018, we believe several new LTPS fabs and large TFT LCD fabs will roll out, and we see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp-up and size migration from China players. China display panel production capacity has been aggressively expanding in the past few years backed by Chinese government subsidies and expanding domestic supply chain. We expect China capacity to post a 25% CAGR over 2016-18E, and account for 33% of worldwide capacity in terms of display area by 2018. China is also aggressively moving to OLED, surpassing Japan and Taiwan, due to: (1) capital resources from the government and the stock market, (2) policy support and (3) Chinese players' aim to surpass global peers in a particular area. Several panel makers have announced that they will accelerate their OLED capacity build-up plans, including BOE, Tianma and Truly. However, we believe domestic OLED supply chain is still small, which may not be competitive in the next three years. Quality improvement in progress Display panel manufacturing is a capex-intensive sector, we believe only a company with scale and technology could be dominant in leadership and sustainability. China's display panel players still lag behind global players in terms of scale and profitability. Their earnings are largely backed by government subsidy, which is always a concern for overseas investors. Yet, China's display players are progressing to improve their quality. BOE is likely to post a 24% CAGR in revenue over 2016-18E, driven by capacity expansion, spec upgrade and mid-term ASP stabilising. We expect BOE to post a 20% CAGR in net income over 2016-18E due to higher utilisation and better mix. BOE is also building up its technological capabilities such as IP applications, AMOLED investment and product diversification. More a cyclical valuation We initiate coverage on BOE with a NEUTRAL rating, as we see mid-term upcycle already priced-in, but limited downside due to improving earnings and the OLED theme. Our target price of Rmb3.28 is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. We maintain NEUTRAL on Truly, as its delaying OLED ramp remains a near-term overhang. Our TP of HK$3.3 is based on 10.3x P/E and 2018E EPS. Among regional peers, we prefer AUO and Innolux on cyclical upcycle, and Samsung on its OLED leadership. Key risks: better-/slower-than-expected display demand, rising competition and pricing pressure, oversupply, government policy change, OLED replacement and FX risks. China Display Sector 3 27 February 2017 Mid-term supply ease extends into 2H17 Despite slowing global smartphones' and consumer electronics' demand, CS display technology team estimates global display panel demand would grow 5%/3% in 2017/18 in terms of display area, thanks to screen size and technology upgrade. Chinese brands 250 (M sq. m) accounted for about 15.0%60%/40% of global smartphone/TV shipment, which remains an 200 attractive market for display panel makers. In terms of supply, we believe 2017 will continue to see slow growth10.0% , given several multiple large-sized fabs will not ramp up until 150 2H17. Net-net, we believe panel makers will continue to enjoy a healthy market in 2017, 100 given the ease in supply.5.0% In 2018, we believe several new LTPS fabs and large TFT LCD 50 fabs would roll out, and we see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp-up and size migration in China players. - 0.0% 2014 2015 2016E 2017E 2018E FigureMobile 10 :Phone Global displayTablet demandNB (volume) toMonitor grow Figure 11: Global display demand (area) to grow 1%/1%TV in 2017/18 Others %YoY 5%/3% in 2017/18 4,000 (mn) 6% 4% 3,000 2% 2,000 0% 1,000 -2% - -4% 2014 2015 2016E 2017E 2018E Mobile Phone Tablet NB Monitor TV Others %YoY Source: Credit Suisse estimates Source: Credit Suisse estimates ■ Small-to-medium-size displays: We estimate China market smartphone shipments' growth would decelerate to 4% in 2017 from 11% in 2016 (by MIIT) (link).
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