LG Display Q2’11 Data Analysis

I have decided to begin analyzing market data for a few public companies including LG Display (NYSE: LPL). My focus will center around big trends. As you can see from the chart above, I have painstakingly simplified the chart to accentuate the trend that I want to analyze. All data is publicly available and will be based on local currencies to minimize the effects of currency exchange fluctuations. In the case of LPL financial data will be denominated by the Korean won (₩).

First let’s start with average selling price or ASP. LCD manufacturers, like LPL, are in the business of selling LCD area, not units. Units can be easily manipulated. For instance, a 3.5-inch LCD panel manufactured for Apple is one unit. And so is a 55-inch LCD TV panel for LG Electronics. Clearly, one unit isn’t the same as the other. Instead of unit shipments, a more accurate measurement of performance is area shipments. Unfortunately, not all LCD companies provide this metric, but LPL does. Area shipments will be measured in square meters (m2).

In the case of LPL, ASP will be calculated by revenue, in millions of won, divided by area shipments, in millions of square meters. The result is a metric that looks like this: ₩/m2. With that out of the way, let’s get into the nitty gritty.

Q3’06 is the furthest back available on LPL’s website. The ASP for LPL has been trending down since Q3’06. With some exceptions, the general trend has been downward. In Q2’11 LGD’s ASP recovered somewhat by 1.8% Q/Q but declined 18.9% Y/Y to ₩812K/m2.

This chart shows LPL’s shipment performance since Q3’06 measured in millions of m2. It looks like the inverse of the ASP chart where the area shipment trend is generally upward. In Q2’11 LPL shipments increased 10.7% Q/Q and 15.6% Y/Y to 7.45 million m2.

For quite some time there was a general understanding that you needed to get to the next generation fabrication plants faster than the competition to win. Next generation means being able to process larger LCD glass substrates. The logic is with larger glass substrates more of the same sized LCD panels can be cut leading to lower cost of manufacturing and more profits. Another reason for the mad race to larger fabs was sparked by the shift from CRT TVs to LCD TVs and then to larger LCD TVs.

Another very important factor is depreciation schedules: the faster you get to next generation fabs the earlier they are fully depreciated giving the company a considerable cost advantage. In between constructing larger LCD fabs, manufacturers add capacity to existing lines and improve yields.

LPL has been adding capacity, which is measured by glass substrate input in millions of square meters per month. In Q2’11 LPL’s capacity increased 4.1% Q/Q and 29.8% Y/Y to 11.2 million m2. From LPL’s Q2’11 presentation material it looks like capacity additions came mostly from Line 1 to 3 at P8, the company’s Gen 8 plant.

Gen 8 plants are normally optimized for large LCD TV panel production. Although overall LCD TV demand will grow Y/Y from 2010, TV brands have cut their forecasts for 2011. So it’s a head-scratcher as to why LPL continued to add capacity at its Gen 8 fab when demand expectations for LCD TV panels weren’t going to materialize.

Finally, let’s look at profits. Unlike other production metrics, balance sheet information available from LPL goes all the way back to Q1’03. As you can see there are huge swings from massive profits to extraordinary losses. One of the main reasons for such wide fluctuations is because of the Crystal Cycle, which can be described like this: shortage → price increase → profit increase → capacity increase → production increase → oversupply → price decrease → demand increase → and back to shortage. At the moment it seems the LCD market is in a state of oversupply with continued pressure toward lower ASPs.

LPL eked out a net income of ₩21.3 billion in Q2’11, quite an improvement from a net loss of ₩115.4 billion in the prior quarter. Third quarter will be tough for many LCD manufacturers including LPL with economies in the U.S. and the E.U. struggling and in China where economic growth is slowing down.