Seoul: Recovery momentum will be key for quarterly earnings of leading LCD maker as the sector bounces back from one of its worst downturns, helped by robust demand for flat-screen TVs and shortages of key inputs.
The liquid crystal display (LCD) sector is restarting production lines and securing raw materials after sharp output cuts in late 2008 resulted in a shortage of panels this year.
Markets are pricing in a recovery for the sector, one of the few bright spots in the weak global technology industry, and many analysts have upgraded earnings forecasts and price targets.
South Korea’s Samsung Electronics and LG Display, the top two LCD makers, are set to return to profit in April-June from losses in the previous two quarters, when the global recession battered demand for electronics.
Taiwanese rivals AU Optronics and Chi Mei Optoelectronics are likely to report significantly smaller losses than prior quarters, analysts said.
“Demand to replace bulky CRT TV with LCD model is propelling the market. It’s comparable to the shift from black-and-white tube to colour TV,” said Park Sang-hyun, an analyst at HI Investment & Securities.
“There will be a slowdown in the fourth quarter in accordance with the usual seasonal pattern, but price declines are likely to be limited due to a glass shortage.”
Demand for LCD televisions has got a boost from resilient North American markets and China’s massive state subsidy, helping the sector rebound faster than expected.
Panel prices are set to rise further in the third quarter after increasing about 5% on average in the second quarter from the previous quarter, according to analysts estimates.
Thanks to booming sales at Samsung’s own TV division, its LCD business likely swung to an operating profit margin of about 5% in the second quarter from an operating loss of 8% in the first quarter, analysts said.
LG Display said last week its notebook PC panel sales rose 20% in June from a year ago, suggesting strong results. It also said it was not able to cope with surging demand for TV panels even with plants running at full capacity.
Risks of Increased Output
The rebound in LCD prices can be largely attributed to a shortage of glass substrates, as suppliers such as Corning Inc and Asahi Glass have been slow to raise output, keeping a lid on capacity growth especially in Taiwan.
But the outlook is not all bright for the latter part of the year due to rapid growth of output and a fragile global economy. Some analysts warned prices and sales may plummet in the fourth quarter when demand usually weakens.
“Since the business will slow down in the fourth quarter, companies want to squeeze as much profits as they can before the cycle turns weak,” said Jason Kang, an analyst at NH Investment & Securities.
Last month, research firm DisplaySearch raised its forecast for 2009 LCD TV sales, predicting a 21% increase in global LCD TV shipments to 127 million units.
Samsung shares have risen 43% so far this year and LG Display jumped 62% versus a 27% gain in the KOSPI. AU jumped 46% and Chi Mei surged 73% in a Taiwan market up 47%.
The cost of protecting debt of LCD makers from defaults has dropped. For example, five-year credit default swap spreads on LG Display tightened to 467 basis points at the end of last week from 593 points at the start of the year, according to data provider Markit.