KOREATECH：UHDTVSTHENEWWAVEIN1126.ppt

,Telecoms,Media&TechnologyAsia TechnologyKorea TechUHD TVs the new wave in 2013Korea Tech investment summaryLGE LGD Soulbrain DuksanCode 066570 KS 034220 KS 036830 KS 077360 KSRating OW(V)OW(V)OW(V)UW(V)HSBC TP(KRW)110,000 38,500 60,000 15,000Price(KRW)77,300 35,800 48,500 19,250Market cap(KRWbn)12,650 12,810 786 566,abcGlobal Research Korean TV makers set to drive Ultra HighDefinition(UHD)TVs in 2013 Benefits of UHD TV:accelerates sizemigration and converges with mobiledevices Revitalises traditional LCD food chain;pushes back AMOLED TV introductionLooming price war in large size TVs:We believe there was aprice war among LCD TV makers for larger size(55”)TVs,2013e valuationsPE(x)PB(x)EPS growthROE,10.70.913.1%8.9%,8.01.1234.1%14.4%,7.81.724.9%24.1%,20.02.5-2.10%19.9%,during the Thanksgiving holiday season as Vizio cut the priceof its 60”model to below USD700(see Asia LCD:Supplyshortage coming,27 September).We expect Korean LCD TVmakers to follow suit;otherwise they risk losing market share in,Source:Bloomberg,HSBC estimatesPriced as of 22 November 2012.In this note we lower our target price on Duksan Hi-Metal to KRW15,000from KRW19,000.26 November 2012Brian Sohn*AnalystThe Hongkong and Shanghai BankingCorporation Limited,Seoul Securities Branch+822 3706 8765 Jerry Tsai*AnalystHSBC Securities(Taiwan)Corporation Limited+8862 6631 2863.twHongsik Jo*AssociateThe Hongkong and Shanghai BankingCorporation Limited,Seoul Securities Branch+822 3706 8774 View HSBC Global Research at:http:/*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation Limited,Seoul Securities BranchDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,the US.UHD TV the next wave in LCD TVs:We expect KoreanLCD TV makers to drive UHD TVs starting from CES 2013 asthey provide various benefits,including 1)a shorter viewingdistance such that 60”TVs better fit a normal room size,2)superior picture quality for a better viewing experience and 3)convergence with mobile devices such as smartphones andtablets given no deterioration of picture quality.ASP should improve for high-end TV makers:The benefitsof UHD TV should be enough to drive a replacement if theprice is right.We estimate UHD TV pricing could be set at a40%premium to current high-end LED TVs,which couldtrigger replacement demand in the high-end segment.As aresult,we estimate UHD TVs will take 2%and 6%share of theoverall LCD TV market in 2013 and 2014 respectively,anddrive ASP and margin improvement for high-end TV makerssuch as Samsung Electronics(an Asia Super Ten stock)andLGE.Reiterate OW(V)on LGE and LGD and remain cautiouson the Korea OLED food chain:We think increased demandfor UHD TVs will improve ASP and margins,howeverselectively for the high-end TV makers.In contrast,thelowering in priority of OLED TVs by Korean TV set makersmay slow capacity additions by OLED panel suppliers,whichcould pose a downside risk to the OLED food chain,includingDuksan Hi-Metal(UW V).,80.0%,40.0%,20.0%,0.0%,Telecoms,Media&TechnologyAsia Technology26 November 2012Investment summary UHD TV set to drive replacement demand in 2013 Benefit to Korean TV makers for early mover advantage,butOLED becomes less attractive We advise buying Samsung and LGE,but are cautious on theKorea OLED food chain,abc,Size migration to continue inLCD TV marketWe believe size migration in LCD TVs will be akey replacement driver in developed marketswhere the price of large size LCD TV(e.g.60”orlarger)becomes more attractive,especially duringthe Thanksgiving holiday season.Although thereis not much room to reduce costs on the LCDpanel side,the price competition initiated byVizio accelerates the decline in TV set prices byutilising excessive panel inventory in Japanesefabs.Margins of TV set makers will also declineaccordingly,thus 4-7%operating profit margin isno longer sustainable.,UHD TV to defend ASPTV set makers need another wave of areplacement cycle in order to prevent further ASPdeclines;otherwise bargaining power will shift topanel makers.We believe UHD TVs will bepushed in 2013 given that they provide severalbenefits to justify the premium over traditionalTV sets.In contrast to OLED TVs which wereregarded as the“killer application”during CES2012,UHD TVs do not require new technology inequipment and materials,which can beimplemented with the current existing technologyand facilities.%of UHD TV out of 50”LCD TV,The difficulty for TV set makers is that fallingprices of large size TVs may also affect the pricesof smaller sizes such as 50”or below givenconsumer expectations of a reasonable price gapamong different sizes of TVs.Unfortunately,there is not much capacity to manufacture small-mid size TVs as most production has been,100.0%60.0%,%of UHD out of 50 abov e,allocated to more profitable IT panels(e.g.,2013e,2014e,2015e,smartphones and tablets).Source:HSBC estimates2,Telecoms,Media&TechnologyAsia Technology26 November 2012Why UHD TV?The benefit of UHD TV is that it offers betterpicture quality.Its resolution is 4 times higherthan the current full HD TV.It is difficult toexplain the actual feeling of UHD TV,howeverwe think it is similar to the feeling that you hadwhen you first experienced“Retina Display”onthe iPhone 4.The picture is vivid and the color isnatural and crisp.However,more importantly for UHD TV is thatthe viewing distance can be shortened to 1.5 timesthe height of the TV panel,which is less than 2maway from the TV as it provides a higher numberof pixels so that images are not distorted.Theshorter viewing distance opens up an opportunityfor size migration given 60”or larger TVs canbetter fit in a normal sized house,which can drivefurther size migration.Also,UHD TV offers moresmart functions with quad view in the large screenand better 3D contents due to its high resolution.TV set makers to benefit fromUHD TVWe believe the introduction of UHD TV willbenefit high-end TV set makers.Although weexpect total UHD TV to account for only 2%ofthe LCD TV market in 2013,it could take up 30%of the large size TV market(e.g.,50”or larger).The exposure to large size TVs should be greatestfor brand TV makers which are mostly Koreanand Japanese.Also,we believe that the value ofset manufacturing will increase given UHD TVrequires an“up-scaler”chip,which converts fullHD contents to UHD contents.LG Electronics(066570 KS,OW(V),TP KRW110,000)We reiterate our Overweight(V)rating on LGElectronics stock given its solid TV margin on theback of introducing UHD TV which could helpgain further high-end TV market share from Japan.We forecast TVs to account for 45%of total,revenue and 47%of operating profit in 2013e.UHD TV could contribute 10%of total TV salesand 28%of total operating profit in 2013e.Soulbrain(036830 KS,OW(V),TPKRW60,000)We reiterate our OW(V)rating on Soulbrain,aswe think migration to larger-sized panels willincrease demand for LCD etchant.We expectetchant demand to increase 23%,as it isproportional to the size of the panel and we expectthe average TV size(in diagonal length)willreach 40”by year-end 2012 vs.consensusexpectation of 36”.LG Display(034220,OW(V),TPKRW38,500)We reiterate our OW(V)rating and KRW38,500target price on LG Display stock on the back oftightening supply due to size migration.Webelieve ASP/sqm will continue to rise due tobetter product mix(ramp of iPhone 5/iPad Mini),even after the 5%growth in 3Q.We expect 10%revenue growth in 4Q12,making this potentiallyone of the strongest 4Qs in the past three years.Our target price is based on 1.1x 2013e bookvalue.LGD currently trades at an 8.0 x 2013e PEand a 1.1x 2013e PB.Negative to OLED food chainWe believe UHD TV could take the lead in theLCD TV market over the next two years,whichwould drive better efficiency of traditional LCDfabs.However,it raises the risk to the OLED foodchain that there is less room to be attractive unlessit offers competitive prices or a differentiatingform factor(e.g.,flexible or transparent),but thisis unlikely within the next two years.Duksan Hi-Metal(077360 KS,UW(V),TP KRW15,000 from KRW19,000)We reiterate our UW(V)rating on Duksan Hi-Metal stock as OLED TV mass production,abc3,Telecoms,Media&TechnologyAsia Technology26 November 2012continues to face delays.We see downside risk toour 2013 forecasts due to stronger competitionfrom UHD TV and therefore we cut our 2013earnings estimate by 10%.As a result,we cut ourtarget price to KRW15,000 from KRW19,000,using a target 12-month forward PE multiple of15.7x,which is the stocks five-year averageforward PE.Duksan currently trades at 18.5x2013e PE and 2.3x 2013e PB.4,abc,Telecoms,Media&TechnologyAsia Technology,abc,26 November 2012Bigger size needs UHD TV UHD TV could be a killer application in the LCD TV market in 2013;set to boost replacement demand in high-end TV market UHD TV enables size migration as it shortens viewing distance andprovides more smart functions Likely to benefit margins on the back of its higher ASP,No“killer apps”in LCD TVsWe believe there have been limited replacementdrivers for the flat TV industry;however,therehave been endless efforts by TV set makers tolaunch“killer applications”in order to encouragereplacement demand.During 2007-09,LED TVwas a big hit that triggered replacement demandin conjunction with analogue digital conversion.LED TV was superior to CRT or PDP in terms ofits form factor in that it provided a slimmer designand better picture quality in addition to beingmore environmentally friendly.,LED TV has been very popular among flat panelTVs.Consumers who purchased LED TVsremained satisfied with their TVs although TV setmakers offered various additional functionsincluding 3D,internet connectivity and a fasterrefresh rate.As a result,its replacement in thedeveloped markets has slowed significantly.This is one of the reasons why panel producers areshifting their focus to mobile display where thegrowth rate is much faster than conventional TVdemand.Korean TV set makers tried to counterthe weakening LCD TV demand by offering,OLED TV in 2012,however,they facedTV market trend,300,(m units),Full HD introduction 3D TV introductionLED introduction,UD TV introduction,OLED TV introduction,240180120,Analog to digital(HD)conv ersionPDP TV introduction,LCD-HD,LED-LCD,3D-LED,UHD,600,CRT,PDP,LCD-FHD,2004,2005,2006,2007,2008,2009,2010,2011,2012,2013,2014,CRT,PDP,LCD-HD,LCD-FHD,LED-LCD,3D-LED,UHD,OLED,Source:DisplaySearch,HSBC estimates5,1Q09,2Q09,3Q09,4Q09,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,3Q12,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,3Q12,4Q12e,1Q13e,2Q13e,3Q13e,4Q13e,Telecoms,Media&TechnologyAsia Technology26 November 2012Global LCD supply-demand trend550500450400350300250,10%5%0%-5%-10%-15%-20%,abc,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,3Q12e,4Q12e,1Q13e,2Q13e,3Q13e,4Q13e,Panel supply(mn units,17 equ.)Source:HSBC estimates,Panel demand(mn units,17 equ.),Ov ersupply/(shortage)(RHS,%),technological difficulties especially in yield andstability,and the introduction or mass productionof OLED TV panel has been delayed.What about 2013?According to our display analyst in Taiwan,thereshould be size migration in LCD TVs by offeringbetter price or larger size.This started with Viziothat priced its 60”LED TV at USD799 for BlackFriday(23 November),which is 30-40%cheaperthan the original price point so very attractive forcurrent 42”or 47”users.We believe this kind ofaggressive pricing strategy is possible by utilisingsupply left in Japan where it tries to cover thefixed cost.Unfortunately for TV set makers(andfortunately for customers),LCD TV is a typicalLGD:Quarterly trend of sales breakdown by application,deflationary industry where the price has neverbeen increased despite tight supply.We believe 60”or larger sized TVs will be one ofthe main replacement drivers for LCD TVs duringthe upcoming holiday season in developedmarkets.The difficulty for TV set makers is thatnot only do they need to lower the price of largersized LCD TVs,but they also have to lower theprice for smaller sized TVs in order to staycompetitive as consumers expect a price gapamong different sized TVs.Set margin squeezedConsequently,we believe margins for TV setmakers will decline given the tight LCD panelAverage TV size to reach 40”in 2H13e,100%,TV,Monitor,NBPC,Mobile&Tablet,4240,(Diagonal-inch),Display Search,HSBCe,6,80%60%40%20%0%Source:Company data,HSBC,3836343230Source:DisplaySearch,HSBC estimates,1Q08,2Q08,3Q08,4Q08,1Q09,2Q09,3Q09,4Q09,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,3Q12,Telecoms,Media&TechnologyAsia Technology26 November 2012situation and aggressive price pressure in LCDTV sets.As 20%of existing fabs have beenconverted to mobile display panels amid flattishgrowth in overall LCD panel production over thelast two years,supply of conventional LCD TVpanels has tightened.In addition to rationalisationof supply among LCD panel makers,the increasein the demand of larger size panel causes tightersupply.We believe supply and demand could bebalanced in 2013,and be positive for the overallLCD panel industry.Panel to set price ratio declining to2.5x from 3xIt is important for set makers to maintain a ratio ofpanel prices to set price of about 3x in order tosustain mid-single digit operating profit margin.However,since 2Q12,the ratio has started todecline given stabilising panel prices and decliningset prices.Set makers have tried to add additionalfunctions and different designs to expand the panelto set price ratio,such as narrow bezel display andsmart function.This has not been enough to offsetoverall price pressure,and as a result,TV setmargins for Korean makers have declined from 5-7%in 1H12 to 3-5%in 2H12.Defending ASP with UHD TVThus,it becomes critical for the TV set makers tofind a“killer application”to defend ASP pressure.During 2012,OLED TV had been the hope forLCD TV ASP trend,TV set makers,however,it was not successful dueto technological difficulties.We believe that thenext technological innovation in TV sets could beUHD given it provides a better viewingexperience without any technological barrier.Benefits of UHD TV“Retina Display”in TVsIt is a common phenomenon that picture qualitydeteriorates as panel size increases.From 42”to55”,the minimum full HD(1,9201,080)resolution is required in order to maintain picturequality similar to what the contents offer.Forsizes 60”or larger,FHD resolution is unlikely tobe enough given viewers can be distracted byrecognizing cell structures in the panel.For UHD,its resolution is 4 times higher than FHD,providing 3,8402,160,which offers super vividpicture quality.The difference in picture quality ishighlighted in 60”or larger sized TVs given cellstructure cannot be recognized.Simply put,UHDadopts the“Retina Display”of the iPhone intoTVs,thus the picture qua