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LG Display 2Q16 report ?3

13:44 27-Jul-16

Apologies for how long it has taken to get this write-up out.  Management's switch to a bilingual call format makes it take 3 times longer to find anything out, which is why I saved this analysis for last.

Overall, this quarter was pretty much business along the trends that I've already outlined, but the market is finally taking notice of them.  Management is too, in that it confirmed investment in a new Gen 6 flexible AMOLED line (called E6), which will have capacity of 15K/mo and start mass production starting in 2H 2018.  This is a point where LGD had previously acknowledged that it is late to the game.  That means a lot of CapEx, 50% of which is expected to be AMOLED-related.  Analysts were challenging on management claims operations alone could even mostly cover the build out, and also voiced concerns about QDTVs.  Management responses on both points were unconvincing.  Though current assets have trended upward, LGD has already issued bonds and increased its debt by even greater levels.

To that end, macro and competitive factors may have a big impact over the next year or two.  On the financial side, currency had a big impact on profitability, and an interesting note was that a 10 won increase against the $ makes for a monthly impact of about 8b won, or about 10% of the quarter's loss.  So, if we ever do get an FOMC rate hike, look for that to help results.

On the competitive side, there were more claims of progress toward AMOLED TV profitability with revenue increasing to 10% of the mix by the end of this year.  Conviction on agreements with third party manufacturers was also professed, with financial results probably coming next year.  However, management declined to give any quantification dodged any questions regarding actual timing or volumes.  The one competitive advantage that did ring true for me is that LGD pointed out that it already has lots of experience in converting fabs, but there is a lot of new technology coming into play as well.

Thus my take here is that the easy gains are already in front of us.  Transitioning manufacturing is harder than most investors realize.  LPL can easily go higher over time, but CapEx and macro factors will need to be monitored carefully for the next two years or so.

LG Display has announced financial results for its second quarter:

• an earnings loss of 10 cents per ADR, misses by 4 cents
  
• on revenue of $5.15b, which misses by $250M
  

These calculation used a currency rate of 0.00088 USD to each Korean Won to relate the results to the ADRs.  Note that the company still had an operating profit (its 17th straight), and this doesn't substantially change my outlook.  I'll write up any further notes after finishing the Covanta conference call, and listening to LGD's.

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