Size migration is the key driver behind
the strongest 4Q panel prices in a decade,
but the impact on LCD profit is far greater
 50”-plus panels generate 25-50% higher
revenue vs. smaller panels, leading to
multi-year margin expansion
 Depreciation expenses are also declining
fast; reiterate OW(V) on LGD, CMI and
AUO and raise target prices by 30-50%
Bigger size, bigger profit. Size migration is happening, and
opens the door to multi-year margin expansion. Revenue
generation is 25-50% higher when cutting larger panels
(50”-plus) vs. smaller panels. We expect significant margin
expansion opportunities ahead, as less than 20% of global
capacity is dedicated to large-sized panels now; however, we
expect the mix will approach 40% next year and result in 3-
6ppt GM expansion in 2013.
Decline in depreciation expense to kick into higher gear,
as the industry practices highly disciplined supply expansion.
We expect a boost of 3-4ppt in margin for Taiwanese players
in 2013, while LG Display (LGD) should start to reap
benefits in 2014 and beyond. We estimate that more than 60-
70% of LGD, Chimei Innolux (CMI) and AU Optronics
(AUO) capacity should be fully depreciated in 2014-15, up
from the current 40-50%. The trend of depreciation roll-off
will likely continue, even if each panel maker adds a sizable
Gen 8.5 fab in the coming three years.
Shares are still trading well below their mid-cycle multiples,
despite what we consider to be the best fundamentals in years.
We raise our 2013 earnings estimates by 30-60% to reflect
robust revenue and margin expansion, which, on average, could
rise 10ppt y-o-y in 2013. Our forecasts are the highest on the
Street. In our view, any weakness will be short-lived in 2013,
due to ongoing size migration, controlled inventory and highly
disciplined expansion. We reiterate our OW(V) ratings on LGD,
CMI and AUO on higher target prices. We increase our target
prices by 30-50%, partly due to higher BVPS, but mainly
driven by migration to mid-cycle multiples (from average of
mid- and trough multiples), which we believe are welldeserved,
given the future ROE profile.
Telecoms, Media & Technology
Asia – Equity
Asia LCD
Structural margin expansion overlooked
10 December 2012
Jerry Tsai*
Analyst