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Wednesday, July 12, 2006

Philips on LCDs

By William Trent, CFA of Stock Market Beat

LG Philips LCD Co., Ltd hosted its second quarter conference call (full transcript available at SeekingAlpha) and had some interesting things to say about the state of the LCD panel market. As that is an issue near and dear to our hearts, we are happy to provide this summary.

First, the obligatory “we think the market is great” comment:

We believe that the growth characteristics of the TFT LCD industry are still undiminished and intact. We are seeing positive signs that reinforce this belief.

Well, sure. Demand is very strong for flat panel TVs (if not as strong as was hoped.) If only the producers hadn’t made so darn many of them…

Against the backdrop of positive long-term growth prospects, the industry is experiencing several challenges:

Greater than expected industry-wide price declines — which on one hand help drive demand, but on the other hand can temporarily impact us negatively in terms of profitability;
Ongoing capital expenditures, although CapEx intensity is diminishing;
The start of consolidation of manufacturers, which in the longer term can be positive, but in the shorter term creates future competition among top tier players; and,
The need to meet the increasing variety of customer demands with greater flexibility.
And the excess capacity is causing prices to fall faster than demand grows:

The average selling price per square meter of net display area shipped for the second quarter decreased at a greater than expected rate of 18% to $1,598. Quarter-end to quarter-end price per square meter decreased 19% $1,479. The total display area shipped for the second quarter of 2006 was 1.5 million square meters, an increase of 17% quarter-on-quarter.

But they note that some of the manufacturers are doing what needs to be done.

The industry shows indications of increased rationality in terms of temporization of production.

Given the current market conditions, we have decided to postpone incremental investment in existing fabs and we continue to evaluate any further investment in a next generation fab. As a result, we have revised our capital expenditure guidance for 2006 downward from KRW4.2 trillion to KRW3 trillion.

We have decided to continue evaluating any further investment in a next generation fab. We have also decided to invest in the multipurpose Gen 5.5 fab which will be housed in our P8 facility to better meet the expected strong demand for both high-end monitors and wide format notebooks.

We are reinforcing our strong collaborative relationships with our customer base to ensure appropriate production levels and a high quality standard for our products. This and other actions, such as better alignment with our customers’ needs, are ongoing tasks to which we remain committed.

The impact of some of our initiatives is immediate. We expect that these actions will strengthen the long-term value for our shareholders and enable us to leverage the industry’s strong growth opportunities. These efforts would allow us to better compete in what is now a more crowded space in the top tier of the industry.

As a result of these actions they believe prices will stabilize in the third quarter (which may be aggressive if holiday sales demand is slower than expected).

Looking ahead, we expect to see prices begin to stabilize and anticipate sustained growth in consumer demand for LCD TV’s in the second half of 2006, particularly in the fourth quarter.

For the third quarter of 2006, we expect our area shipments to increase quarter on quarter by a mid to high 20% range, driven by continued growth in the expanding LCD TV segment, continued ramp up at our P7 facility and the stabilization of pricing.

We expect our average selling price per square meter of net display area shipped at the end of the third quarter of 2006 to be relatively flat, as compared to the end of the second quarter of 2006, largely due to increased seasonal demand leading into the holiday season.

We expect the average ASP per square meter in the third quarter to decrease by a mid single-digit percentage.

It is also looking like their capacity expansion in 2007 will be more in line with end demand. If others follow the same discipline pricing should be much more stable next year.

Well, it is a little bit early to guide for ’07. For ’06, I will say that the figure is about 55% to 60% growth of the capacity.

So all in all, it looks like industry leaders are starting to get the message and cut production back (at least relative to plans.) That, in turn, suggests that things could improve in a quarter or two.

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