Shares of LG Display (LPL) are down 47 cents, or 3.5%, at $13.12 after Macquarie Equities Research’s Daniel Kim cut his rating on the ordinary shares traded in Seoul to Neutral from Outperform, and cut his estimates, to reflect the risk of production cuts in Apple‘s (AAPL) iPhone, which surfaced yesterday following articles over the weekend in The Wall Street Journal and Japan’s Nikkei News Service that said orders for displays for the device had been reduced by as much as half by Apple.
Kim is inclined to give credence to the idea that Apple has sharply cut panel orders for the iPhone from LG this quarter, leaving the company with less room to make up for the fixed costs of its plants:
Profit margin on iPhone 5 in-cell touch screen should be disappointing in 1H13. We expect iPhone 5 panel orders to fall 40% QoQ in 1Q13 at LGD. This should be mostly driven by Apple�s broad-based order cut, not LGD�s relative vendor share loss within Apple. This poses a serious issue for LGD, since its newly built LTPS fab (AP2 in Paju) should suffer from circa 60% utilization rate. This growing fixed cost burden should lead the small size application segment to fall into losses compared to a double digit positive operating margin up until 4Q12. Order pick-up in 2Q12 should be minimal, since Samsung is scheduled to introduce its Galaxy S IV (GS4) in April with improved spec and user experience.
But Kim also goes further, opining that the iPhone and the regular-size iPad may lose ground to Samsung Electronics‘s (005930KS) more competitive “phablets,” the combination phone-tablet devices, such as the “Galaxy Note” series:
Our channel checks indicate that the 9.7� iPad model will not be refreshed in 2013. This raises a fundamental question: is tablet PC taking after notebook PC amidst threat from �phablet�? That is, innovation pace slows and the replacement cycle becomes longer from 1-2 year to 4-5 years. The iPad Mini business helps little to LGD due to its low price points and razor-thin margins [�] The most worrying scenario is that iPad innovation cycle comes to an end. Moreover, the potential addressable market for iPad has been eroded by the proliferation of �phablet�, over 5� size screen smartphone such as Galaxy Note II. Without any new compelling reason to upgrade or refresh, the iPad is poised to take after the notebook, resulting in a much longer replacement cycle (from 1-2 years to 4-5 years). Then, LGD should feel much more pricing pressure [�] We are afraid that Apple has lost its ground in the smartphone arms race against Samsung Electronics. This is especially after we saw the impressive next-generation Galaxy phones form factor of Samsung Electronics, at 2013 CES. We understand that Samsung is close to the mass production of plastic unbreakable substrate screen. In addition, larger size screen is critical to LTE smartphone, since the main purpose of a smartphone is migrating from communication (calling and SMS) to video consumption and web surfing. Then, iPhone�s 4� screen is likely to remain a drag versus popular phablet like Galaxy Note II. The worst case scenario would be that Apple exerts pricing pressure on LCD screen, when iPhone unit growth plateaus and LGD had sizeable idle capacity from order cuts.
Kim maintains his estimate for last year’s revenue at roughly ?29.07 trillion, while slightly trimming his EPS estimate to ?1,016 from ?1,018. For 2013, he is modeling ?30.78 trillion and ?2,115 per share, down from a prior ?33.34 trillion and ?4,412 per share.
LG Display’s ordinary shares (034220KS) today fell 3.5% in Seoul trading, to ?27,900.
Today’s worries over Apple and the iPhone and Samsung, of course, follow a raft of presentations on competing display technologies at last week’s Consumer Electronics Show in Las Vegas, where LG Electronics (066570KS) talked about the work LPL is doing for various kinds of touch screens, only to be followed hours later by a presentation from Sharp Electronics (6753JP), who some believe could displace LPL for some display supplies.
LG is among several suppliers to Apple feeling the heat today, including�Cirrus Logic�(CRUS),�Qualcomm�(QCOM), and�Skyworks Solutions (SWKS), as I mentioned earlier.
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