The LCD Flat Panel Rises Again

Strong earnings news from LG. Philips, the world's second largest LCD panel maker, could herald a broader, sector-wide, surge in pricing power

by Moon Ihlwan

In recent years, consumers have grown accustomed to price declines for high-end liquid crystal display panels used for everything from high-resolution computer monitors to sleek, flat-panel TVs. It was a great ride while it lasted. Now, for the time being at least, it is the manufacturers of thin-film transistor (TFT) liquid crystal displays that are going to have the upper hand when it comes to pricing and profits.

On July 10 LG.Philips LCD (LPL) announced its first profit in five quarters, and this may signal a wider flat-screen industry upturn. LG.Philips, which is controlled jointly by South Korea's LG Electronics and Dutch electronics group Philips, swung to a net profit of $247 million in the April-June period from a $183 million loss in the previous quarter and a $349 million shortfall a year earlier. Sales were $3.64 billion, up 23% from the previous quarter and up 45% from a year earlier.

"Our second-quarter performance was better than expected, which underscored a faster than anticipated turnaround," says LG.Philips Chief Executive Officer Kwon Young Soo. A company statement said it expects a brisk revenue increase with average selling price increase in the low single digits (see BusinessWeek.com, 4/11/07, "LG.Philips LCD's Loss is Really a Gain").

Optimism in the Industry

The upbeat earnings report by the world's second largest LCD panel maker suggests that some semblance of pricing power is returning to this sector which has suffered mightily in recent quarters. "You'll probably see decent margins and sales growth in the industry over the next 18 months when demand will outpace supply, although there'll be a brief seasonal slowdown after the yearend shopping spree," says Cho Yeong Duk, vice-president in charge of LCD business strategy at Samsung Electronics (SSNGY), the industry leader. Other major competitors include Taiwan's AU Optronics (AUO) and Chi Mei Optoelectronics (CMOPF).

Why the optimism in an industry hitherto plagued by a supply glut? First, LG.Philips and Taiwanese makers have been holding back on investment in production facilities in the past year after racing to ramp up production in the previous two. As a result, the industry's supply growth rate is set to fall from 75% in 2006 to 46% in 2007 and 33% in 2008, while demand is projected to rise 54% in 2007 and 38% in 2008, according to research by Merrill Lynch (MLV).

On the other hand, large LCD TVs have become affordable, encouraging consumers to snap them up. Market researcher DisplaySearch expects sales of 32-in. or bigger LCD TVs to jump to 54.9 million sets this year from 31.2 million last year. "Growth momentum for TV sales will accelerate in years to come," predicts Cho at Samsung.

Computers Going Wide

Another key driver of growth for both sales and profits is the burgeoning popularity of wider screens for both desktop and notebook PCs. Debbie Tsao, LCD specialist at Taipei market researcher WitsView, notes the introduction of Microsoft's (MSFT) Windows Vista operating system has prompted consumers to seek wider screens to better enjoy multimedia entertainment functions.

This has a knock-on effect of further tightening supply. To capitalize on booming demand for wide screens, panel makers have switched their production lines to computer monitors from large-sized TV screens. "2007 marks a big transition in the overall TFT-LCD product structure," says Tsao.

It adds up to price gains in the traditionally slow second quarter. Prices began turning up in April for monitor and notebook screens and in May for TV panels. The price of a 17-in.