Transcript Bumpy Road Ahead For Taiwan's TFT

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Bumpy Road Ahead For Taiwan's
TFT-LCD Manufacturers
By Raymond Hsu
Sep. 2005
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Methodology twAAA
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• Industry Analysis
– Identify opportunities and risks in the industry
– Identify key success factors
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Market position/market share
Low cost position
Diverse product and application mix
Technology leadership
• Business Profile Comparison
• Financial Profile Comparison
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Profitability
Cash flow protection measures
Liquidity
Capital Structure & Financial flexibility
• Conclusion
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TFT-LCD Industry Overview
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• Growing Market Size
– Volume growth was more than enough to offset fast price erosion, resulting
in fast growth in market size, despite high cyclicality
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TFT-LCD IndustrytwAAA
Overview
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• High Growth Potential
– Penetration in 2004 : Monitors, 52%; TVs, 5%; Notebook PC,
27%
– Desktop PC for notebook PC substitution trend continues
– LCD monitors continue to rapidly replace CRTs
– TVs will be the major growth driver due to large-area panel size
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TFT-LCD IndustrytwAAA
Overview
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• Market Structure
– Taiwan exceeds Korea in terms of capacity in 2005
– Taiwan's infrastructure improving
– Japan gradually retreats from standardized large-area TFTLCD panel production
– China is not a threat in the medium term
TFT-LCD Capacity Breakdown By Region
Unit: %
2000
2001
Taiwan
17.1
29.5
Korea
32.6
35.3
Japan
50.3
35.1
China
0.0
0.0
Total
100
100
* Taiwan Ratings estimates
2002
35.4
34.2
30.4
0.0
100
2003
34.2
39.9
26.0
0.0
100
2004
38.8
40.1
21.1
0.0
100
2005*
40.3
39.6
17.2
2.8
100
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TFT-LCD Industry twAAA
Overview
• Major Risk Sources
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– Unpredictable market demand
– Capital intensity and long lead time for fabrication plant construction
– Limited product differentiation
• High Industry Risk: high cyclicality, intense price competition
– Standard & Poor's views the TFT LCD industry as relatively risky
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TFT-LCD Industry twAAA
Overview
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• Aggressive Pricing
– TV panel prices are currently under the most pressure
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TFT-LCD IndustrytwAAA
Overview
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• Volatile Profitability
– High volatility in EBITDA margin reflects the cyclical nature
– Average EBITDA margin ranged between 3.7% and 38.6%
since 2002
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TFT-LCD Industry Overview
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• Key Success Factors
• · Market position, which is primarily measured by market share,
determines scale benefits and the level of buyer and supplier
bargaining power
• · Low cost position, which is achieved through economies of scale,
advanced production facilities, and vertical integration. A low cost
position is a critical competitive advantage given the increasing
standardization of TFT-LCD products
• · Diverse product and application mix, which helps reduce
business volatility
• · Technology leadership, which is important for entering rapidly
evolving markets, but is dependent on the company's ability to
support ever increasing capital requirements
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Business Profile Comparison
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• Conclusion
Company
AU Optronics Corp.
Credit
rating
Not rated
Business Strengths and weaknesses
Profile
1
- Good position in small/medium size panels
- Better scale economies and technology
- Diverse product and application mix
2
- Good position in LCD TV market
- High degree of vertical integration
Chi Mei Optoelectronics Corp.
Not rated
Chunghwa Picture Tubes, Ltd.
Not rated
3
Quanta Display Inc.
Not rated
4
HannStar Display Corp.
Not rated
5
- Weak market position
- High application concentration on monitors
- 3G & 4.5G production technology
- Weak market position
- High concentration on notebook PCs
- Relatively small business scale
- Small business scale
- High concentration on monitors
- slow in ramping 5G technology
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Business Profile Comparison
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• Market Position
– Samsung and LG remain the industry leaders
– Taiwan panel makers continue to gain market shares
– Taiwan's large-area TFT LCD makers are benefiting from improving
infrastructure
TFT-LCD Global Capacity Breakdown By Manufacturer
Unit: %
AU Optronics Corp.
2001
2002
2003
2004
2005*
12.8
11.9
11.8
13.3
13.1
Chi Mei Optoelectronics Corp.
5.2
8.7
8.3
9.3
9.9
Chunghwa Picture Tubes, Ltd.
5.0
6.8
7.1
6.6
6.6
Quanta Display Inc.
5.8
5.3
4.0
4.3
5.7
HannStar Display Corp.
0.7
2.6
3.0
5.3
4.3
LG.Philips LCD Co. Ltd.
13.7
14.8
18.3
16.6
18.6
Samsung Electronics Co. Ltd.
16.0
15.6
18.9
21.7
21.2
* Taiwan Ratings estimates
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Business Profile Comparison
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• Market Position
– Revenue trend reflects the widening gap
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Business Profile Comparison
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• Low Cost Position & Technology Leadership
– Scale economies are important due to a higher percentage of
material costs for new production technology
– AUO has better scale economies and the first mover advantage
in new technology
– CMO has better integration into in-house component
production, but slower in ramping advanced facilities,
including its 5G and 5.5G fabs
– CPT operates 3G and 4.5G fabs, resulting in less favorable cost
structure
– QDI currently operates one 3.5G fab and one 5G fab and will
commission its first 6G fab in 1H06
– HannStar was the slowest to ramp 5G technology. Its cost
position could deteriorate without a clear 6G plan
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Business Profile Comparison
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• Low Cost Position & Technology Leadership
– Korean players still have advantage in production technology, but
AUO and CMO are catching up
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Business Profile Comparison
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• Product and application mix
– All are single product companies, representing high product
concentration risk
– AUO has a better product and application mix because of its
good position in the small- to mid-size TFT-LCD sector
– CMO occupies good position in the LCD TV segment: 20%
global market share and 38% of its revenue in 1H05
– CPT, QDI, and HannStar all continue to focus on notebook
PCs and PC monitors
– CPT’s legacy CRT business and PDP investment are not
considered as meaningful product diversification
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Business Profile Comparison
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• Product and application mix
– AUO has a good position in the small-size panel segment
– AUO can better use its 3.5G capacity, which is not cost effective
for large-area panel production
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Financial Profile Comparison
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• Conclusion
Company
AU Optronics Corp.
Credit
Financial Strengths and weaknesses
rating
profile
- Relatively strong and stable profitability
Not rated
1
Chi Mei Optoelectronics
Corp.
Not rated
2
Quanta Display Inc.
Not rated
3
- Better cash flow to support large expenditures
- Good access to loan and equity m arkets as a result of
leading m arket position
- More cyclical profitability because of relatively
concentrated product m ix
- Lim ited financial support from its m ajor shareholder
- Good access to banking and capital m arkets
- Volatile profitability as a result of product
concentration
- Low er profitability because of a sm aller scale
- Potential support from its m ajor shareholder
Chunghwa Picture Tubes,
Ltd.
Not rated
4
HannStar Display Corp.
Not rated
5
- Laggard technology results in low er profitability
- Insufficient internal cash flow to support expansion
- Weaker access to loan and equity m arkets
- Low and volatile profitability because of w eak m arket
position and laggard technology
- cash flow generation not enough to support capital
expenditures on advanced technology
- Access to capital m arkets becom e m ore lim ited
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Financial Profile Comparison
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• Profitability
– AUO and CMO enhanced their leading profitability positions
relative to CPT, QDI and HannStar, reflecting their stronger
business profiles
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Financial Profile Comparison
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• Profitability
– The gap between industry leaders and laggards expanded
during the recent business cycle
– Margin gap widens during down cycles as a result of differences
in production technology and product mix
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Financial Profile Comparison
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• Profitability
– Volatility in profitability will continue
– The industry generated low returns on capital during the
recent business cycle
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Financial Profile Comparison
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• Cash Flow Protection Measures
– Volatile cash flow protection measures due to volatile
profitability
– Average FFO to total debt was 47.2% in 2004
– The ratio will fall below 20% in 2005
– Widening gap between leaders and laggards
– AUO has the best cash flow protection measures
– Constant negative free operating cash flow because of high
expenditure needs
– Total expenditure topped NT$230 bn in 2004. Further increase
to NT$250 billion is expected in 2005
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Financial Profile Comparison
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• Cash Flow Protection Measures
– Volatile cash flow protection measures due to volatile profitability
2001
2002
2003
2004
1H05
AU Optronics Corp.
4.7
52.4
98.5
91.1
29.9
Chi Mei Optoelectronics Corp.
0.2
27.8
40.6
47.6
14.8
Chunghwa Picture Tubes, Ltd.
2.1
24.6
35.5
37.8
1.1
(10.7)
40.9
22.2
18.9
(7.4)
(4.2)
16.4
18.8
30.7
(9.1)
NA
NA
104.2
105.0
44.9
AU Optronics Corp.
(12.8)
2.7
(3.1)
(37.9)
(28.1)
Chi Mei Optoelectronics Corp.
(24.7)
(8.5)
(15.9)
(36.5)
(33.0)
Chunghwa Picture Tubes, Ltd.
(16.1)
(3.5)
(5.6)
(23.2)
(48.0)
(8.1)
0.7
(10.9)
(32.2)
(10.4)
NA
NA
(9.0)
(9.2)
(43.7)
Funds from operations/total debt (%)
HannStar Display Corp.
Quanta Display Inc.
LG Philips LCD Co., Ltd.
Free operating cash flow (NT$ bil.)
HannStar Display Corp.
Quanta Display Inc.
Source: company data * semiannual figures are annualized
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Financial Profile Comparison
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• Liquidity
– Taiwan's five TFT-LCD manufacturers all have sufficient liquidity to
meet term debt repayments in 2005
2001
2002
2003
2004
1H05
Cash position (NT$ bil.)
AU Optronics Corp.
11.5
29.2
20.2
19.4
16.6
Chi Mei Optoelectronics Corp.
0.7
4.5
24.2
15.6
20.6
Chunghwa Picture Tubes, Ltd.
12.9
20.4
28.4
44.2
20.9
Quanta Display Inc.
3.4
0.9
16.6
42.5
13.9
HannStar Display Corp.
3.4
13.9
25.3
16.2
12.1
Long-term debt due within one year (NT$ bil.)
2005
AU Optronics Corp.
5.9
Chi Mei Optoelectronics Corp.
8.0
Chunghwa Picture Tubes, Ltd.
6.7
Quanta Display Inc.
4.8
HannStar Display Corp.
Source: company data, Taiwan Ratings
13.2
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Financial Profile Comparison
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• Liquidity
– Significant external funding is needed to support capital expenditures
Company Liquidity Forecasts for 2005
Unit: NT$ bil.
Available
liquidity*
Maturing term
debt
Capital
expenditure
Liquidity needs
AU Optronics Corp.
57.6
5.9
80.0
85.9
Chi Mei Optoelectronics Corp.
42.2
8.0
52.5
60.5
Chunghwa Picture Tubes, Ltd.
64.3
6.7
61.1
67.8
Quanta Display Inc.
50.7
4.8
35.0
39.8
HannStar Display Corp.
18.0
13.2
20.2
33.4
* Available liquidity = cash position at end-2004 + estimated operating cash flow in 2005
Source: Taiwan Ratings Corp.
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Financial Profile Comparison
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•
Capital Structure & Financial Flexibility
– Higher leverage in 1H05 due to lower profit and high capex
– Total debt/EBITDA improved in 1H05, compared with 2001
– The banking sector's appetite for new exposure to the industry becomes
more limited
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Conclusion
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• Diverging credit quality among Taiwan's panel makers
• Reasons behind: better scale economies, product diversification
and technology lead to better profitability and cash flows
• This in turn expands the gap between leaders and laggards
because of leaders' more aggressive expenditures
• AUO has a clear-cut leading position among Taiwan's panel
makers in terms of credit quality
• CMO follows closely, but needs to enhance its execution and
product strategy
• M&A may not happen soon because of continued access to loan
and equity markets
• Local banks' decreasing appetite has a negative implication,
particularly for smaller players