Samsung, LG Alerted in Panel Business
By Kim Yoo-chul
Staff Reporter
It seems too early to talk about "risk" in the liquid crystal display (LCD) business of Samsung Electronics and LG Display. But one thing is clear, their main business outlook isn't all that bright as deepening macro-economic troubles in North America and Europe have been dampening consumer demand.
Aggressive expansion by panel makers has led to oversupply this year, pulling down prices. Slower than expected LCD TV demand in China before and during the Olympic Games in Beijing has also hurt prices.
A fast-spreading global downturn has led leading LCD panel suppliers such as Taiwan's AU Optronics and Chi Mei Optoelectronics to cut output in recent months to cope with falling prices during a traditionally strong period.
Samsung, the world's biggest LCD panel manufacturer, is now faced with a business slowdown in the short-term as its panel inventory has grown rapidly, particularly in panels for monitors and TV sets.
"Samsung is in emergency mode as our panel inventory has exceeded the 30-day limit. The industry's oversupply forced set makers to cancel pre-orders, forcing inventory levels to rise," an executive at Samsung Electronics LCD Business in Tangjeong, South Chungcheong Province, told The Korea Times, Friday.
"Usually, an inventory period longer than two weeks is recognized as an alarm signal at Samsung," said the executive who asked not to be identified. Despite massive production cuts by Samsung chasers, the South Korean player has been sticking to a stubborn strategy of not cutting production.
Industry sources say Dell ― the biggest PC maker and one of Samsung’s main clients for panels for IT products ― recently reduced its order by 40 percent from previous volumes. Sony ― Samsung’s strategic partner in operating S-LCD joint venture in Tangjeong ― cut 120,000 panels from its order.
"Dell, Hewlett-Packard and Sony are the main clients of Samsung and won't significantly reduce their panel orders as the LCD panel industry is cyclical in its ups and downs. But Samsung shouldn't underestimate the significant implication," the executive said.
Samsung's LCD business was a strong contributor to lift the electronic giant's total sales amid a slump in the global chip market. The unit posted an operating profit of $992 million, a 21 percent margin in the latest quarter, but down from 23 percent in the first quarter.
In line with analysts, views, Samsung agrees that it won't be immune to the cyclical downturn.
Lee Sang-wan, head of Samsung Electronics LCD Business Division, told reporters months ago it was highly unlikely that the supply and demand imbalance will turnaround soon due to external reasons.
"From August, panel prices for IT applications plunged to break-even point, while those for TV use are expected to reach that point in October," Kim Sung-in, an analyst at Kium Securities said.
"Even some major LCD panel suppliers will experience decreased profit margins as the supply and demand situation has been deteriorating further with no imminent sign of economic turnaround in North America, China and Europe," Kim added.
No Way for LG Display
The situation is more desperate for LG Display. The world's No. 2 LCD panel supplier revised down its third quarter forecast on LCD panel shipments, Thursday, despite having cut output at its factories by 10 percent in July.
The company expects third-quarter shipments to rise by around 16 percent. The company also said its margin on earnings before interest, tax, depreciation and amortization would be around 25 percent, compared with 38 percent in the second quarter.
"By cutting production in late July, LG Display has maintained a healthy inventory and will effectively cope with the short-term market situation," CFO Jeong Ho-yeong said.
The remarks are against the positive outlook given by the company's top dog in April. CEO Kwon Young-soo said then he was less concerned about the supply glut because strong demand for flat-screen TVs from emerging markets and replacement demand for computer panels were increasing.
Analysts are busy downgrading LG Display's target price as they say the problem is how long the downward trend of LCD panel prices will continue.
Citigroup recently lowered its target price on LG Display by nearly a third to 37,000 won on the South Korean stock market, forecasting the company's third quarter operating profit would plunge 81 percent from the second quarter.
LG Display is forecast to report a net profit of $510 million and on sales of $1.32 billion for the July-September period.
"The demand is decreasing and set makers are trying to lower their inventory levels, triggering the further lowering of prices amid the excessive supply of LCD panels. This directly affects Samsung and LG Display," Ahn Hyun-seung, country head of market research firm DisplaySearch said.