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Sector Update Summary - OLED Industry (2017.6.16)

Core Content

This report provides an update on the OLED industry, focusing on supply and demand dynamics, as well as investment strategies for various companies within the OLED value chain. The analysis highlights the sector's growth potential, despite current volatility, and offers recommendations based on the performance and future prospects of key players.

Main Points

• Market Performance:

  • OLED equipment and material suppliers experienced a significant correction in 1Q 2017 but rebounded strongly in 2Q.
  • Equipment makers saw a 23% gain, while materials firms gained 62% in the same period.
  • The overall market cap of OLED-related companies has increased, with some firms like AP Systems and Innox seeing notable growth.

• Key Companies and Target Prices:

  • LG Display: Target price of KRW44,000, representing a 26.1% increase from current price.
  • SFA Engineering: Target price raised to KRW50,000, with a 9.3% increase, but downgraded to HOLD due to valuation concerns.
  • SKC Kolon PI: Target price raised to KRW25,000, with a 19.6% increase, remains a top pick.
  • Duksan Neolux: Target price raised to KRW23,000, but downgraded to HOLD due to recent gains.
  • Jusung Engineering: Initiated coverage at BUY and presented as a new top pick among equipment makers.
  • Innox: Target price raised to KRW55,000, with an 11.9% increase.

• Investment Strategy:

  • The report suggests a conservative approach for Samsung Display (SDC) equipment value chain due to near-term risks.
  • LG Display (LGD) is highlighted as a better investment option, with expectations of significant equipment orders for its P10 fab.
  • Materials firms are preferred over equipment ones due to their stronger earnings momentum.

• Supply and Demand:

  • SDC has already ordered equipment for its A3 fab and is expected to ship 60m OLED panels to Apple, despite a delay in mass production.
  • LGD is anticipated to expand its OLED capacity, which should boost demand for its equipment suppliers.
  • Chinese panel makers such as BOE and Tianma are also expanding their 6G OLED capacity, contributing to the market's growth.

• Order Momentum:

  • Equipment orders for 2017 are expected to peak, with SDC and LGD leading the way.
  • There is a gap between land development and actual equipment orders, which investors should consider.
  • The report notes that the order environment for OLED equipment is still favorable, but not as strong as in previous years.

• Valuation and Market Outlook:

  • OLED value chain companies are currently overvalued, and the report advises caution in the face of potential corrections.
  • The market is expected to grow in the long term due to expanding applications in flexible phones, auto displays, and signage.
  • The report emphasizes the importance of monitoring which companies will benefit from LGD's potential supply to Apple.

Key Information

• OLED Equipment Orders:

  • SDC ordered equipment for converting its T7-1 LCD line to 6G OLED capacity.
  • Chinese panel makers BOE and Tianma are also increasing their 6G OLED capacity.
  • Equipment orders from China account for 22% of the full-year estimate, with more expected from GVO and CSOT.

• Equipment and Materials Performance:

  • AP Systems, SFA Engineering, and Innox have seen significant gains in 2017.
  • Duksan Neolux experienced a 61.3% jump after a strong 1Q earnings surprise.
  • The report suggests that materials firms will see significant earnings improvements before new smartphone models from SEC and Apple are released.

• Supply Chain Changes:

  • There is a shift from LLOs to DPSS LLOs, which is expected to reduce maintenance costs.
  • SDC has switched to DPSS LLOs, shifting some orders from AP Systems to Philoptics.
  • The FMM evaporator market is competitive, with Canon Tokki increasing its capacity to 12 units per year.

• Valuation Table:

  • The report includes a table of valuations for major OLED equipment and material firms.
  • Key metrics include market cap, P/E, P/B, EV/EBITDA, and operating margin.

Investment Recommendations

• Buy:

  • SKC Kolon PI (still top pick)
  • Jusung Engineering (new top pick)

• Hold:

  • SFA Engineering
  • Duksan Neolux

• Sell:

  • AP Systems (advised to take a conservative approach)

Conclusion

The OLED industry is expected to grow in the long term, driven by expanding applications and increasing demand from major players like Samsung and Apple. However, investors should be cautious due to current market volatility and the potential for corrections. The report recommends focusing on materials firms and monitoring LGD's expansion plans, as well as the competitive landscape in the FMM and LLO markets.