LCD Parts Makers Are Anything But Flat
By ERIC C. FLEMING
[WSJ Online, 3/29/04]
ON THE FIFTIETH anniversary of the first color television sold, TV and other screens are moving from fat to flat.
Businesses and consumers are replacing those clunky, archaic cathode-ray tube computer monitors and TVs. They're swapping desktops for laptops and picking up cell phones that have color screens. Many of these new products use liquid crystal display (LCD) screens.
With new desktop, laptop and cell phone sales, "you've got three drivers all hitting [LCDs] at once," says Dennis McKechnie, manager of the PIMCO PEA Innovation Fund.
Falling prices are fueling demand: The price of a 17-inch LCD computer monitor is expected to fall 27% in 2005, to $335, according to market research firm IDC, based in Framingham, Mass.
As prices slide, sales of desktop LCD flat screen monitors are expected to more than double to 104 million units worldwide next year, from 47 million in 2003, market research firm iSuppli forecasts.
But producers of the parts that go into the screens -- like AU Optronics, which manufactures LCD panels, and chipmaker Pixelworks -- may be in the sweet spot. They could maintain margins by gaining economies of scale, while prices of the parts they use also decline.
LCD flat-panel screens work like a souped-up Timex Ironman watch screen. Transistors create color images by altering the crystals' shape. The screen is backlit, and filters and integrated circuits refine the picture.
"Plasma" flat panels use pockets of gas excited by electricity to create a picture. While sales of cathode ray tube TVs are flattening, LCD technology will become even more dominant. Manufacturers are making LCD TV screens as big as plasma, which has a problem with images --like the CNN logo or NBC peacock-- being "burned" into the screen's corner.
Meanwhile, rapidly declining prices are fueling demand for LCD TVs.
"TV prices will be falling like a rock," says Bob O'Donnell, analyst at IDC.
IDC forecasts that a 30- to 39-inch LCD TV that sold for $5,000 last year will cost less than $2,000 in 2005, as plasma prices also sink.
Worldwide sales of LCD TVs -- the biggest driver of LCD demand-- may hit nearly 20 million units by 2006 from 3.6 million last year, iSuppli estimates.
This market has experienced some growing pains. Starting early last year, prices of some displays began rising as component makers couldn't keep pace with demand.
"There will always be shortages, [but] the momentum to LCD is unstoppable," says O'Donnell.
AU Optronics, the Taiwan-based maker and assembler of LCD panels of all sizes, is boosting production to ride that wave.
AU sells mostly large panels to other manufacturers, like BenQ and Sony, which then put them in televisions, cell phones and other electronics devices.
Since 2000, AU has doubled its share of the large LCD panel market, to about 12% last year. During that time, number-two Samsung lost some share (to about 19%) and market leader LG Philips LCD (a joint venture between Royal Philips and LG Electronics) gained six points, to 20%, according to iSuppli.
In the past year, AU Optronics' gross margins climbed five percentage points to 22%. Margins could rise by another percentage point this year as AU makes production more efficient and customers migrate to ever-larger, more profitable panels, says Ali Irani, an analyst at CIBC World Markets.
O'Donnell expects prices of components used to make panels like color filters and chips to fall, too, as AU's suppliers become more efficient.
AU itself is boosting production in China, to benefit from its skilled, low-cost workforce.
Pixelworks, which makes semiconductors for digital TVs, flat panel monitors and projectors (its customers include Dell and Sony) also should be a big winner from the big move to LCD.
Chips for flat panel displays and digital TVs of all kinds comprised nearly half of Pixelworks' 2003 sales. Chips it makes for projectors also accounted for around half of its sales.
Brian Alger, analyst at Pacific Growth Equities, sees Pixelworks' digital TV sales nearly doubling this year as LCD sales rise.
But he expects Pixelworks' gross margins to shrink slightly to 44% as Texas Instruments takes share in the projector chip market.
Still, amid booming demand for LCDs, valuations of AU Optronics and Pixelworks look reasonable.
Analysts have been raising AU's earnings estimates over the past 90 days, and the stock has sold off because of concerns about the Taiwanese elections. That has shrunk AU's multiple to only eight times next year's estimated earnings, a steep discount to its projected long-term annual earnings growth rate (see At a Glance).
Pixelworks, a diversified, U.S.-based chipmaker, fetches 37x next year's earnings estimates, slightly above its expected long-term annual earnings growth rate (see At a Glance).
To be sure, political tensions between China and Taiwan could make investors nervous. Or larger rivals like Samsung could slash prices to grab share, hurting AU's profits -- and everyone else's.
But in the long run, as more businesses and consumers upgrade to LCD, parts suppliers like AU Optronics and Pixelworks should shine like a crystal. |
