Maturing LCD makers focus on stability, profits

TAIPEI (Reuters) - Asian LCD makers who have bet big on flat screen TVs are starting to see returns as the booming sector matures, but only a handful of companies with strong brand clients or exposure to the most advanced TV panels will see a significant profit boost.

Well-planned investments and better inventory management are helping to stabilize liquid crystal display (LCD) makers, whose stocks and profits have gyrated in past cycles that saw supplies swing from too much to too little every two years.

The biggest manufacturers are likely to stand out in a new crystal cycle that shows signs of evolving into a shorter, more stable pattern as flat-screen televisions gain popularity with more affordable prices.

Companies tipped to succeed in this new climate include South Korea's LG.Philips LCD (034220.KS) (LPL.N) and AU Optronics (2409.TW) (AUO.N), and Chi Mei Optoelectronics (3009.TW) of Taiwan, which sell panels to top TV brands such as Sony (6758.T).

"I'd say LG.Philips, AU and Chi Mei have chances to win in this new game and, for long-term investors, they are worthwhile investments," said Robyn Hsu, a fund manager at Taiwan's Truswell Securities Investment Trust.

"Others are not pure panel makers. Take Samsung (005930.KS) for example, we can't just count on its LCD sales when we take a look at its balance sheet because we have to worry about its memory or cellphone business now."

Still, the industry could risk diving back into oversupply if LCD makers are over-optimistic and pour huge amounts of money into investments as they did in the previous boom, triggered by robust demand for flat-screen PC monitors.

"The entire TFT (thin-film transistor) LCD supply chain needs to be careful," DisplaySearch Vice President of Manufacturing Research Charles Annis said in a statement last week.

"If all panel makers rush to dramatically increase capacity in the next two years, the industry could once again set itself up for a significant over-supply and a repeat of the crystal cycle in 2010."

FASTER REACTIONS

As TV screens get bigger and prices fall, major players which have strong brand clients and which make key components for TV panels have learned to react quickly to strengthen product design flexibility and lower costs and lead times.

LG.Philips LCD, for example, expects to churn out more advanced panels this year for full high-definition TVs, which command a higher price premium and offer better images than conventional models.

"It's only the beginning (for full HD TV) and demand is set to grow rapidly," Eddie Yeo, executive vice president of LG.Philips' TV business unit, said.

The Korean LCD company, which supplies to its namesake firms Philips and LG Electronics (066570.KS), is also looking for more strategic alliance deals with TV set makers.

Flat panel display sales -- most of those using LCD technology -- are expected to increase 12 percent to $106 billion this year, with TV panels taking more than 40 percent of that, according to DisplaySearch.

The top five LCD makers -- Samsung, LG.Philips LCD, AU, Chi Mei and Sharp, control about 80 percent of capacity.

Surging demand for flat-screen TVs is widely expected to cause a shortage of TV panels later this year, and the specter of oversupply is looming after new capacity comes online in 2009.

But future up and downcycles won't be as severe as past ones.

"They have learned a lesson and now they know how to handle inventories in the slow and peak season," Truswell's Hsu said.

BUYING OPPORTUNITY

A recent tailspin for display maker stocks after the latest glut, and concerns about a slowing U.S. economy could present a buying opportunity for long-term investors, analysts said.

Based on a modest P/E ratio of 1.5 times Citigroup's 2008 profit forecasts, the U.S. investment bank put a buy rating on LG.Philips LCD, whose share price slumped 30 percent since early November. Citi also rated Samsung a buy.

"(LG.Philips') strong Q4 results re-affirm our bullish outlook for the company," Citi analyst Jonathan Rhee said in a research note after LG.Philips posted record quarterly profit. It was a big turnaround from a year-ago loss, when prices sagged on weak computer and TV sales.

But analysts say second-tier players with big exposure to the maturing PC market, such as Taiwan's HannStar (6116.TW) and China's field of younger players, may suffer.

"TV is the mainstream," said Jeff Kim, analyst at Hyundai Securities. "Smaller makers don't have strong chances here."

(Additional reporting by Rhee So-eui in Seoul and Kiyoshi Takenaka in Tokyo)

(Editing by Doug Young & Ian Geoghegan)