"After experiencing ups and downs, the panel industry has once again fallen to the bottom after the rise since 2020. Historically, the valuation of the panel industry has mostly fluctuated within the range of 1-2 times PB.

There were voices in the market that believed the panel industry would be able to break free from its cyclical nature after optimizing its structure. .

In July last year, Dolphin also wrote a short review titled "** The Peak of the Panel Cycle, No Bottom to Pick " to signal the peak of the previous panel cycle. And now, with the industry cycle downturn, the overall PB of the panel industry has once again fallen to the bottom range of around 1 times.

Source: Wind, Dolphin Research

Dolphin's overall view:

Dolphin believes that although the panel industry is still in a downward phase of price decline, major panel manufacturers have begun to reduce production capacity, which is expected to improve the industry's supply-demand relationship and digest inventory.

First, let's look at the valuation side. Whether it is PB or PE, the panel industry has historical scores of only about 10%, still at the historical bottom range. Looking at the recent performance of various industries, the panel industry is one of the few undervalued sectors that are still at the bottom;

Next, let's look at the industry. As panel prices have fallen to the bottom range and have already broken the cash cost, and production capacity has also been reduced, the performance in the third quarter is likely to be poor. However, the situation of continuous price decline below the cash cost is not sustainable, and prices will definitely rebound. At the same time, industry capacity has also started to shrink since June, which, along with the improvement in supply and demand and inventory digestion, will help prices rebound faster.

In this article, Dolphin mainly focuses on the judgment of the panel industry's cyclical nodes and investment opportunities. The next article will estimate the performance and valuation of important stocks in the panel industry.

Dolphin's analysis of the cyclical performance and node judgment of the panel industry can be found in the following:

I. The Cyclical Nature of Panels - From Supply and Demand Changes

The development of technology products can be divided into two stages:

① Industrial Development Stage: The emergence of new technologies/processes can better enhance product characteristics and bring substantial profit returns to companies. Whoever has more advanced technology has a better chance of gaining industry dominance; the core of competition in this stage is technological/process breakthroughs.

② Industrial Maturity Stage: As the industry develops, the development of new technologies encounters bottlenecks. Whoever has a larger production capacity has more industry dominance. The key factors in this stage are production capacity + cost.

After decades of development, LCD panels have matured technologically, and the industry has entered the stage of competing in production capacity + cost. When the industry enters the stage of industrial maturity, its cyclical characteristics become more apparent." In the industry's high prosperity upward cycle, it is often characterized by "supply shortage - price increase - investment growth", while in the downward cycle of prosperity, it is usually "overcapacity - oversupply - price decline".

Looking back at the cyclical changes in LCD panel prices in the previous cycle:

① Upward Cycle: First half of 2020 to mid-2021. In recent years, the gradual release of domestic manufacturers' production capacity has led to a continuous decline in panel prices. In other words, panel manufacturers were losing money for every panel produced. In order to reduce losses, Samsung and LG began to gradually withdraw from the LCD panel market. The supply-demand relationship changed, and prices started to rebound from the bottom, and the upward cycle continued until the first half of 2021.

② Downward Cycle: Mid-2021 to present. With the continuous increase in panel prices, the price increase was transmitted to end products through the industry chain. The industry shifted to a situation of "oversupply", and prices started to decline from the peak.

II. Where is the current panel cycle?

According to Witsview's data, the downstream of the panel mainly includes LCD TVs, monitors, notebooks, and other display devices, among which LCD TV panels account for more than 70% of the downstream market. Since the industry situation of LCD TVs has the greatest impact on the entire panel industry, the Dolphin mainly focuses on LCD panel cycles based on LCD TVs.

So, where is the current panel cycle? The Dolphin mainly observes from the perspectives of inventory and prices:

2.1 Inventory Situation: High inventory in the industry chain, short-term pressure remains

For the manufacturing industry, inventory turnover is an important indicator that affects a company's production and expansion. Looking at the inventory situation in the panel industry chain from the perspective of inventory, we can better understand the current inventory situation of the entire industry.

① End-brand TV manufacturers: Taking SKYWORTH DT and CHANGHONG as examples, both companies have a relatively high proportion of TV business. The inventory turnover days of both companies have been increasing since last year, and in the first quarter of 2022, the inventory turnover days of both companies reached more than 80 days. The increase in inventory level will reduce TV manufacturers' purchase orders for panels.

②Panel Manufacturers: Taking Dolphin and TCL Technology as examples, these two companies are currently the largest panel manufacturers in the world. Starting from the second quarter of 2021, the inventory turnover days of both companies have shown a significant increase. In the first quarter, the inventory turnover days of the two companies have already increased to 66 days and 37 days, respectively.

From the perspective of the industry chain, the inventory of end-brand televisions has a transmission effect on panel manufacturers. The lowest point of inventory turnover days for end-brand television manufacturers occurred in the fourth quarter of 2020, while the lowest point for panel manufacturers occurred in the first half of 2021.

Regarding the current panel inventory situation, Dolphin believes that the inventory turnover days of television manufacturers reached a historical high of more than 80 days in the first quarter. Under the circumstances of television manufacturers reducing orders, the inventory level of panel manufacturers has also reached a historical high. Panel manufacturers can only reduce capacity utilization or production in order to cope with this situation. Therefore, Dolphin believes that panel prices will remain low until inventory in the industry chain starts to decline.

2.2 Price Situation: Cost Anchoring, Supply and Demand Impact

①Value Foundation - Cost Anchoring

The cost of LCD panels mainly comes from material items, including backlight modules, color filters, glass substrates, driver ICs, polarizers, etc. The materials for different panel sizes are generally similar, with slight differences in cost proportions. Taking 42-inch panels as an example, the combined cost of backlight modules, color filters, and glass substrates accounts for more than 60% of the material cost.

In the long run, the cost of panels is influenced by economies of scale, but due to the fact that the largest cost of panels still comes from the material side, and considering the current inflation situation, there is no significant downward trend in panel costs.

Looking back at the price position of the previous round of panel bottoming out, taking 55-inch panels as an example, the price fell to around $100 in the first half of 2020. Then the industry began to shrink capacity, and the supply-demand relationship improved, leading to a rebound in prices.

Specifically, as shown in the chart below, when panel prices started to rise in the second quarter of 2020, the net profit margins of Dolphin, TCL, Innolux, and AUO were still positive, while the net profit margins of BOE and Innolux were still negative. Under the influence of producing more and losing more, the industry began to reduce capacity.

The panel industry always undergoes cyclical changes. When it comes to the second quarter of this year, panel prices have once again broken through the cash cost. Faced with the situation of producing more and losing more, Dolphin, TCL, and HKC have already started to reduce production and shrink capacity in the second quarter to minimize losses. The specific details can be seen from the figure below, the bottom of the previous upward cycle of the panel was around June 2020. At that time, the prices of 65/55/43/32-inch panels were $164/$103/$67/$32 respectively, and now the prices of all four types of panels have fallen below the previous low point, already below the cash cost of the panels.

. After the capacity contraction of various manufacturers in this round, the supply-demand relationship in the industry will improve. When the industry's capacity is lower than downstream demand, the inventory in the industrial chain will be consumed, and panel prices are expected to rebound as downstream manufacturers increase their shipments.

② Price Changes - Supply and Demand Impact

Demand side: Overall steady growth

Since the downstream of the panel is mainly LCD TVs, the overall demand downstream tends to grow steadily. Although the global LCD TV shipments have not increased significantly, the annual shipment volume of LCD TVs has remained stable at 250-290 million units in the past 7 years. However, from the perspective of the global LCD TV shipment area, it has shown positive growth almost every year.

In short, the global LCD TV market has entered a mature stage, and there is no significant room for growth in overall shipments. However, due to people's pursuit of large-screen TVs, the size of a single TV tends to be larger. Just like 10 years ago, the TV at home was mainly 40-50 inches, but now there is an increasing demand for TVs with a size of 50 inches or above. According to Dolphin's calculation of the average shipment area per LCD TV globally, the average shipment area per TV has shown positive single-digit growth since 2015.

Supply side: The main factors affecting the supply-demand relationship

From the analysis above, the demand in the panel industry is relatively stable. When the demand is relatively strong and the inventory is low, the capacity utilization rate will be increased and production will be expanded; while in the case of demand contraction and increased inventory, the production capacity will be scaled back.

According to Omdia's data, global LCD capacity may face contraction in 2023 after experiencing growth in the past 2 years. However, based on the latest panel prices and company situations, this panel capacity contraction may occur as early as the second half of 2022.

With the establishment of new panel production lines by companies such as BOE, TCL, and HKC in the past two years, the market share of Korean manufacturers continues to decline, and starting from 2021, Chinese companies' capacity accounts for more than 50% of the global total for the first time. The cliff-like decline in panel prices in the first half of this year has also exceeded market expectations. Global mainstream panel manufacturers have started to reduce capacity utilization ahead of schedule since June, and the capacity of two Korean companies may face accelerated withdrawal.

3. Investment Highlights in the Panel Industry: Enduring Hardship, Awaiting Turning Point

3.1 Industry Perspective: Short-term Loss, Inevitable Bottoming and Rebound in the Medium and Long Term

1) Short-term: Panel manufacturers' performance in the third quarter will be poor. ① In terms of prices, the current panel prices have once again reached historical lows, and the shipment prices of panels in the second and third quarters will inevitably be low. In the case where the cash cost has already been broken, panel manufacturers in the third quarter may have to endure the dilemma of losses. ② In terms of shipment volume, the inventories of panel manufacturers and terminal factories are still at historical highs. Panel manufacturers have started to scale back since June, and the shipment volume in the third quarter will still be pessimistic. With prices at the bottom and shipment volume shrinking, the performance of panel companies in the third quarter will be poor.

2) Medium and Long Term: Demand will not disappear, and prices will eventually bottom out and rebound. ① In terms of demand, due to the industry's failure to reduce the cost of OLEDs, LCD panels still remain the main choice for various types of displays worldwide due to their price advantage. Therefore, as the capacity shrinks, the supply-demand relationship will change to some extent. ② In terms of supply-demand relationship: Major mainstream panel manufacturers have already started to reduce capacity in June. With the contraction of capacity, it will help digest the inventory situation in the industry chain. When major panel manufacturers start to scale back, it is also possible to continue to pay attention to changes in inventory in the industry. This may be the key turning point for the bottoming out of panel prices.

3.2 Trading Perspective: Relatively Cost-effective

Looking at the recent rise in various sectors, the panel industry is one of the few industries that is still at the bottom. Looking at the historical PE-TTM of the past 5 years, the panel industry currently has a PE ratio of only 7.83, and the historical percentile is only 5.95%. Admittedly, due to the unexpected price decline of panels this year, the annual performance may be revised downward.

However, as a capital-intensive industry, from the perspective of PB, the PB ratio of the entire display panel industry is still in the historical bottom range of around 1.

Source: Wind, Dolphin Research and Analysis

In the next part, Dolphin will focus on performance estimation and valuation of important individual stocks in the panel industry.

Panel Industry

Commentary on June 15, 2022: "Panel Giants, Both Sealed" On July 21, 2021, commented on "Panel Cycle Peaks, No Bottom to Buy".

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure

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