Diguang International's Relationship with #1 LCD Maker LG Philips

Includes: DGNG, LPL
by: China OTC Player

Diguang International Development Co., Ltd.(DGNG.OB), an emerging manufacturer of backlights for the LCD display market (TV, computer monitor, cellphone display, etc.), has projected that sales to LG Philips (NYSE:LPL) will likely double in 2008. The company sold approximately two million backlight units to LG Philips this year, and is expecting to ship up to 1.8 million units in the first half of 2008 alone.

This follows Diguang's announcement in November that it won a contract worth at least 10 million units from Samsung (OTC:SSNLF).

Latest research shows that LG Philips is the #1 manufacturer of LCD displays in terms of units shipped, with over 20% of the global market, ahead of players such as Samsung and AU Optronics (NYSE:AUO).

Clearly the fortune of DGNG rises and falls with those of its clients. When it lost a major customer in late 2006, 25% of the company's revenues went with it, causing DGNG to slip into the red for three quarters starting in Q4 2006. The company has since returned to profitability and this should sustain through 2008.

I think this is a remarkably quick turnaround for a company that was so recently facing increasing competition, pricing pressures and quick customer turnover. According to NPD research, the TFT (thin-film transistor) LCD market is expected to grow 14% in 2008 and 12% in 2009, but this rate will be much higher for LED-based LCDs, an area which the company is going into in a big way, with its plan not just to manufacture LED-based backlights but to upstream components and technology as well.

If prices for backlights hold, I'm expecting the company to return an EPS of $0.24 in 2008, which, at the current share price of $2.80, represents a decent forward P/E of 11.7x.

My Position: None.