LCD Market Expectations Too High Going Into the Holiday Season

|
Includes: AUO, GLW, LPL, SNE
by: William Trent, CFA

Although we have been generally bearish toward LCD display-related companies, we recognize that demand is very strong. Our concerns have more to do with the capacity being added in the industry, which we think has been more than what was needed to feed the demand.

It is useful, however, to know what is being compared. So to that end we were happy to see this week that DisplaySearch had provided its estimates for end demand in 2006 and 2007. According to Reuters:

Global display makers are expected to ship 50.4 million large-size, liquid crystal displays (LCDs) for LCD televisions this year, up 77 percent from last year, David Hsieh, head of DisplaySearch Taiwan, told reporters.

The research firm had originally forecast global shipments for LCD TVs to reach 46 million units, Hsieh said.

Meanwhile, DigiTimes points us to their 2007 estimate:

Global LCD TVs are expected to reach 66 million units in 2007, up 53-57% from 42-43 million units in 2006, according to today’s Chinese-language Commercial Times, quoting David Hsieh, president of DisplaySearch Taiwan, as saying.

Note that there is an apples-to-oranges issue here, with one source providing overall LCD TV sales and the other covering the displays that go on them. Another way of looking at it is that TV makers are building inventories of the display component, which accounts for the roughly 8 million-unit difference between the 50.4 million display estimate and the 42-43 million TV estimates for 2006. Those 8 million extra displays sold in 2006 cover a full third of the anticipated growth requirements in 2007, further reinforcing our belief that there is too much capacity.

Casting that aside, however, we see two things from this: that demand is growing rapidly and that the rate of growth is slowing. With any industry growing at 50+ percent annually, even the best estimates are really guesstimates. However, they will serve well enough as a guide. We can also expect that LCD TV sales growth may fall below 50% in 2008, continuing the trend. Thus, any growth in capacity above 50% is just going to make things worse.

We are also growing more concerned about the holiday sales expectations, particularly given this quote from the Reuters article:

Global unit shipments of large LCD screens for computers and flat-screen TVs are set to grow faster in the current 2006 second half after a weak first half, iSuppli said.

The estimates came after major LCD makers saw higher inventories earlier this year due to slower-than-expected demand for LCD TVs.

The first half was weak despite Olympics and World Cup-related sales expectations. Those are events that did not occur last year, and should thus have made for an easy comparison. Holiday sales, on the other hand, happen every year. Expecting this year to not only beat last year but to make up for a weak first half appears optimistic at best. Particularly given signs that consumer spending may be weakening.

Comment on this article