By Brian Sohn, Ricky Seo and Jerry Tsai The smartphone and tablet industries are on the verge of another revolution – look out for a new wave of innovation starting in 2H13 Curved handsets and bendable, stronger tablets will be the next big thing, thanks to new plastic materials Korean companies Samsung Electronics (OW) and LG Electronics (OW) stand to gain the most from flexible display, but the whole supply chain will benefit; we upgrade Cheil Industries and SFA to OW and Duksan Himetal to N(V) Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Flexible Display Fantastic plastic – a shape-shifting game changer Telecoms, Media & Technology Equity – Asia April 2013
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By Brian Sohn, Ricky Seo and Jerry Tsai
The smartphone and tablet industries are on the verge of another revolution – look out for a
new wave of innovation starting in 2H13
Curved handsets and bendable, stronger tablets will be the next big thing, thanks to new
plastic materials
Korean companies Samsung Electronics (OW) and LG Electronics (OW) stand to gain the most
from flexible display, but the whole supply chain will benefit; we upgrade Cheil Industries and
SFA to OW and Duksan Himetal to N(V)
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Flexible DisplayFantastic plastic – a shape-shifting game changer
Telecoms, Media & Technology
Equity – Asia
April 2013
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Impact from flexible display
Positive Neutral Negative Reason Impact
Handset makers
SEC Differentiation among smartphone makers Flexible display could help to sustain its dominance in the high-end smartphone segment
LGE Flexible display could be a key differentiating factor in high-end smartphones, and help to improve ASP and margin. Revise up 2013 handset margin assumption from 0.9% to 3.7%
Materials Cheil Industries
New business in plastic substrate and OLED materials to kick in
OLED business drives ECM division growth as it expects to take 23% of ECM revenue in 4Q15 from nothing in 4Q12
LG Chem Contribution from plastic substrate, which accounts for only a small portion of overall earnings
Although the company is a key player in making flexible display feasible, the contribution to earnings is limited
Duksan Himetal
Already a major supplier of OLED materials to Samsung Display
Already a main OLED material supplier for Samsung Display, limited upside from flexible display transition
Glass makers*
Glass substrate to be replaced by plastic in the longer term
Panels Samsung Display
Limited to small-sized displays, insignificant to overall earnings
Substantial potential to become major flexible display makers as its AMOLED line could be converted to flexible display when materials are ready for mass production
LG Display
Although the company should play an important role in commercialising flexible display, expect an insignificant contribution to earnings
Component LG Innotek
Indirect beneficiary if LGE’s smartphone business can turn around
Once LGE smartphone business turns round, it is likely to benefit from the mobile component business with LGE
SEMCO Already a major beneficiary of Samsung’s smartphone success
Handset accounts for 23% of estimated 2013 total revenue
LED makers*
No BLU is required in flexible display (e.g., Seoul Semi)
(Battery) Samsung SDI
Product mix improvement through irregular shaped battery IT battery accounts for 64% of estimated 2013 total revenue
LG Chem Although the company is a key player in making flexible display feasible, the contribution to earnings is limited
Equipment SFA Line conversion to LTPS OLED Additional small panel equipment orders from Samsung Display during 2-3Q13e, given that it has to switch or extend capacity for flexible AMOLED. Galaxy Note 3 likely to adopt flexible OLED (unbreakable).
LTPS equipment*
Line conversion to LTPS OLED from traditional LCD
Source: HSBC estimates *Note: Refer to the table on page 9 for the food chain
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Roadmap for flexible display
Phase Available solution Time frame Product Key benefit Prototype
Lighter, slimmer, given no substrate glass required, but no change in form factor
Plastic substrate + ultra-thin glass
LTPS, RGB OLED, Polyimde, irregular type Li-Polymer battery
3Q13e Curved screen smartphone
Lighter, slimmer and curved screen design
Plastic substrate + plastic front glass
LTPS, OLED, transparent Polyimde substrate, irregular type Li-Polymer battery, new plastic material
2014e Bendable tablet, notebook
Lighter, expandable screen size
Transparent LTPS, OLED, transparent Polyimde substrate, transparent battery, new plastic material
2015e Transparent, smartphone, tablet, monitor
Transparent, rollable tablet
Source: HSBC estimates
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The next big thing – flexible display. Imagine a screen that is bent around the side of the phone, so you
can see data updates or messages. Then go a stage further and imagine a range of bendable, rollable and
foldable digital devices. Welcome to flexible display, the technology that is about to become commercial
reality. Flexible displays can be bent without being damaged, making it possible to create products that
are ultra-thin, almost unbreakable and flexible. The potential for this technology is substantial as the
ultimate goal is to produce cheap mass-produced digital devices that can be rolled up like paper.
We believe the introduction of flexible display will change the industry landscape. Starting with another
wave of innovation in 2H13, flexible display based on new plastic materials will evolve into bendable and
then transparent products.
This report focuses on Korean companies as they appear better placed to benefit from flexible display
than their global competitors, at least to begin with. They are at an advanced stage of development in
most of the processes needed to make this technology a reality and should also be the first to enjoy the
advantages of a vertically integrated supply chain.
Korean giants LG Electronics (LGE) and Samsung Electronics (SEC) are likely be the main beneficiaries.
The two companies are leading the way in developing this new technology (Samsung gave a sneak
preview at a recent trade show in Las Vegas) and have the capability to manufacture and release
differentiated products that will change the market.
Importantly, both have already commercialised organic light-emitting diode (OLED) technology, the base
technology for flexible display, and have established vertically integrated panel, chemical, and handset
production. LGE and SEC should lead the way in the initial stage when the flexible display technology is
first used in handsets for smartphones. LG Innotek (LGI) should benefit as a component supplier, as
should Cheil Industries and SFA as materials and equipment providers.
Summary
The concept of a digital device that can be rolled up like a piece of paper is no longer science fiction. We believe flexible display technology will be a game changer for smartphones and tablets and the first prototype products should be available in a few months. LG Electronics and Samsung Electronics stand to gain the most, but the whole vertically integrated Korean supply chain will benefit. We upgrade Cheil Industries and SFA to OW from N and Duksan Himetal to N(V) from UW(V). We remain OW on Samsung Electronics (an Asia Super 10 and GEMs Super 15 portfolio stock) and OW (remove the volatility indicator (V)) on LG Electronics and LG Innotek.
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All this is good news for the digital supply chain. For example, the smartphone market, which has grown
at a significant rate since the second half of 2009, is starting to mature. Aggressive new players are trying
to catch up with market leaders. Currently, all smartphones use rectangular touch screens, making it
harder to differentiate between products (see The new three “Cs” – commoditisation, concentration and
cost, 6 December 2012, and Lots of new products, little differentiation. Commoditisation accelerating,
14 January 2013). And with lower entry barriers leading to fierce price competition, sentiment has turned
gloomy as fears about lower profitability grow. Flexible display should help change that.
OLED gives established players an edge. Other than larger screen size and better resolution, there is
little room for improvement in flat display panel, which is based on light-emitting diode (LED)
technology. Top Korean LCD makers have been trying to breathe life into the industry but penetration
levels for LCD TVs are already high. LCD can’t be used in flexible display, which needs self-light
emitting material, such as OLED. Korean companies have led the development of OLED, which is
already being used in some smartphones and TVs. OLED’s faster response time and outstanding colour
definition have given the early entrants an edge as its use in high-end products also generates a margin
premium. OLED is the first step to making the commercialisation of flexible display a reality.
The challenges: 1) Customer satisfaction and good profit margins are the incentives driving the
commercialisation of flexible display. Heavy investments have already been made in LCD facilities,
which will have to be converted to produce flexible display. 2) A substitute for glass: most displays use
glass as it offers better resistance to heat, gas and moisture, and is more transparent than other materials;
but it is not flexible, so new plastic materials are needed. 3) Flexible display products need to show that
they can offer consumers added value. It remains to be seen how much of a premium companies will be
able to charge for these products. The consumer will be the judge of that. What can we expect? We think flexible display will be fully commercialised in 2014, but some products
based on existing technology may be available much earlier. The first thin smartphones and tablet PCs
using plastic substrates could be in stores in just a couple of months, but how much added value these
prototypes will offer consumers remains to be seen. We expect competition to start to hot up in 3Q13
after the release of smartphones with curved screens made of both plastic substrate and thin glass.
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The winners. We believe vertical integration is essential to fully commercialise flexible display for the
following reasons: 1) Although individual panel and materials companies are capable of solving
technological issues, the supply chain needs to be tested by the rigours of mass production; 2) We think
flexibility on pricing throughout the supply chain is also essential, especially in the early stages. TV set
makers have a “40% premium rule” for TV products but set prices lower when they launched LED and
ultra-high definition TV. They will probably have to adopt the same tactics for flexible display as
customers assess these new products. 3) A whole range of new components will be needed to meet the
requirements of flexible display (for example, a completely new shaped battery will have to be designed).
Korean handset makers that stand to benefit most at first as they have an opportunity to grow their market
share on the back of these new and highly differentiated flexible display products. It’s certainly a
substantial opportunity for LGE, which is experiencing a slump in its smartphone business. The
company’s market share is only 5%, but we believe this can rise to 7-8% in 2014. Samsung Electronics,
the leader in the smartphone handset market, can use flexible display to further strengthen its position.
We believe these two companies have a head start on their global handset rivals because they already a
vertically integrated supply chain in place. For example, we think flexible display will be difficult to
commercialise for Apple, given the large size of its orders and a lack of capacity in the industry.
Meanwhile, it may take Nokia and HTC some time to introduce flexible display products as organising
the supply chain is likely to be a lengthy process.
We believe LG Innotek (LGI) will be one the biggest indirect beneficiaries of the flexible display trend.
For example, if LGE’s handset business improves, LGI will supply it with most of the handset
Impact from flexible display
Food chain Name Impact Description
Handset and panel
Samsung Electronics
Handsets account for 51% and 64% of sales and operating profit in 2013e, respectively
Flexible display could help to sustain its dominance in the high-end smartphone segment
Samsung Display
OLED panels account for 6.8% and 9.1% of sales and operating profit in 2013e, respectively
Substantial potential to become a major flexible display maker as its AMOLED line could be converted to flexible display when materials are ready for mass production
Handset makers
LG Electronics Handsets account for 23% and 30% of sales and operating profit in 2013e, respectively
Flexible display could be a key differentiating factor in high-end smartphones and help to improve ASP and margin. Revise up 2013e handset margin assumption from 1% to 3%
Materials LG Chem Plastic substrate and Li-Polymer battery take <1% and 6% of total sales in 2013e
Although the company is a key player in making flexible display feasible, the contribution to earnings is limited
Cheil Industries Electronics Chemical Material (ECM)business accounts for 29% of 2013e sales
OLED business drives ECM division growth as it expects to take 24% of ECM revenue in 4Q15e, up from nothing in 4Q12
Duksan Himetal
OLED materials account for 71% of 2013e sales
Already a main OLED material supplier for Samsung Display, limited upside from flexible display transition
Component LG Innotek Mobile component business accounts for 60% of 2013e sales
Once LGE’s smartphone business turns around, it is likely to benefit from the mobile component business with LGE
SEMCO c50% of sales is from Samsung Electronics
Already a major component supplier to Samsung Electronics, the incremental benefit from flexible display could be limited
Panel LG Display G6 LTPS fab is to be converted to flexible OLED, it accounts for 6% of total output capacity
Although the company will likely play an important role in commercialising flexible display, expect insignificant contribution to earnings
Equipment SFA 57% of 2013e sales is related to OLED manufacturing equipment (back-end and logistics)
Additional small panel equipment orders from Samsung Display during 2-3Q13e, given that it has to switch or extend capacity for flexible AMOLED. Galaxy Note 3 will mostly likely adopt flexible OLED (unbreakable)
Source: HSBC estimates
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components – touch screen, PCB, and camera modules. LGI also holds the key to developing the required
flexible components (e.g. flexible PCB) when curved design is introduced. This will strengthen the
relationship between LGI and LGE. What’s more, LGI is developing a transparent electrode, essential for
transparent display in the longer term. We also believe Cheil Industries will have the largest upside risk in
the mid to long term as the company can co-operate with Samsung Display to develop core technologies
required for flexible display. This is Cheil’s differentiating factor and is expected to drive revenue growth
at its electronic material division.
It’s also good news for equipment makers. Starting in 3Q13, Samsung Display and LG Display are
expected to expand capacity by converting existing LCD fabs to plastic OLED to maximise investment
efficiency. As a result, SFA, Samsung Display’s equipment makers, is expected to benefit.
Our preferred stocks among handset makers are Samsung Electronics and LG Electronics, while we
prefer Cheil Industries, LG Innotek, and SFA among component, materials and equipment providers. We
upgrade Cheil Industries and SFA to OW from N and Duksan Himetal to N(V) from UW(V). We remain
OW on Samsung Electronics (an Asia Super 10 and GEMs Super 15 portfolio stock) and OW (remove
the volatility indicator (V)) on LG Electronics and LG Innotek.
Summary of ratings and target price changes
LG Electronics Cheil Industries LG Innotek SFA Samsung Electronics
Flexible display uses plates that are pliable and as
thin as paper. They can be bent without being
damaged, making it possible to create products
that are thin, durable and flexible. The potential of
this technology is substantial as the ultimate goal
will be cheap digital devices that can be rolled up
like paper.
In the early stages, flexible display will be used in
small displays, such as watches, which can be
mass produced. Then, depending on how the
technology matures, it will be applied in
smartphones and tablets.
Flexible display: market prospects
We expect the flexible display market to develop
along similar lines as the OLED TV market. As
we explained in our report LG poised to take
lead in AMOLED TVs, January 2012, it is a four-
step process.
Establishing a stable base for the technology
(there was an early dispute between LG and
Samsung over different types of OLED)
Commercialisation based on pilot production
lines and market reaction
Characteristics of flexible display
Information
Technology Thin and light; change of shape and production possible according to need, and unbreakable Variety of organic materials, such as semiconductors and insulators. Low production cost as manufacturing at room temperature and atmospheric pressure is possibleBusiness Instead of simply substituting existing display industry, it has the potential to create market and new application areas Future value-oriented technology. Technology makes low-cost start-up costs possible Technology that is not dominated by any country or company
Source: HSBC
Development of OLED display vs. flexible display
2011 2012 2013 2014 2015 2016
OLED TV Flex ible display
① Technological
improv ement
② Introduction of
prototy pe through
pilot line
③ Penetration of
new play ers
④ Mass production
for OLED TV
①Technological
improv ement
② Introduction
of prototy pe
③Penetration of
new play ers
Source: HSBC estimates
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Entry of new players, including Japanese and
Taiwanese companies
Capex investment by LG and Samsung to
enable mass production
The commercialisation of flexible display is
expected to proceed in a similar manner. We think
that prototype products will be introduced by
Samsung and LG and the start of mass production
will be dictated by a variety of factors, including
technology, market response and cost. Samsung
Display and LG Display are both expected to start
small-scale flexible display manufacturing in the
next few months.
The debate about which is the best OLED
technology has yet to be resolved. When large-
size OLED panel production started in early 2012
the two companies adopted different strategies
when they set up pilot production lines.
LG Display plans to invest KRW700 billion in a
G8 White OLED facility, while Samsung Display
appears to have a two-track strategy, developing
both White OLED and RGB technology for high-
end products. For more details on OLED
technology, please see LG poised to take lead in
AMOLED TVs, 6 January 2012.
We believe LG Display is contemplating converting
a G6 LTPS line, which currently makes high-
resolution mobile display, to produce plastic display.
Samsung Display has already obtained two OLED
lines and may convert more capacity; it is also
working on a hybrid line that can produce both glass
and plastic OLED. How quickly new lines can be
adapted or expanded will depend how soon the
necessary materials can be developed.
Large-scale production in unlikely in 2H13 as not
all the technical systems are in place (e.g., it is not
yet possible to apply the evaporation process to
plastic substrate). However, we do expect a pilot
facility to produce prototype 2” watch and 5”
curved displays.
Things are moving fast and Samsung and LG are
likely to be able to apply flexible display
technology to their respective Galaxy Note 3 and
Optimus G2 models before the end of the year.
We expect demand in 2H13 to be about 25m and
take up about 5% of the smartphone market. If our
assumptions are correct, flexible display models
could capture 15% of the high-end smartphone
market by the end of the year.
The impact on profitability will depend on
generating decent yield on OLED, which may not
happen until next year at the earliest. At the
moment, because of the additional technical steps
required, production costs are higher than for
LCD. We expect them to fall considerably once
Flexible display market forecasts Samsung’s OLED sales and OPM forecast
0
2,000
4,000
6,000
8,000
10,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
LCD OLED E-ink Others(USDmil)
0
5,000
10,000
15,000
20,000
25,000
2010 2011 2012 2013e 2014e
0%
5%
10%
15%
20%
25%
OLED rev enue (USDmil) OPM (RHS)
Source: Display Search, HSBC estimates Source: Company data, HSBC estimate
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the evaporation process can be applied to plastic
substrate. This should happen next year, along
with other technical breakthroughs, such as the
development of transparent plastic that can
replace the front glass.
Once these are in place, flexible display will be
expanded from watches and small screens to 5-8
inch tablets and 13-15 inch notebooks. The
market should then really start to take off and we
forecast it will be worth up to USD6bn by 2015
and USD8bn in 2018.
However, it remains to be seen how much of a
premium companies will be able to charge for these
products. The consumer will be the judge of that.
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The commercialisation of flexible display will
depend on technology, mass production and cost.
We identify four key challenges.
1: Re-using LCD fabs
LCD panel businesses already make a wide range
IT products and TVs. Making sizeable new
investments could be a burden as profitability has
been declining due to oversupply. It will make
more sense for these companies to convert
existing LCD business lines to OLED to produce
flexible display.
Samsung Display and LG Display have already
made substantial investments in OLED, giving them
a head start on their Japanese and Taiwanese
competitors in the flexible display market. We
expect the LTPS-based RGB OLED technology –
already being used by Samsung Display in its high-
definition OLED small-size panel production – to
become the industry standard for flexible display.
2: A substitute for glass
Glass is currently used in the upper and lower
layers of LCD and OLED panels. The reason is
simple – it is flat, transparent and resistant to heat
and moisture. However, glass has low levels of
elasticity, making is unsuitable for flexible display.
Key success factors
Companies must convert existing LCD fabs to flexible display for
investment efficiency
Plastic material is needed to replace glass
Vertical integration – from material providers to handset
manufacturers – is important
Comparison of technologies involved in flexible display production
Process Technology Advantages Disadvantages
Backplane a-Si Cost competitiveness is high because most of existing LCD equipment can be re-used
Low mobility
Oxide More advanced than a-Si with the better mobility suitable for OLED, applicable in large-sized OLED panels and high-resolution panels
Applicability is uncertain due to low stability and low yield for mass-production
LTPS Most suitable for flexible display: 1) Sufficient mobility is feasible, 2) plastic can be easily utilised as it can be manufactured in a low-temperature environment
Equipment is expensive
Evaporation / Deposition
LED Backlight
Can’t be applied in flexible display
White OLED Can be applied in large-sized panel production Has limitations to be used in flexible display because it needs other layers, such as colour filters
RGB OLED Safest technology depositioning RGB colour in each cell; colour implementation is excellent on flexible surface
Source: HSBC
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Next-generation plastic looks like the best
substitute. Currently, it can be used in high-
performance thin transistors as its thermal
expansion coefficient is low. However, this is
expensive and not efficient due to its opaqueness.
However, on the plus side a wide range of
materials can be applied in plastic. Research is
being done on materials with high thermal
resistance, such as PET (Polyethylene
Terephthalate), PC (Polycarbonate), PES
(Polyether Sulfone), PI (Polyimide) and how
plastic boards can withstand the process of
thinning (see table on the next page).
We believe polyimide plastic film is most
compatible with flexible display since polyimide
provides the highest thermal resistance. Polyimide
is a transparent polymer material that has a
relatively low degree of crystallisation and an
amorphous structure. Moreover, it is an excellent
mechanical material and provides outstanding
heat and chemical resistance, electric
characteristics and stable size based on a rigid
chain structure. It is widely used in auto, aviation,
aerospace and flexible circuit boards.
Despite its advantages in being applicable in
insulating material, flexible film, and aerospace
aviation, polyimide is partially used in FPCB
(flexible printed circuit board) and costly displays
within aeroplanes due to its unique yellow colour;
efforts are being made to lower this yellow colour
and raise transparency. The result of this work,
polymer, is likely to be in use in 2014.
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3: Plastic to replace frontal glass
Frontal glass needs to be more scratch proof than
the lower glass panel. A plastic substitute would
need to have the same hardness as glass, but this
technology is still at an early stage. Some
Japanese companies are making progress in this
area, but the cost is much higher than tempered
glass, making commercialisation difficult.
4: Vertical integration
Some Japanese companies have already
developed technologies for the commercialisation
of flexible display and have even introduced some
prototypes. However, they are being produced by
a single company, so there is a lack of
competition in cost and mass productivity.
While a number of technological issues still need
to be resolved by individual material and panel
companies, we believe that vertical integration
among material developers, components and
panel producers, and handset makers is essential
for the commercial success of flexible display.
Given the newness and complexity of the
technology, co-operation among the companies in
the supply chain, especially in the early stages of
mass production, will be important.
We think flexibility on pricing is also essential.
Manufacturer info and pros and cons of plastic substrates
MD vs. TD direction optical anisotropy Weak temperature safety Gets murky due to partial recrystallisation after thermal process High CTE (20~80x10-6/K) Production room temperature (~130C)
General Atomics (USA) Mitsubishi Chemical (Japan)
PEN (polyethylene naphthalate )
Chemical-resistant Low CTE (~20x10-6/K) Low cost
Optical anisotropyWeak heat resistance Production room temperature (~130C)
Dupont Teijin Film (Japan)
PC (polycarbonate)
Good optical characteristic Good mechanical characteristic Easy to purchase
Weak chemical-resistanceHigh CTE (60~70x10-6/K) Low production room temperature (~150C) Weak UV resistance
Dupont Teijin Film (Japan) GE (USA) Mitsubishi (Japan)
PES (polyether sulfone)
UV resistance Easy to purchase
High moisture hygroscopicity (over 24h. 0.4~1.0%)High CTE (55x10-6/K) High cost Weak chemical-resistance Production room temperature (~180C)
i-Component (Korea) Sumitomo Bakelite (Japan)
PI (polyimide) Excellent chemical resistanceProduction room temperature (>200C) UV resistance Easy to purchase
Mobility Fair Average Very good Scalability G3~G10 G8 or larger Up to G8 Availability Very good Average Good Advantages Low cost Scalability, Good uniformity Superior mobility, stability
Good track record Weakness Low mobility Low cost Low scalability
Source: HSBC estimates
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We believe flexible display will have a positive
impact on the overall display industry because it
will create a new line of business. We expect new
product shapes and designs to revitalise the slowing
notebook market. Smart watches, previously
considered a niche market, should also benefit.
We are convinced that a vertically integrated
industry structure that includes materials, panels and
handsets is essential to commercialise flexible
display. This involves:
Re-using existing LCD equipment
Co-operation between handset makers and
material providers to obtain a decent yield
from mass production
Set makers fully utilising flexible display to
maximise added value and secure sales capacity
Samsung Electronics and LG Electronics have the
technological advantages to lead industry as both
have already commercialised OLED panels that
are generating stable yields.
We believe it’s the handset makers that stand to
benefit most at first as they have an opportunity to
grow their market share on the back of these new
and highly differentiated flexible display
products. It’s certainly a substantial opportunity
for LGE, which is experiencing a slump in its
smartphone business. The company’s market
share is only 5%, but we believe this can rise to 7-
8% in 2014. Samsung Electronics, the leader in
the smartphone handset market, can use flexible
display to further strengthen its position.
We believe LG Innotek (LGI) will be one the
biggest indirect beneficiaries of the flexible display
trend. For example, if LGE’s handset business
improves, LGI will supply most of handset
components – touch screen, PCB, and camera
modules – to LGE. LGI also holds the key to
developing the required flexible components (e.g.,
flexible PCB) when curved design is introduced.
This will strengthen the relationship between LGI
and LGE. Moreover, LGI is focusing on
developing a transparent electrode, essential for
transparent display in the longer term.
We also believe Cheil Industries will have the
largest upside risk in the mid to long term as the
company can co-operate with Samsung Display to
Who benefits fromflexible display?
LGE and SEC are expected to benefit the most
Their major suppliers, LG Innotek and Cheil Industries, are also
well positioned
SFA has an opportunity to benefit from converting and expanding
Samsung’s production lines
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develop core technologies required for flexible
display. This is Cheil’s differentiating factor and
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Process 2: Evaporation process
The evaporation process involves placing several
layers of organics, which emit light on the
backplane in a vacuum. An electrical membrane is
formed through plasma treatment, and with the
help of organics, a cathode is formed.
The important aspect in the evaporation process is
how to pile on the organic layers. There are three
technologies: 1) Embedded Metal Mask (EMM);
2) Laser Induced Thermal Imaging (LITI); and 3)
the printing method, which raises a membrane by
making tiny droplets like an inkjet printer.
Although each method has pros and cons, FMM is
the most widely used for the small panels due to
its high yield from mass production. On the other
hand, FMM’s material efficiency is lower because
it spreads organic materials on the backplane
through the holes in the thin metal mask.
Moreover, it has limits in realising high-definition
displays of over 250ppi. Recently, demand for the
laser printing has been increasing because full HD
panels with over 400ppi are now used in
smartphones. Flexible display has similar issues to the TFT
backplane manufacturing process. It needs
material, which can withstand high temperatures
when using laser technology. FMM technology is
expected to be used until the flexible material,
which can tolerate high temperature, is developed.
Process 3: Encapsulation process
The last major process is encapsulation, which
enhances durability and lengthens useful life by
protecting the panel from water and oxygen
permeation. Encapsulation is considered a
relatively easy process for LCD manufacturing.
However, it also became one of the most
important processes in determining mass
production yield in OLED manufacturing, as
unstable organic materials are used.
Generally, “Frit Seal” and “Face Seal”
technologies are used for the evaporation process.
Frit Seal builds walls between evaporated organic
materials and covers glass over it. It has an
advantage in terms of yield because its process
and structure are simple. In addition, it helps
preserve organic materials as its simple structure
makes it easier to maintain a highly vacuumed
status. On the other hand, its disadvantage stems
from its weakness to physical shock and
overheating problems as melted glass becomes
sticky. Face Seal technology has been developed
to alleviate these problems. It coats adhesive film
on evaporated organic materials, and covers the
upper glass in it. Although the filming process
Encapsulation technology comparison, Frit Seal and Face Seal structure
Frit Seal Face Seal
Structure
TFT (Lower Glass)
OLEDCathode
CPL
Upper Glass
N2Frit
TFT (Lower Glass)
OLEDCathode
CPL
Upper Glass
N2Frit
TFT (Lower Glass)
OLED
Upper Glass
Polymer
Adhesive
1st Passi.
2nd Passi.
TFT (Lower Glass)
OLED
Upper Glass
Polymer
Adhesive
1st Passi.
2nd Passi.
Hardness/slim Bezel limiting value 1.2mm 0.6mm Panel Mo wiring (resistivity 14 Ω) Mo/AI wiring (resistivity 5 Ω) TSP On-Cell Only In-Cell, On-Cell Flexible No Yes
Source: HSBC
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lowers yields for mass production, it still can
maintain the highly vacuumed status and
enhances endurance to the external shock thanks
to the adhesive film.
Face Seal is better suited than Frit Seal for
flexible display. It is easier to use plastic materials,
(Frit Seal uses melted glass for adhesion) because
adhesive film eases the overheating problem.
Moreover, to produce truly flexible display in the
future, the upper glass should be removed and
replaced with film.
Comparison of TFT backplane technology
TFT
Oxide TFT
LTPS
Cost
Performance
Laser processing
Sputtering
TFT
Oxide TFT
LTPS
Cost
Performance
Laser processing
Sputtering
Source: HSBC
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Patent trends
The core technologies of flexible display include
substrate, driver, and display, while each
technology can be broken down into materials and
manufacturing processes.
Display
The US, Japan and Korea account for more than
90% of the global patents for flexible display. In
Korea, Samsung Electronics, LG Electronics and
LG Display have the biggest number of patents.
Canon, Seiko Epson, and Ricoh are the most active
companies in Japan and the US is dominated by E
Ink, SiPix Imaging, and Seiko Epson.
Drivers
The key technology for drivers is the development
of active material for printing or R2R process.
Developing organic semiconductors and organic
insulators are essential, given their advantages for
low temperature and large-sized processes. Also,
TFT technology using inorganic materials, such as
a-Si TFT and Oxide TFT, are still under
development, because they are more stable than
organic materials.
Samsung Electronics is the biggest patent issuer,
followed by Konica Minolta and Merck, while the
US accounts for more than 40% of total driver
patents. Korea seems to relatively strong in
organic semiconductor materials, especially
insulators, while Japanese and US companies are
strong in materials for organic semiconductors.
Major companies include Samsung Electronics,
Konica Minolta and Merck.
Substrates
Substrates require a lot of physical characteristics,
such as high light transmittance, physical strength,
outstanding formability, stability against heat and
chemical solvent, low transmittance of gas and
moisture, low price, etc. Currently, materials that
can completely meet those requirements have not
been developed. Metal foil, ultra-thin glass, paper
sheet, and plastic sheets are under development.
Comparison of thickness between display technologies
TFT-LCD
Liquid crystal
Glass
Polarizer
Backlight unit
Glass
Polarizer
Color Filter
AMOLED Flexible display True flexible display
Glass
Glass
OLED materials
OLED materials
OLED materials
Glass
Polyimide Film
TFT-LCD
Liquid crystal
Glass
Polarizer
Backlight unit
Glass
Polarizer
Color Filter
Liquid crystal
Glass
Polarizer
Backlight unit
Glass
Polarizer
Color Filter
AMOLED Flexible display True flexible display
Glass
Glass
OLED materials
Glass
Glass
OLED materials
OLED materialsOLED materials
OLED materials
Glass
Polyimide Film
OLED materials
Glass
Polyimide Film
Source: HSBC
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OLED / Flexible display food chain
Category Component Name Description Suppliers
TFT Glass Mother glass Base glass to apply TFT circuit NEG (NEG US) Corning (GLW US)
Plastic Substrate Polyimide Film Plastic film to apply on TFT glass LG Chem (051910 KS) Cheil Industries (001300 KS) Nippon Steel Chemical Corp (5401 JP)
Circuit Surface Mount Device
Flexible Printed Circuit Board Flexible plastic board with complex of circuit ACT (unlisted)
MLCC Multi-layer Ceramic Condenser Multiple layer of ceramic condenser to control power between chip on the circuit board
SEMCO (009150 KS) Murata (6981 JP)
OLED Common Layer HIL, HTL, ETL, EIL Layer to transfer electrons UDC (PANL US) Idemitsu Kosan (5019 JP) LG Chem (051910 KS) Cheil Industries (001300 KS) Doosan Electronics (unlisted)
equals the percentage difference between the current
share price and the target price, including the
forecast dividend yield when indicated.
We remove the volatility indicator (V) as the
stock’s average volatility (defined as the past
month’s average of the daily 365-day moving
average volatilities) is below the 40% volatility
threshold as defined by our research model.
Risks
Downside risks include: delayed launch of flagship
smartphones and TVs, and a slower-than-expected
recovery in demand for consumer electronics.
Summary of the STOP valuation
(KRWbn) 2013e EBITDA
EV/EBITDA (x)
EV Comments
+Total EV 3,261 6.4x 20,945 Home entertainment 1,013 5.2x 5,270 Applying a 30% premium to the lowest 2013e EV/EBITDA multiple of
Japanese peers, given LGE has the second largest market share in the LCD TV market (Sony, Sharp, Panasonic)
Mobile handsets 811 10.0x 8,107 Applying average multiple of peers (Motorola Mobility Holdings and HTC) Appliance 793 4.1x 3,251 Applying average 2013e EV/EBITDA multiple of peers (Electrolux and
Whirlpool) Air conditioner 644 6.7x 4,317 Applying the multiple to Daikan Industries, given LGE's strong
competitiveness in CAC market -Net debt (less) 4,347 +Stake in subsidiaries 4,241 37.9% stake in LG Display 3,578 LGD's market cap of KRW9.9trn with a 15% discount49% stake in LG Innotek 663 LGI's market cap of KRW1.8trn with a 15% discount Target mkt cap 20,839 Total # of shrs (‘000) 180,066 Target price (KRW) 116,000
Source: HSBC estimates
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Vertical integration at Samsung an upside risk
Although Cheil Industries is a supplier of many
essential materials for Samsung Display, investor
confidence suffered because its polariser and OLED
businesses have slowed due to delayed technological
developments and product launches. However, we
believe that Cheil Industries has the largest upside
risk in the mid to long term. The opportunities to co-
operate with Samsung Display to develop core
technologies for flexible display are expected to lead
revenue growth at the electronic material division.
ECM business, the biggest swing factor, should improve on OLED materials
Cheil Industries has a wide portfolio of businesses,
including fashion, chemical, and electronic
materials. The stock price depends on the
performance of the electronic material division, and
the growth drivers have been sluggish, owing to a
slowdown in the polariser business and delayed sales
of OLED materials.
However, Cheil Industries seems to have made
progress in developing plastic substrate with
polyimide (just as LG Chem has done). It is
expected to play an important role in helping
Samsung Display develop and launch plastic display
products. We expect OLED materials sales to pick
up in 2H13 and to grow significantly from 2014. We
expect 13% and 20% of ECM revenue will come
from OLED in 2013 and 2014, respectively. ECM
(electronic chemical materials) revenue accounts for
about 30% of the company’s total revenue.
Upgrade to OW from N; raise TP to KRW108,000 from KRW98,000
We increase our 2013 sales and operating profit
estimates by 8.8% and 11.2%, respectively, mainly
to reflect improvement in the ECM division, thanks
to flexible display. Our 2013 and 2014 operating
profit estimates are in line with consensus.
Accordingly, we raise our target price to
KRW108,000 as we believe Cheil Industries is a
beneficiary of flexible display.
Cheil Industries(001300 KS)
Samsung Group’s vertical integration in flexible OLED
development represents an opportunity
OLED materials to improve the ECM business, the biggest swing
factor for the share price
Upgrade to OW from N, raise target price to KRW108,000 from
KRW98,000
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Our target price is derived from EV/EBITDA
multiples in our sum-of-the-parts (SOTP) valuation
and implies a 16.7x 2013e PE and a 1.5x 2013e PB
versus a historical average of 16.6x and 1.3x,
respectively. The stock currently trades at a 14.3x
2013e PE and 1.3x 2013e PB.
Valuation and risks
Valuation
We raise our target price to KRW108,000 from
KRW98,000 as we increase our 2013 earnings
estimates by 8.8% to reflect upside opportunities
from flexible OLED display. Our target price
implies a 16.7x 2013e PE and a 1.5x 2013e PB.
We use the target EV/EBITDA multiples in our
SOTP valuation to capture Cheil’s potential as a
pure electric chemical company. In this regard, we
apply a 20% premium to the peer average. For the
chemical and fashion divisions, we apply peer
average valuations.
Under our research model, for stocks without a
volatility indicator, the Neutral band is 5ppts
above and below the hurdle rate for Korea stocks
of 10%. Our target price implies a potential return
of 16.8%, above the Neutral band; therefore, we
are upgrading our rating to Overweight from
Neutral. Potential return equals the percentage
difference between the current share price and the
Reuters (Equity) 051910.KS Bloomberg (Equity) 051910 KSMarket cap (USDm) 14,898 Market cap (KRWb) 16,634Free float (%) 66 Enterprise value (KRWb) 17565Country Korea Sector ChemicalsAnalyst Brian Sohn Contact +822 3706 8765
Reuters (Equity) 077360.KQ Bloomberg (Equity) 077360 KSMarket cap (USDm) 707 Market cap (KRWb) 789Free float (%) 48 Enterprise value (KRWb) 740Country Korea Sector Electronic EquipmentAnalyst Brian Sohn Contact +822 3706 8765
Price relative
15131
20131
25131
30131
35131
2011 2012 2013 2014
15131
20131
25131
30131
35131
Duksan Hi-Metal Rel to KOSPI INDEX
Source: HSBC Note: price at close of 03 Apr 2013
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Notes
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Notes
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Notes
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Brian Sohn, Ricky Seo, Jerry Tsai and Hongsik Jo
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 05 April 2013, the distribution of all ratings published is as follows: Overweight (Buy) 44% (30% of these provided with Investment Banking Services)
Neutral (Hold) 38% (29% of these provided with Investment Banking Services)
Underweight (Sell) 18% (23% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 28 February 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
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Additional disclosures 1 This report is dated as at 08 April 2013. 2 All market data included in this report are dated as at close 03 April 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 As of 29 March 2013, HSBC owned a significant interest in the debt securities of the following company(ies) :LG DISPLAY,SAMSUNG ELECTRONICS
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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR
Issuer of report
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch 7th Floor, HSBC Building
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
Brian Sohn*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 3706 [email protected]
Brian Sohn joined HSBC in April 2010 as Korea Technology analyst, from LG Electronics, where he was Head of Investor Relations.Before joining LG Electronics in 2001, Brian served as a research analyst at the Korea Institute of Public Finance for five years. Brian received an MBA and BS from the University of Akron. He is also a US certified public accountant.
Ricky Seo*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 3706 [email protected]
Ricky has been covering Korean semi stocks since his first post as an equity analyst at a major investment bank in 2006, following five years as a manager on the Strategic Planning Team of Samsung Electronics’ Semiconductor Division. Prior to joining HSBC in March 2011, he shifted to a domestic equity house in 2009 and was ranked among the top semiconductor analysts by Maekyoung andHankyoung in 2010.
Jerry Tsai*AnalystHSBC Securities (Taiwan) Corporation Limited+8862 6631 [email protected]
Jerry Tsai is an analyst in Taiwan’s Technology research team. Previously, he covered non-tech small cap/material sectors at two majorinvestment banks. Prior to his career in finance, he was a licensed civil/transportation engineer in the US for six years. He receivedhis MBA from Carnegie Mellon and holds a Bachelor’s degree in engineering from UC Berkeley.
Steven PelayoRegional Head of Technology Research, Asia PacificThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]
Steven Pelayo joined HSBC in June 2006 as a global technology analyst focusing on Asian semiconductor foundries, equipment andpackaging and test services. Currently, Steven is Regional Head of Technology Research for Asia Pacific. In addition to covering thefoundry/semiconductor sector, he develops regional products in conjunction with other HSBC technology analysts and coordinatesviews within the broader technology space in Asia. Prior to joining HSBC, Steven was Managing Director and equity research analystin the US. He has focused on the technology sector on both the buy and sell side for more than a decade, and is a CFA charterholder.
Hongsik Jo*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 [email protected]
Hongsik Jo joined HSBC as a research associate for Korea technology research in February 2012. Prior to this, he worked at leadingUS and Australian firms where he supported insurance and brokerage sector analysts. Hongsik holds a Bachelor of Economics degreefrom Seoul National University, Korea.