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130408 hsbc flexible display

  1. 1. Telecoms, Media & Technology Equity – Asia April 2013 Flexible Display Fantastic plastic – a shape-shifting game changer 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) By Brian Sohn, Ricky Seo and Jerry TsaiDisclosures 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
  2. 2. Telecoms, Media & Technology Asia Technology abc 8 April 2013Impact from flexible display Positive Neutral Negative Reason ImpactHandset SEC Differentiation among smartphone makers Flexible display could help to sustain its dominance in themakers 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 New business in plastic substrate and OLED materials to OLED business drives ECM division growth as it expects to Industries kick in take 23% of ECM revenue in 4Q15 from nothing in 4Q12 LG Chem Contribution from plastic substrate, which accounts for only Although the company is a key player in making flexible a small portion of overall earnings display feasible, the contribution to earnings is limited Duksan Already a major supplier of OLED materials to Samsung Already a main OLED material supplier for Samsung Himetal Display Display, limited upside from flexible display transition Glass Glass substrate to be replaced by plastic in the longer term makers*Panels Samsung Limited to small-sized displays, insignificant to overall Substantial potential to become major flexible display Display earnings makers as its AMOLED line could be converted to flexible display when materials are ready for mass production LG Although the company should play an important role in Display commercialising flexible display, expect an insignificant contribution to earningsComponent LG Indirect beneficiary if LGE’s smartphone business can turn Once LGE smartphone business turns round, it is likely to Innotek around benefit from the mobile component business with LGE SEMCO Already a major beneficiary of Samsung’s smartphone Handset accounts for 23% of estimated 2013 total revenue success LED No BLU is required in flexible display (e.g., Seoul Semi) makers*(Battery) Samsung Product mix improvement through irregular shaped battery IT battery accounts for 64% of estimated 2013 total revenue SDI LG Chem Although the company is a key player in making flexible display feasible, the contribution to earnings is limitedEquipment 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 Line conversion to LTPS OLED from traditional LCD equipment*Source: HSBC estimates*Note: Refer to the table on page 9 for the food chain 1
  3. 3. Telecoms, Media & Technology Asia Technology abc 8 April 2013Roadmap for flexible displayPhase Available solution Time frame Product Key benefit PrototypePlastic substrate LTPS, RGB OLED, 2Q13e Unbreakable Lighter, slimmer, given no substrate glass Polyimde (not fully smartphone required, but no change in form factor transparent)Plastic substrate + LTPS, RGB OLED, 3Q13e Curved screen Lighter, slimmer and curved screen designultra-thin glass Polyimde, irregular type smartphone Li-Polymer batteryPlastic substrate + LTPS, OLED, 2014e Bendable tablet, Lighter, expandable screen sizeplastic front glass transparent Polyimde notebook substrate, irregular type Li-Polymer battery, new plastic materialTransparent LTPS, OLED, 2015e Transparent, Transparent, rollable tablet transparent Polyimde smartphone, substrate, transparent tablet, monitor battery, new plastic materialSource: HSBC estimates2
  4. 4. Telecoms, Media & Technology Asia Technology abc 8 April 2013SummaryThe concept of a digital device that can be rolled up like a piece ofpaper is no longer science fiction. We believe flexible displaytechnology will be a game changer for smartphones and tablets andthe first prototype products should be available in a few months. LGElectronics and Samsung Electronics stand to gain the most, but thewhole vertically integrated Korean supply chain will benefit. Weupgrade Cheil Industries and SFA to OW from N and Duksan Himetalto N(V) from UW(V). We remain OW on Samsung Electronics (anAsia Super 10 and GEMs Super 15 portfolio stock) and OW (removethe volatility indicator (V)) on LG Electronics and LG Innotek.The next big thing – flexible display. Imagine a screen that is bent around the side of the phone, so youcan see data updates or messages. Then go a stage further and imagine a range of bendable, rollable andfoldable digital devices. Welcome to flexible display, the technology that is about to become commercialreality. Flexible displays can be bent without being damaged, making it possible to create products thatare ultra-thin, almost unbreakable and flexible. The potential for this technology is substantial as theultimate 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 anotherwave of innovation in 2H13, flexible display based on new plastic materials will evolve into bendable andthen transparent products.This report focuses on Korean companies as they appear better placed to benefit from flexible displaythan their global competitors, at least to begin with. They are at an advanced stage of development inmost of the processes needed to make this technology a reality and should also be the first to enjoy theadvantages 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 sneakpreview at a recent trade show in Las Vegas) and have the capability to manufacture and releasedifferentiated products that will change the market.Importantly, both have already commercialised organic light-emitting diode (OLED) technology, the basetechnology for flexible display, and have established vertically integrated panel, chemical, and handsetproduction. LGE and SEC should lead the way in the initial stage when the flexible display technology isfirst used in handsets for smartphones. LG Innotek (LGI) should benefit as a component supplier, asshould Cheil Industries and SFA as materials and equipment providers. 3
  5. 5. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Curved design smartphone concept Curved design smartphone concept Source: HSBC Source: HSBCAll this is good news for the digital supply chain. For example, the smartphone market, which has grownat a significant rate since the second half of 2009, is starting to mature. Aggressive new players are tryingto catch up with market leaders. Currently, all smartphones use rectangular touch screens, making itharder to differentiate between products (see The new three “Cs” – commoditisation, concentration andcost, 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 turnedgloomy 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 islittle 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 penetrationlevels for LCD TVs are already high. LCD can’t be used in flexible display, which needs self-lightemitting material, such as OLED. Korean companies have led the development of OLED, which isalready being used in some smartphones and TVs. OLED’s faster response time and outstanding colourdefinition have given the early entrants an edge as its use in high-end products also generates a marginpremium. 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 thecommercialisation 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 useglass 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 thatthey can offer consumers added value. It remains to be seen how much of a premium companies will beable 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 productsbased on existing technology may be available much earlier. The first thin smartphones and tablet PCsusing plastic substrates could be in stores in just a couple of months, but how much added value theseprototypes will offer consumers remains to be seen. We expect competition to start to hot up in 3Q13after the release of smartphones with curved screens made of both plastic substrate and thin glass.4
  6. 6. Telecoms, Media & Technology Asia Technology abc 8 April 2013LGE and SEC, which have vied with each other since the launch of OLED TV in January 2012, shouldalso compete fiercely in the flexible display smartphone market. In 2H13, SEC is likely to start offeringflexible display in its Galaxy Note 3 and LG Electronics in its Optimus G2 models, with possible volumesof 10-15m and 5-10m, respectively. This would mean that by the end of the year flexible display couldrepresent 5% of the global smartphone market and 15% of high-end smartphones in 2H13. These modelsare all high end, so the impact on earnings will be visible at an early stage. The first models will still useglass in the outer layer of the curved screen, so won’t be completely flexible. However, by 2014 plasticfilm will be available and the new products will represent a revolutionary change in the smartphone,notebook and tablet industry. Flexible display market forecasts Samsung’s OLED sales and OPM forecasts (USDmil) LCD OLED E-ink Others 25,000 25% 10,000 20,000 20% 8,000 15,000 15% 6,000 10,000 10% 4,000 5,000 5% 2,000 0 0% 0 2010 2011 2012 2013e 2014e 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 OLED rev enue (USDmil) OPM (RHS) Source: Display Search, HSBC estimates Source: HSBC estimates 5
  7. 7. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Bendable display conceptual picture Bendable display conceptual picture Source: HSBC Source: HSBCMarket prospects. We expect two important technological steps to be taken next year. First, anevaporation process on top of plastic substrates will simplify the manufacturing process, leading to massproduction. We also expect transparent plastic to replace the frontal glass of curved screens. This willbroaden the scope of flexible display’s applications from pilot products, such as two-inch watches andfive-inch curved screens, to commercial 5-8 inch tablets and 13-15 inch notebooks. When this happens,the size of the flexible display market size will increase substantially.Given the scale and pace at which Samsung Display is converting some of its OLED facilities to flexiblelines, we estimate the market could be worth USD6bn by 2015. Much will depend on how fast newmaterials and processes can be developed. While demand for prototype flexible display products, such aswatches and small curved screen is likely to be limited, we expect the market to start taking off when SECand LGE launch flexible display Galaxy Note 3 and Optimus G smartphones later this year. Development of OLED display vs. flexible display OLED TV Flex ible display ④ Mass production for OLED TV ③ Penetration of ③Penetration of ② Introduction of new play ers new play ers ① Technological prototy pe through ② Introduction improv ement pilot line ①Technological of prototy pe improv ement 2011 2012 2013 2014 2015 2016 Source: HSBC estimates6
  8. 8. Telecoms, Media & Technology Asia Technology abc 8 April 2013Impact from flexible displayFood chain Name Impact DescriptionHandset and Samsung Handsets account for 51% and 64% of Flexible display could help to sustain its dominance in the high-endpanel Electronics sales and operating profit in 2013e, smartphone segment respectively Samsung OLED panels account for 6.8% and Substantial potential to become a major flexible display maker as its Display 9.1% of sales and operating profit in AMOLED line could be converted to flexible display when materials 2013e, respectively are ready for mass productionHandset LG Electronics Handsets account for 23% and 30% of Flexible display could be a key differentiating factor in high-endmakers sales and operating profit in 2013e, smartphones and help to improve ASP and margin. Revise up 2013e respectively handset margin assumption from 1% to 3%Materials LG Chem Plastic substrate and Li-Polymer Although the company is a key player in making flexible display battery take <1% and 6% of total sales feasible, the contribution to earnings is limited in 2013e Cheil Industries Electronics Chemical Material (ECM) OLED business drives ECM division growth as it expects to take 24% business accounts for 29% of 2013e of ECM revenue in 4Q15e, up from nothing in 4Q12 sales Duksan OLED materials account for 71% of Already a main OLED material supplier for Samsung Display, limited Himetal 2013e sales upside from flexible display transitionComponent LG Innotek Mobile component business accounts Once LGE’s smartphone business turns around, it is likely to benefit for 60% of 2013e sales from the mobile component business with LGE SEMCO c50% of sales is from Samsung Already a major component supplier to Samsung Electronics, the Electronics incremental benefit from flexible display could be limitedPanel LG Display G6 LTPS fab is to be converted to Although the company will likely play an important role in flexible OLED, it accounts for 6% of commercialising flexible display, expect insignificant contribution to total output capacity earningsEquipment SFA 57% of 2013e sales is related to OLED Additional small panel equipment orders from Samsung Display manufacturing equipment (back-end during 2-3Q13e, given that it has to switch or extend capacity for and logistics) flexible AMOLED. Galaxy Note 3 will mostly likely adopt flexible OLED (unbreakable)Source: HSBC estimatesThe winners. We believe vertical integration is essential to fully commercialise flexible display for thefollowing reasons: 1) Although individual panel and materials companies are capable of solvingtechnological issues, the supply chain needs to be tested by the rigours of mass production; 2) We thinkflexibility on pricing throughout the supply chain is also essential, especially in the early stages. TV setmakers have a “40% premium rule” for TV products but set prices lower when they launched LED andultra-high definition TV. They will probably have to adopt the same tactics for flexible display ascustomers assess these new products. 3) A whole range of new components will be needed to meet therequirements 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 marketshare on the back of these new and highly differentiated flexible display products. It’s certainly asubstantial opportunity for LGE, which is experiencing a slump in its smartphone business. Thecompany’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 avertically integrated supply chain in place. For example, we think flexible display will be difficult tocommercialise 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 organisingthe 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 7
  9. 9. Telecoms, Media & Technology Asia Technology abc 8 April 2013components – touch screen, PCB, and camera modules. LGI also holds the key to developing the requiredflexible components (e.g. flexible PCB) when curved design is introduced. This will strengthen therelationship between LGI and LGE. What’s more, LGI is developing a transparent electrode, essential fortransparent display in the longer term. We also believe Cheil Industries will have the largest upside risk inthe mid to long term as the company can co-operate with Samsung Display to develop core technologiesrequired for flexible display. This is Cheil’s differentiating factor and is expected to drive revenue growthat its electronic material division.It’s also good news for equipment makers. Starting in 3Q13, Samsung Display and LG Display areexpected to expand capacity by converting existing LCD fabs to plastic OLED to maximise investmentefficiency. 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 weprefer Cheil Industries, LG Innotek, and SFA among component, materials and equipment providers. Weupgrade Cheil Industries and SFA to OW from N and Duksan Himetal to N(V) from UW(V). We remainOW on Samsung Electronics (an Asia Super 10 and GEMs Super 15 portfolio stock) and OW (removethe volatility indicator (V)) on LG Electronics and LG Innotek.Summary of ratings and target price changes LG Electronics Cheil Industries LG Innotek SFA Samsung LG Display LG Chem Duksan Himetal ElectronicsStock Code 066570 KS 001300 KS 011070 KS 056190 KS 005930 KS 034220 KS 051910 KS 077360 KSMarket Cap (KRWbn) 13,042.7 4,415.3 1,567.3 1,086.2 221,980.1 11,181.7 18,257.7 806.8Rating Reiterate OW Upgrade to OW Reiterate OW Upgrade to OW Reiterate OW Reiterate OW(V) Reiterate OW(V) Upgrade to N(V) from N from N from UW(V)Target Price (KRW) 116,000 108,000 108,000 75,000 2,000,000 51,500 365,000 31,700Previous TP (KRW) 104,000 98,000 108,000 56,000 2,000,000 51,500 365,000 17,500Current Price (KRW) 80,000 92,500 85,700 62,400 1,521,000 31,150 251,000 26,850Diff to TP 45.0% 16.8% 26.0% 20.2% 31.5% 65.3% 45.4% 18.1%PE 2012a 215.7x 22.4x -69.1x 14.9x 9.6x 48.5x 11.8x 16.1x 2013e 11.4x 14.3x 36.8x 11.1x 7.1x 5.4x 9.2x 14.2xPB 2012a 1.2x 1.4x 1.4x 2.9x 1.9x 1.1x 1.5x 3.7x 2013e 1.1x 1.3x 1.3x 2.4x 1.5x 0.9x 1.3x 2.9xROE 2012a 0.5% 6.4% -1.9% 19.6% 22.3% 2.3% 14.1% 26.1% 2013e 9.7% 9.6% 3.6% 23.3% 23.9% 18.8% 15.9% 23.1%EPS 2012a 371 4,124 -1,240 4,175 158,228 642 21,281 1,665 2013e 7,044 6,458 2,330 5,611 214,645 5,746 27,138 1,891BVPS 2012a 69,166 64,329 62,895 21,838 806,096 28,619 163,890 7,253 2013e 75,959 70,041 65,226 26,249 1,028,740 34,438 185,941 9,144Source: Bloomberg, HSBC estimates; Priced as of 3 April 20138
  10. 10. Telecoms, Media & Technology Asia Technology abc 8 April 2013OLED/Flexible display food chainCategory Component Name Description SuppliersTFT 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 Flexible printed circuit board Flexible plastic board with complex of circuit ACT (unlisted) device MLCC Multi-layer ceramic condenser Multiple layer of ceramic condenser to control power SEMCO (009150 KS) between chip on the circuit board 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) Emission Materials Fluorescence materials, Self-illuminating material when electric power is UDC (PANL US) Phosphorescence materials applied Idemitsu Kosan (5019 JP) Kodak (unlisted) Evaporation RGB LTPS Equipment to use low temperature laser base Tokki (7751 JP) evaporation process AP System (054620 KS) ULVAC (6728 JP) White OLED Sputtering equipment AVACO (083930 KS) Encapsulation Sealant Paste to stick upper glass and bottom glass in TFT Three Bond LG Chem (051910 KS) Cheil Industries (001300 KS) Frit seal Glass pounder to be used as adhesive paste Yamato (9064 JP) Corning (GLW US) Face seal Apply adhesive seal in order to bind upper and Three Bond (unlisted) bottom glass AVACO (083930 KS) LIG ADP (079950 KS) PECVD chamber Vacuum chamber for face seal process Jusung Eng(036930 KS)Source: HSBC 9
  11. 11. Telecoms, Media & Technology Asia Technology abc 8 April 2013ContentsIntroduction to flexible display 11 Company section 39Why flexible display is important 11 LG Electronics (066570 KS) 40Flexible display: market prospects 13 Cheil Industries (001300 KS) 43 LG Innotek (011070 KS) 46Key success factors 16 Samsung Electronics (005930 KS) 481: Re-using LCD fabs 16 LG Display (034220 KS) 502: A substitute for glass 16 LG Chem (051910 KS) 523: Plastic to replace frontal glass 18 SFA (056190 KS) 544: Vertical integration 18 Duksan Himetal (077360 KS) 56What to expect near term 20 Disclosure appendix 69Who benefits from flexibledisplay? 24 Disclaimer 72Implications for non-Koreanplayers 26Technology overview 29Technology overview 30Introduction 30Patent trends 3610
  12. 12. Telecoms, Media & Technology Asia Technology abc 8 April 2013Introduction to flexibledisplay Flexible display will improve the user experience for mobile devices by increasing design options Materials, evaporation and encapsulation are the key to mass production Korean companies are leading the way in technological advancesWhy flexible display is and CDMA combined to form WCDMA or 3G. Brian Sohn* Analystimportant The market became more operator-driven as The Hongkong and Shanghai telecom companies used a variety of marketing Banking Corporation Limited,The era of mobile devices began in the second Seoul Securities Branch methods, including providing customers with +822 3706 8765half of the 1990s. As cell phones became widely subsidies and two-year contracts. briansohn@kr.hsbc.comused, the market for mobile equipment grew at a Ricky Seo*rapid rate. The main area of competition was in By the second half of 2005, most phones had Analyst The Hongkong and Shanghaimaking devices smaller and improving call similar design and functions (camera, colour Banking Corporation Limited, display, 3G) and with differentiation becoming Seoul Securities Branchquality. Once the ideal size and call quality was +822 3706 8777achieved it became harder to differentiate the more difficult, commoditisation started and rickyjuilseo@kr.hsbc.com competitors focused on lowering production costs. Jerry Tsai*products in the early 2000s. Analyst HSBC Securities (Taiwan)As a result, companies started competing to Corporation Limiteddevelop simple wireless telecom devices and +8862 8725 6023 jerrycytsai@hsbc.com.twadded value for customers by offering colour *Employed by a non-USdisplay, MP3 and camera functions. The affiliate of HSBC Securitieslandscape of the market changed quickly as GSM (USA) Inc, and is not registered/ qualified pursuant to FINRA regulationsThe history of the handset industryTime frame Technology Key application1990s 2G Voice quality, ring tone, MP3, slimmer form factor2000 Colour screen, dual display, longer battery life2002-03 Active matrix colour display, number portability, CDMA2004-05 3G 3G, operator-driven subsidy programme, data download speed2005-08 Cost competitiveness in commoditised market, design differentiation2008-10 Smartphone, application store, eco-system2010-11 Android smartphone eco-system, multi-core application processor2012-13 LTE LTE, size and resolution of display2013e Design differentiation (flexible display)Source: HSBC estimates 11
  13. 13. Telecoms, Media & Technology Asia Technology abc 8 April 2013After 2005, competitors turned their attention to Differentiation has become even harder with mostmaking cell phones essential in everyday life. As a companies using full HD panels, a standardisedresult, products with differentiated form factors, quad-core application process, touch screen andsuch as casing, keypad and slim form factor, were the Android operating system. In a commoditiseddesigned. The market for high-end phones started market, design is the high-end market’s mainto take off. Consumer interest in design was an differentiating point. We believe flexible displayopportunity for Samsung and LG to strengthen will take this to a new level as the new technologytheir positions in a market dominated by cost- will see hand-held digital devices become lighter,efficient companies, such as Nokia. thinner and more convenient for users.Then Apple’s iPhone arrived, providing completely Display technology is advancing in fournew experiences, such as entertainment features directions: 1) improving the sense of realityand a highly distinctive design and customisation through 3D TV, 2) adopting additional functions,options. The handset market went through rapid such as touch and internet connectivity,change as Wi-Fi internet revolutionised the data 3) enabling greater mobility via lighter andside of the business. Apple was the dominant force thinner products, such as in smartphones anduntil the advent of Android-based phones. tablet PCs, and 4) expanding adaptability for displays in homes and industries via thinner, larger products, such as UHD TV. Until recently, progress on flexible display technology has been slow. The main reason is that companies have already made heavy investments in LCD, the technology used in flat display panels. Flexible display requires a completely Display development Realism Multifunction High Performance High Performance Glassless 3-D Transparent Lightening & Super-thinning Lighting Communication Projection 3-D Flexible Touch Screen Bendable Thinning & Enlarging 3D Glass Digital signage FHD TV, OLED TV LCD, PDP LCD Thin-Large Plastic Glass Monitor 2003 2008 2013 2020 Glass Convenience Source: KEIT, HSBC12
  14. 14. Telecoms, Media & Technology Asia Technology abc 8 April 2013Characteristics of flexible display InformationTechnology 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 companySource: HSBCdifferent set of technologies, the first of which is In the early stages, flexible display will be used inOLED display, which has a faster response time small displays, such as watches, which can beand outstanding colour definition. mass produced. Then, depending on how the technology matures, it will be applied inOLED is the base technology for flexible display smartphones and tablets.because of its self-illuminating properties thatallows greater design flexibility. Samsung Display Flexible display: markethas made rapid progress in OLED technology and prospectsis already using it its smartphones. LG Display We expect the flexible display market to developrecently commercialised large TV displays using along similar lines as the OLED TV market. Asthis technology. we explained in our report LG poised to takeFlexible display uses plates that are pliable and as lead in AMOLED TVs, January 2012, it is a four-thin as paper. They can be bent without being step process.damaged, making it possible to create products  Establishing a stable base for the technologythat are thin, durable and flexible. The potential of (there was an early dispute between LG andthis technology is substantial as the ultimate goal Samsung over different types of OLED)will be cheap digital devices that can be rolled uplike paper.  Commercialisation based on pilot production lines and market reaction Development of OLED display vs. flexible display OLED TV Flex ible display ④ Mass production for OLED TV ③ Penetration of ③Penetration of ② Introduction of new play ers new play ers ① Technological prototy pe through ② Introduction improv ement pilot line ①Technological of prototy pe improv ement 2011 2012 2013 2014 2015 2016 Source: HSBC estimates 13
  15. 15. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Entry of new players, including Japanese and resolution mobile display, to produce plastic display. Taiwanese companies Samsung Display has already obtained two OLED lines and may convert more capacity; it is also Capex investment by LG and Samsung to working on a hybrid line that can produce both glass enable mass production and plastic OLED. How quickly new lines can beThe commercialisation of flexible display is adapted or expanded will depend how soon theexpected to proceed in a similar manner. We think necessary materials can be developed.that prototype products will be introduced by Large-scale production in unlikely in 2H13 as notSamsung and LG and the start of mass production all the technical systems are in place (e.g., it is notwill be dictated by a variety of factors, including yet possible to apply the evaporation process totechnology, market response and cost. Samsung plastic substrate). However, we do expect a pilotDisplay and LG Display are both expected to start facility to produce prototype 2” watch and 5”small-scale flexible display manufacturing in the curved displays.next few months. Things are moving fast and Samsung and LG are The debate about which is the best OLED likely to be able to apply flexible displaytechnology has yet to be resolved. When large- technology to their respective Galaxy Note 3 andsize OLED panel production started in early 2012 Optimus G2 models before the end of the year.the two companies adopted different strategies We expect demand in 2H13 to be about 25m andwhen they set up pilot production lines. take up about 5% of the smartphone market. If ourLG Display plans to invest KRW700 billion in a assumptions are correct, flexible display modelsG8 White OLED facility, while Samsung Display could capture 15% of the high-end smartphoneappears to have a two-track strategy, developing market by the end of the year.both White OLED and RGB technology for high- The impact on profitability will depend onend products. For more details on OLED generating decent yield on OLED, which may nottechnology, please see LG poised to take lead in happen until next year at the earliest. At theAMOLED TVs, 6 January 2012. moment, because of the additional technical stepsWe believe LG Display is contemplating converting required, production costs are higher than fora G6 LTPS line, which currently makes high- LCD. We expect them to fall considerably once Flexible display market forecasts Samsung’s OLED sales and OPM forecast (USDmil) LCD OLED E-ink Others 25,000 25% 10,000 20,000 20% 8,000 15,000 15% 6,000 10,000 10% 4,000 5,000 5% 2,000 0 0% 0 2010 2011 2012 2013e 2014e 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 OLED rev enue (USDmil) OPM (RHS) Source: Display Search, HSBC estimates Source: Company data, HSBC estimate14
  16. 16. Telecoms, Media & Technology Asia Technology abc 8 April 2013the evaporation process can be applied to plasticsubstrate. This should happen next year, alongwith other technical breakthroughs, such as thedevelopment of transparent plastic that canreplace the front glass.Once these are in place, flexible display will beexpanded from watches and small screens to 5-8inch tablets and 13-15 inch notebooks. Themarket should then really start to take off and weforecast it will be worth up to USD6bn by 2015and USD8bn in 2018.However, it remains to be seen how much of apremium companies will be able to charge for theseproducts. The consumer will be the judge of that. 15
  17. 17. Telecoms, Media & Technology Asia Technology abc 8 April 2013Key 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 importantThe commercialisation of flexible display will a head start on their Japanese and Taiwanesedepend on technology, mass production and cost. competitors in the flexible display market. WeWe identify four key challenges. expect the LTPS-based RGB OLED technology – already being used by Samsung Display in its high-1: Re-using LCD fabs definition OLED small-size panel production – toLCD panel businesses already make a wide range become the industry standard for flexible display.IT products and TVs. Making sizeable newinvestments could be a burden as profitability has 2: A substitute for glassbeen declining due to oversupply. It will make Glass is currently used in the upper and lowermore sense for these companies to convert layers of LCD and OLED panels. The reason isexisting LCD business lines to OLED to produce simple – it is flat, transparent and resistant to heatflexible display. and moisture. However, glass has low levels of elasticity, making is unsuitable for flexible display.Samsung Display and LG Display have alreadymade substantial investments in OLED, giving themComparison of technologies involved in flexible display productionProcess Technology Advantages DisadvantagesBackplane a-Si Cost competitiveness is high because most of existing Low mobility LCD equipment can be re-used Oxide More advanced than a-Si with the better mobility Applicability is uncertain due to low stability and low suitable for OLED, applicable in large-sized OLED yield for mass-production panels and high-resolution panels LTPS Most suitable for flexible display: 1) Sufficient mobility Equipment is expensive is feasible, 2) plastic can be easily utilised as it can be manufactured in a low-temperature environmentEvaporation / LED Can’t be applied in flexible displayDeposition Backlight 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 surfaceSource: HSBC16
  18. 18. Telecoms, Media & Technology Asia Technology abc 8 April 2013Next-generation plastic looks like the bestsubstitute. Currently, it can be used in high-performance thin transistors as its thermalexpansion coefficient is low. However, this isexpensive and not efficient due to its opaqueness.However, on the plus side a wide range ofmaterials can be applied in plastic. Research isbeing done on materials with high thermalresistance, such as PET (PolyethyleneTerephthalate), PC (Polycarbonate), PES(Polyether Sulfone), PI (Polyimide) and howplastic boards can withstand the process ofthinning (see table on the next page).We believe polyimide plastic film is mostcompatible with flexible display since polyimideprovides the highest thermal resistance. Polyimideis a transparent polymer material that has arelatively low degree of crystallisation and anamorphous structure. Moreover, it is an excellentmechanical material and provides outstandingheat and chemical resistance, electriccharacteristics and stable size based on a rigidchain structure. It is widely used in auto, aviation,aerospace and flexible circuit boards.Despite its advantages in being applicable ininsulating material, flexible film, and aerospaceaviation, polyimide is partially used in FPCB(flexible printed circuit board) and costly displayswithin aeroplanes due to its unique yellow colour;efforts are being made to lower this yellow colourand raise transparency. The result of this work,polymer, is likely to be in use in 2014. 17
  19. 19. Telecoms, Media & Technology Asia Technology abc 8 April 20133: Plastic to replace frontal 4: Vertical integrationglass Some Japanese companies have alreadyConditions of plastic substrates vs. physical characters of glass developed technologies for the commercialisation Plastic Glass of flexible display and have even introduced some substrate prototypes. However, they are being produced byGlass transition temperature >250˚C Melting point of a single company, so there is a lack ofHeat deflection temperature 20 ppm/C 1600˚CGas transmittance <1,000/m2 day O competition in cost and mass productivity.Yellow index <5 OFlexibility O X While a number of technological issues still needSource: MOTIE, HSBC to be resolved by individual material and panel companies, we believe that vertical integrationFrontal glass needs to be more scratch proof than among material developers, components andthe lower glass panel. A plastic substitute would panel producers, and handset makers is essentialneed to have the same hardness as glass, but this for the commercial success of flexible display.technology is still at an early stage. Some Given the newness and complexity of theJapanese companies are making progress in this technology, co-operation among the companies inarea, but the cost is much higher than tempered the supply chain, especially in the early stages ofglass, making commercialisation difficult. mass production, will be important. We think flexibility on pricing is also essential.Manufacturer info and pros and cons of plastic substrates Pros Cons ManufacturerPET Strong UV resistance MD vs. TD direction optical anisotropy General Atomics(polyethylene Excellent chemical-resistant Weak temperature safety (USA)terephthalate) Low moisture hygroscopicity (over 24h, 0.1%) Gets murky due to partial recrystallisation after thermal Mitsubishi process Chemical High CTE (20~80x10-6/K) (Japan) Production room temperature (~130C)PEN Chemical-resistant Optical anisotropy Dupont Teijin(polyethylene Low CTE (~20x10-6/K) Weak heat resistance Film (Japan)naphthalate ) Low cost Production room temperature (~130C)PC Good optical characteristic Weak chemical-resistance Dupont Teijin(polycarbonate) Good mechanical characteristic High CTE (60~70x10-6/K) Film (Japan) Easy to purchase Low production room temperature (~150C) GE (USA) Weak UV resistance Mitsubishi (Japan)PES (polyether UV resistance High moisture hygroscopicity (over 24h. 0.4~1.0%) i-Componentsulfone) Easy to purchase High CTE (55x10-6/K) (Korea) High cost Sumitomo Weak chemical-resistance Bakelite (Japan) Production room temperature (~180C)PI (polyimide) Excellent chemical resistance High moisture hygroscopicity (over 24. 0.2~2.9%) DuPont (USA) Production room temperature (>200C) CTE (50~60x10-6/K) Mitsubishi Gas UV resistance Coloured board (dark yellow) (Japan) Easy to purchase Low transparency LG Chem (Korea) Cheil Industries (Korea)AryLite Excellent heat-resistance Weak UV resistance Ferrania Image Production room temperature (~200 C) High (50_60x10-6/K) System (Italy) Good optical characteristic Linear CTE change characteristicSource: MOTIE, HSBC estimates18
  20. 20. Telecoms, Media & Technology Asia Technology abc 8 April 2013Handset makers have a “40% premium rule” forTV products, but set prices lower when theylaunched LED and ultra-high definition TVs.They will probably have to adopt the same tacticsfor flexible display as customers assess these newproduct lines.Components will also have to change to meet thedesign requirements of flexible display. Forexample, different shaped batteries are beingdeveloped to fit behind curved screens.All in all, we believe vertically integratedcompanies including the Samsung Group(Samsung Electronics, Samsung Display, CheilIndustries, SEMCO, Samsung SDI) and LGGroup (LG Electronics, LG Chem, LG Display,and LG Innotek) are better placed to developflexible display than peers in Taiwan and Japan. 19
  21. 21. Telecoms, Media & Technology Asia Technology abc 8 April 2013What to expect near term Unbreakable backplane with curved design could be a killer application in 2H13 Bendable tablets to boost smartphone/notebook demand in 2014 Fully transparent display may take three yearsThe OLED technology needed to make prototype PI is already used widely in electronic materials,flexible display products has already been so the basic structure of flexible display can bedeveloped by Samsung Display and LG Display. made by coating the OLED luminous layer on topHowever, given it will be a gradual process – this of the polyimide-coated lower glass. After thisis how we see events unfolding. process is complete, a plastic OLED structure can be achieved by removing the lower glass.Phase 1: Unbreakable display for Although it is not perfectly transparent, the lower2Q13 glass will have a plastic finish.Technology using LTPS, RGB OLED, opaquePI (Polyimide) substrate Removing the lower glass can make the display much slimmer, lighter and durable. However, itLTPS backplane and RGB OLED technology are will not be completely unbreakable as the uppersuitable for producing flexible products. Many glass would still be used. A thinner display willLCD businesses already produce IT equipment, mean thinner smartphones and tablets.such as smartphones, tablet PCs and high-resolution displays. This will help reduce costs. We expect further progress to be made on using polyimide film technology in flexible display production in the next few months. Structure of OLED and unbreakable display plastic display 5 um SiN passivation ITO Pixel TFT Uppe polyimide layer r glass Upper glass 0.7 mm thick glass substrate Lower glass Lower glass Glass substrate with spin Back Channel Etch a-Si TFT coated polyimide and SiN made on a glass/polyimide passivation layer. substrate Source: HSBC20
  22. 22. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Curved design smartphone design Curved design smartphone design Source: HSBC Source: HSBCPhase 2: Unbreakable backplane with Phase 3: Bendable, true plasticcurved design in 3Q13 display in 2014Technology based on LTPS, RGB OLED, PI Technology based on LTPS, RGB OLED, andsubstrate, and thin glass translucent PI substrateCurved design is one of the great attractions of Once polyimide enters mass production, weflexible display. We expect the first products to be expect flexible display technology to developsmall two-inch displays, such as watches and car rapidly. An improved polyimide material is likelyinstruments, where resolution quality is less to be introduced in 2014, which will lead to thedemanding. Larger curved displays will require an commercialisation of products with displays ofunbreakable backplane and will involve the same over five inches, such as tablets and notebooks.technology as described in phase one. Bendable display requires the following procedures: 1) coat polyimide film to the upper and lower glass panels, 2) OLED manufacturing procedure to build luminous layer; and 3) separate upper and lower glass panes. Once bendable display is commercialised, we expect to see products that can be bent to an angle of less than 90 degrees. Irregular type Li-polymer battery Stepped Li-polymer battery Curved display Curved display Irregular type Li- Stepped Li-polymer polymer battery battery Source: HSBC Source: HSBC 21
  23. 23. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Bendable display conceptual picture Bendable display conceptual picture Source: HSBC Source: HSBCPhase 4: Transparent display in 2015 Phase 5: True flexible displayTechnology based on LTPS, RGB OLED, and Current technology does not allow for trulytransparent PI substrate flexible display products that are totally We believe transparent polyimide will be available transparent and can be rolled up. How quickly thefrom 2014, but it may take at least a year to enter technology develops remains to be seen – forcommercial production. A lot of technological example, bendable batteries are needed – and howchallenges remain, including how to make much added value will be created for consumerstransparent batteries. We think the first products to is also unknown at this stage.be partially transparent, as progress will depend onthe response from the public. How much demandwill there be for transparent devices? Curved design smartphone design Transparent display conceptual picture Source: HSBC Source: HSBC22
  24. 24. Telecoms, Media & Technology Asia Technology abc 8 April 2013 Transparent display concept Transparent display concept Source: HSBC Source: HSBCComparison of TFT backplanes a-Si Oxide LTPS Source Drive Drain Overcoat Electrode Electrode Electrode Etching Stopper a-Si (N+) a-Si a-IGZO Gate Insulator Gate Electrode p-Si (N+) p-Si Glass Substrate Glass Substrate Glass SubstrateMobility Fair Average Very goodScalability G3~G10 G8 or larger Up to G8Availability Very good Average GoodAdvantages Low cost Scalability, Good uniformity Superior mobility, stability Good track recordWeakness Low mobility Low cost Low scalabilitySource: HSBC estimates 23
  25. 25. Telecoms, Media & Technology Asia Technology abc 8 April 2013Who 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 linesWe believe flexible display will have a positive grow their market share on the back of these newimpact on the overall display industry because it and highly differentiated flexible displaywill create a new line of business. We expect new products. It’s certainly a substantial opportunityproduct shapes and designs to revitalise the slowing for LGE, which is experiencing a slump in itsnotebook market. Smart watches, previously smartphone business. The company’s marketconsidered a niche market, should also benefit. share is only 5%, but we believe this can rise to 7- 8% in 2014. Samsung Electronics, the leader inWe are convinced that a vertically integrated the smartphone handset market, can use flexibleindustry structure that includes materials, panels and display to further strengthen its position.handsets is essential to commercialise flexibledisplay. This involves: We believe LG Innotek (LGI) will be one the biggest indirect beneficiaries of the flexible display Re-using existing LCD equipment trend. For example, if LGE’s handset business Co-operation between handset makers and improves, LGI will supply most of handset material providers to obtain a decent yield components – touch screen, PCB, and camera from mass production modules – to LGE. LGI also holds the key to developing the required flexible components (e.g., Set makers fully utilising flexible display to flexible PCB) when curved design is introduced. maximise added value and secure sales capacity This will strengthen the relationship between LGISamsung Electronics and LG Electronics have the and LGE. Moreover, LGI is focusing ontechnological advantages to lead industry as both developing a transparent electrode, essential forhave already commercialised OLED panels that transparent display in the longer term.are generating stable yields. We also believe Cheil Industries will have theWe believe it’s the handset makers that stand to largest upside risk in the mid to long term as thebenefit most at first as they have an opportunity to company can co-operate with Samsung Display to24
  26. 26. Telecoms, Media & Technology Asia Technology abc 8 April 2013develop core technologies required for flexibledisplay. This is Cheil’s differentiating factor andis expected to drive revenue growth at itselectronic material division.It’s also good news for equipment makers.Starting in 3Q13, Samsung Display and LGDisplay are expected to expand capacity byconverting existing LCD fab to plastic OLED inorder to maximise investment efficiency. As aresult, SFA, Samsung Display and relatedequipment makers are expected to benefit.Our preferred stocks among handset makers areSamsung Electronics and LG Electronics, whilewe prefer Cheil Industries, LG Innotek, and SFAamong component, materials and equipmentproviders. We upgrade Cheil Industries and SFAto OW from N and Duksan Himetal to N(V) fromUW(V). We remain OW on Samsung Electronics(an Asia Super 10 and GEMs Super 15 portfoliostock) and OW (remove the volatility (V)indicator) on LG Electronics and LG Innotek.HSBC estimate vs. Consensus(KRWbn) _________ HSBCe __________ _______ Consensus ________ _______ % Difference _______ 2013e 2014e 2013e 2014e 2013e 2014eLG Electronics Sales 60,769 64,901 54,519 57,862 11.5% 12.2% OP 1,686 1,946 1,483 1,892 13.7% 2.9% OP margin 2.8% 3.0% 2.7% 3.3% 0.1%pt -0.3%ptLG Innotek Sales 5,939 6,598 6,015 6,588 -1.3% 0.2% OP 157 250 128 228 22.0% 9.5% OP margin 2.6% 3.8% 2.1% 3.5% 0.5%pt 0.3%ptCheil Industries Sales 6,788 7,368 6,789 7,521 0.0% -2.0% OP 415 501 422 512 -1.6% -2.2% OP margin 6.1% 6.8% 6.2% 6.8% -0.1%pt 0.0%ptSamsung Electronics Sales 225,668 245,350 238,686 264,048 -5.5% -7.1% OP 39,182 41,939 39,388 43,038 -0.5% -2.6% OP margin 17.4% 17.1% 16.5% 16.3% 0.9%pt 0.8%ptLG Display Sales 33,560 34,567 31,349 33,274 7.1% 3.9% OP 2,362 2,755 1,384 1,553 70.7% 77.4% OP margin 7.0% 8.0% 4.4% 4.7% 2.6%pt 3.3%ptLG Chem Sales 25,243 28,347 24,791 26,611 1.8% 6.5% OP 2,693 3,213 2,299 2,686 17.1% 19.6% OP margin 10.7% 11.3% 9.3% 10.1% 1.4%pt 1.2%ptSFA Sales 771 979 694 842 11.1% 16.3% OP 109 137 93 116 17.9% 17.3% OP margin 14.1% 14.0% 13.3% 13.8% 0.8%pt 0.1%ptDuksan Himetal Sales 189 251 171 213 10.9% 17.5% OP 47 66 48 61 -2.2% 7.9% OP margin 25.0% 26.2% 28.3% 28.6% -3.4%pt -2.3%ptSource: Bloomberg , HSBC estimate 25
  27. 27. Telecoms, Media & Technology Asia Technology abc 8 April 2013Implications for non-Korean players Samsung and LG should enjoy early-mover advantage because of their advanced technology in flexible display Taiwan players are already strong in electronic paper and waiting for OLED technology to stabilise Apple is behind at the moment, but should catch up by 2015Flexible display uses OLED as its basic Two Taiwan companies, AU Optronics andtechnology, giving companies like Samsung and Innolux, are actually further advanced in one areaLG, which have already commercialised the of flexible display technology than the Koreanprocess, an early-mover advantage. They probably companies – electronic paper (EPD) – which ishave a 2-3 year head start. Taiwanese and commonly used in e-books. For example, theyJapanese panel makers believe that OLED have made excellent progress in terms oftechnology is not mature yet, so they have not production yield (see E Ink: Initiate OW(V): Theinvested much in mass production, although they year of recovery, 18 March 2013).are investing in R&D.Comparison between flexible colour EPD and flexible OLED Flexible colour EPD Flexible OLEDAdvantages Similar to a piece of paper Self-light emitting -> No need of external light source Consumes electricity only when changing page Able to generate natural colour and image Wide viewing angle Fast reaction speed Easy to mass produce with simple manufacturing processes Wide viewing angleDisadvantages Mirror reflection type -> requires external light source High cost from organic EL Difficult to generate natural colour Requires high-end TFT Difficult to play movie due to slow reaction speed Difficult to mass produce due to complicated manufacturing processesSource: HSBC estimates26
  28. 28. Telecoms, Media & Technology Asia Technology abc 8 April 2013The downside is that e-paper does not have self- emphasises the importance of platform efficiencyilluminating properties and must be viewed under in mass producing one innovative product ratheran external light source. It also uses a colour filter, than going into a variety of product line-ups.so it has limited ability to generate natural colours Therefore, it may be some time before Appleand also has a fairly low rate of response, which is commits a lot of resources to flexible display.not compatible with showing video clips. Apple’s “wrap-around” displayThis is why OLED is considered to be the solutionfor the next generation of flexible display. Taiwanpanel makers already have a G3.5 pilot productionline to manufacture small-sized OLED panels, anda conversion from LTPS to OLED line is beingseriously considered. In Japan, Panasonic andSony have already displayed ultra-high definitionOLED TV technology this year.However, generally, non-Korean panel makers Source: USPTOappear reluctant to invest aggressively in OLEDor flexible technology as the start-up costs are We think the market will take notice once Koreanhigh. The technology will only become profitable companies such as Samsung and LG start towith strong demand for flexible design introduce differentiated flexible design products.smartphones or tablets. At the moment only small As their technology improves, mass production willdisplays are possible, so companies find it hard to kick in, expanding the supply chain for materialsjustify the investment needed to set up mass and equipment by 2H 2014. In turn, withproduction of OLED or flexible displays. economies of scale we expect production costs to fall and the number of products to increase; weThere is also the risk that with such a new believe this will be the catalysts for Taiwanese andtechnology early entry could result in expensive Japanese players to enter the market.failure. It seems that panel makers may be waiting Korean companies are likely to benefit from beingfor a good entry point after the Korean players able to introduce high-end products after eachmake the first move and build up the necessary technical improvement. Meanwhile, competitionsupply chain. will increase as products with many different formMeanwhile, in the US, Apple appears to be factors come on the market as mass productioninterested and has filed a patent application for a grows outside Korea.smartphone that uses flexible display. However, Although the company has a great record ofApple still has doubts about the ability of these innovation (e.g. sophisticated software, in-cell touch,new products to combine natural-coloured images Retina display and aluminium casing), Apple mayand excellent clarity. This is the main reason find it increasingly difficult to differentiate itswhy Apple had not been aggressively pursuing products using existing technology. Apple isOLED technology. expected to introduce flexible display in 2H 2014 when the technology platform has stabilised andApple is considered to be more interested in mass production improves. Given its outstandingapplying Retina display to iPhones and looking at ability to meet customers’ needs, the company mayother options for iPads and MacBooks than start to come up with innovative flexible displaymoving into something completely new. Apple products in 2015. 27