Bumpy Road Ahead For Taiwan's TFTLCD Manufacturers

1
Bumpy Road Ahead For Taiwan's TFT-LCD
Manufacturers

• By Raymond Hsu
• Sep. 2005

2
Methodology

• Industry Analysis
• Identify opportunities and risks in the industry
• Identify key success factors
• Market position/market share
• Low cost position
• Diverse product and application mix
• Technology leadership
• Business Profile Comparison
• Financial Profile Comparison
• Profitability
• Cash flow protection measures
• Liquidity
• Capital Structure Financial flexibility
• Conclusion

3
TFT-LCD Industry Overview

• Growing Market Size
• Volume growth was more than enough to offset fast
  price erosion, resulting in fast growth in market
  size, despite high cyclicality

4
TFT-LCD Industry Overview

• High Growth Potential
• Penetration in 2004 Monitors, 52 TVs, 5
  Notebook PC, 27
• Desktop PC for notebook PC substitution trend
  continues
• LCD monitors continue to rapidly replace CRTs
• TVs will be the major growth driver due to
  large-area panel size

5
TFT-LCD Industry Overview

• Market Structure
• Taiwan exceeds Korea in terms of capacity in 2005
• Taiwan's infrastructure improving
• Japan gradually retreats from standardized
  large-area TFT-LCD panel production
• China is not a threat in the medium term

TFT-LCD Capacity Breakdown By Region Unit
2000 2001 2002 2003 2004 2005 Taiwan 17.1
29.5 35.4 34.2 38.8 40.3 Korea 32.6 35.3
34.2 39.9 40.1 39.6 Japan 50.3 35.1 30.4
26.0 21.1 17.2 China 0.0 0.0 0.0 0.0 0.0
2.8 Total 100 100 100 100 100 100 Taiwan
Ratings estimates
6
TFT-LCD Industry Overview

• Major Risk Sources
• Unpredictable market demand
• Capital intensity and long lead time for
  fabrication plant construction
• Limited product differentiation
• High Industry Risk high cyclicality, intense
  price competition
• Standard Poor's views the TFT LCD industry as
  relatively risky

7
TFT-LCD Industry Overview

• Aggressive Pricing
• TV panel prices are currently under the most
  pressure

8
TFT-LCD Industry Overview

• Volatile Profitability
• High volatility in EBITDA margin reflects the
  cyclical nature
• Average EBITDA margin ranged between 3.7 and
  38.6 since 2002

9
TFT-LCD Industry Overview

• Key Success Factors
•  Market position, which is primarily measured by
  market share, determines scale benefits and the
  level of buyer and supplier bargaining power
•  Low cost position, which is achieved through
  economies of scale, advanced production
  facilities, and vertical integration. A low cost
  position is a critical competitive advantage
  given the increasing standardization of TFT-LCD
  products
•  Diverse product and application mix, which
  helps reduce business volatility
•  Technology leadership, which is important for
  entering rapidly evolving markets, but is
  dependent on the company's ability to support
  ever increasing capital requirements

10
Business Profile Comparison

• Conclusion

11
Business Profile Comparison

• Market Position
• Samsung and LG remain the industry leaders
• Taiwan panel makers continue to gain market
  shares
• Taiwan's large-area TFT LCD makers are benefiting
  from improving infrastructure

12
Business Profile Comparison

• Market Position
• Revenue trend reflects the widening gap

13
Business Profile Comparison

• Low Cost Position Technology Leadership
• Scale economies are important due to a higher
  percentage of material costs for new production
  technology
• AUO has better scale economies and the first
  mover advantage in new technology
• CMO has better integration into in-house
  component production, but slower in ramping
  advanced facilities, including its 5G and 5.5G
  fabs
• CPT operates 3G and 4.5G fabs, resulting in less
  favorable cost structure
• QDI currently operates one 3.5G fab and one 5G
  fab and will commission its first 6G fab in 1H06
• HannStar was the slowest to ramp 5G technology.
  Its cost position could deteriorate without a
  clear 6G plan

14
Business Profile Comparison

• Low Cost Position Technology Leadership
• Korean players still have advantage in production
  technology, but AUO and CMO are catching up

15
Business Profile Comparison

• Product and application mix
• All are single product companies, representing
  high product concentration risk
• AUO has a better product and application mix
  because of its good position in the small- to
  mid-size TFT-LCD sector
• CMO occupies good position in the LCD TV segment
  20 global market share and 38 of its revenue in
  1H05
• CPT, QDI, and HannStar all continue to focus on
  notebook PCs and PC monitors
• CPTs legacy CRT business and PDP investment are
  not considered as meaningful product
  diversification

16
Business Profile Comparison

• Product and application mix
• AUO has a good position in the small-size panel
  segment
• AUO can better use its 3.5G capacity, which is
  not cost effective for large-area panel
  production

17
Financial Profile Comparison

• Conclusion

18
Financial Profile Comparison

• Profitability
• AUO and CMO enhanced their leading profitability
  positions relative to CPT, QDI and HannStar,
  reflecting their stronger business profiles

19
Financial Profile Comparison

• Profitability
• The gap between industry leaders and laggards
  expanded during the recent business cycle
• Margin gap widens during down cycles as a result
  of differences in production technology and
  product mix

20
Financial Profile Comparison

• Profitability
• Volatility in profitability will continue
• The industry generated low returns on capital
  during the recent business cycle

21
Financial Profile Comparison

• Cash Flow Protection Measures
• Volatile cash flow protection measures due to
  volatile profitability
• Average FFO to total debt was 47.2 in 2004
• The ratio will fall below 20 in 2005
• Widening gap between leaders and laggards
• AUO has the best cash flow protection measures
• Constant negative free operating cash flow
  because of high expenditure needs
• Total expenditure topped NT230 bn in 2004.
  Further increase to NT250 billion is expected in
  2005

22
Financial Profile Comparison

• Cash Flow Protection Measures
• Volatile cash flow protection measures due to
  volatile profitability

23
Financial Profile Comparison

• Liquidity
• Taiwan's five TFT-LCD manufacturers all have
  sufficient liquidity to meet term debt repayments
  in 2005

24
Financial Profile Comparison

• Liquidity
• Significant external funding is needed to support
  capital expenditures

25
Financial Profile Comparison

• Capital Structure Financial Flexibility
• Higher leverage in 1H05 due to lower profit and
  high capex
• Total debt/EBITDA improved in 1H05, compared with
  2001
• The banking sector's appetite for new exposure to
  the industry becomes more limited

26
Conclusion

• Diverging credit quality among Taiwan's panel
  makers
• Reasons behind better scale economies, product
  diversification and technology lead to better
  profitability and cash flows
• This in turn expands the gap between leaders and
  laggards because of leaders' more aggressive
  expenditures
• AUO has a clear-cut leading position among
  Taiwan's panel makers in terms of credit quality
• CMO follows closely, but needs to enhance its
  execution and product strategy
• MA may not happen soon because of continued
  access to loan and equity markets
• Local banks' decreasing appetite has a negative
  implication, particularly for smaller players