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Does LPL Financial Point To LCD Glut?

Could an LCD panel glut be looming?

Along with Wednesday’s strong second-quarter financial report from LG Display, the company mentioned that the outlook for the second half and beyond is being impacted by continued global economic pressures on certain display products, particularly pricey LCD TVs. Yet the company also disclosed that it is aggressively expanding production capacity again.

Andy Abrams, LCD/display analyst at Avian Securities, is reporting that contacts outside of LG Display (LPL) have indicated the company will increase capacity in its Gen 6 fab to 60,000 sheets per month from 30,000 by year-end 2009 and that it is nearer full capacity of 83,000 sheets per month on its Gen 8 fab than previously expected. Abrams said LG Display will be adding incremental capacity to all of its production facilities over the next six to 12 months.

“Despite the increase in internal inventories LPL is pushing to squeeze more capacity out of their facilities going forward,” Abrams, who gives LPL a neutral rating, wrote in a recent research note. “On a year-over-year basis (2Q ’07 to 2Q ’08) they have increased capacity by 30.6 percent and based on the increased capex plans for 2009 will increase another 35 percent in 2009 (12/09 over 12/08) excluding any tuck in expansion plans. We believe these smaller additions, similar to those instituted by other panel manufacturers last year during the construction drought, could potentially add another 1 – 3 percent to capacity over the next 6 to 12 months.”

Abrams observed that in 2006, a market share battle between Korean panel manufacturers Samsung and LG Philips LCD helped touch off industry capacity expansions that resulted in “a deep downturn.”

“While it remains early in the 2008/2009 capex cycle, we advise investors to watch the capex situation quite carefully as expansions such as LG Display’s and new entrants such as IPS/Alpha increase the chances of an over capacity situation in 2009,” Abrams said.

Meanwhile, he said of LG Display’s announcement that it is in talks with Apple to possibly supply 3.5-inch panels for its iPhones and Dell about a long-term monitor supply agreement: “We have heard the Dell story surface before, especially when associated with the pending sale of another tranche of Philip’s LPL stock, and would believe that both could easily be the case, but would be surprised if LPL was sole source for either.”