In Cell Touch Technology

Asia Pacific Equity Research
16 June 2012
In-Cell & Touch Panel

A major breakthrough in display: Opportunity in smartphone and Tablet PC
Given uncertainty surrounding In-cell touch panel technology (In-cell), we illustrate (1) where In-cell is in terms of technology spectrum; (2) Incell cost structure analysis; (3) quantify impact of In-cell for supply chains; and (4) implications for major LCD panel and touch panel makers. Whats In-cell technology? In-cell touch panel is a display panel integrated with touch sensor which is a thinner, lighter and more flexible touch solution. This is economically viable for single models with big volume (i.e. iPhone). Since it requires only one lamination layer, this provides set makers one-stop solutions and can match with any kind of cover lens such as 3D or curved lens design. In-cell will save up to 20% over add-on type: We estimate In-cell to reduce panel costs by around 20% which will help to alleviate set makers' burden in touch devices' BOM. Also, LCD makers could enjoy attractive margins leveraging their vertical integration once yield rate is on the right track. As the screen size is getting bigger, the additional value to LCD panel makers would be much bigger than the current revenue opportunity and also bring new value in touch functions. Meaningful revenue opportunity in Apples products: Assuming iPhone 5 is using In-cell panels, we forecast three panel makers, LGD, Sharp, and Japan Display combined will generate In-cell revenue of US$3.6 billion in 2012 and US$8.0 billion in 2013, respectively. If Incell panels (Oxide backplane) are used in iPad which theoretically reduces 7% of total BOM, then total In-cell revenue opportunity in iPad would be almost US$6.0 billion. Hence, a combined In-cell revenue opportunity would be US$14 billion in 2013, by our estimation. LCD panel makers vs. Touch panels: We forecast LCD makers revenue to increase while Touch panel players witness a shrinking trend with multiple contraction. Hence, LCD panel makers (LGD and Sharp) with strong position in In-cell technology will deserve higher multiple, in our view. Among touch panel players, a leading touch panel maker like TPK could still enjoy its industry leadership in the next couple of years.
Display and Touch Panel player valuation
Company LGD Sharp TPK Wintek Ticker 034220 KS 6753 JT 3673 TT 2384 TT Rating OW OW OW N TP (LC) 36,000 650 500 23 Price (LC) 22,300 412 455 16 Upside Downside 61% 58% 10% 46% Market cap (US$ B) 6.9 5.8 3.6 0.9 P/B(x) 12E 0.8 0.7 3.0 0.7 13E 0.7 0.6 2.2 0.7
Asia-Pacific Tech Research
Technology - Semiconductors JJ Park

AC
(822) 758-5717 jj.park@jpmorgan.com J.P. Morgan Securities (Far East) Ltd, Seoul Branch
Narci Chang
AC
(886-2) 2725-9899 narci.h.chang@jpmorgan.com J.P. Morgan Securities (Taiwan) Limited.
Yoshiharu Izumi
AC
(81-3) 6736-8637 yoshiharu.izumi@jpmorgan.com JPMorgan Securities Japan Co., Ltd.
Helaine Kang
(82-2) 758- 5712 helaine.kang@jpmorgan.com J.P. Morgan Securities (Far East) Ltd, Seoul Branch
Rahul Chadha
(91-22) 6157-3261 rahul.z.chadha@jpmorgan.com J.P. Morgan India Private Limited
Panel & Touch YTD performance

%
40% 20% 0% -20% -40% -60% LGD

Source: Bloomberg.
23%
-11% -39% Sharp TPK -27% Wintek
P/E(x) 12E 14.3 na 8.9 31.6 13E 5.8 4.9 8.4 19.8
ROE (%) 12E 13E 5.4 12.4 2.2 36.6 2.2 13.7 30.5 3.4
Source: Bloomberg, J.P. Morgan estimates
See page 19 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com
JJ Park (822) 758-5717 jj.park@jpmorgan.com
Asia Pacific Equity Research 16 June 2012
Table of Contents
What is In-cell technology? .....................................................3
In-cell technology in touch panel trend ....................................................................3 In-cell vs. OGS (One Glass Solution) ......................................................................4 In-cell touch panel cost structure .............................................................................5
How big is In-cell? ....................................................................6

Methodology...........................................................................................................6 In-cell supply/demand .............................................................................................6 In-cell ASP and revenue trend .................................................................................9 In-cell technology beyond iPhone..........................................................................10
Stock implications..................................................................11
Market Cap comparison: TFT-LCD vs. Touch Panel..............................................12 Implications to LGD..............................................................................................13 Implications to Sharp ............................................................................................14 Implication to Japan Display .................................................................................15 Implications to Touch Panel players ......................................................................15
Appendices
Appendix I: In-cell supply/demand model............................17
Given uncertainty around in-cell technology, we made an attempt to: (1) see where in-cell is in terms of technology spectrum; (2) in-cell cost structure analysis; (3) quantify potential impact of in-cell to supply chains; (4) comparison b/w TFT-LCD and Touch Panel; and (5) implications for key stocks. Please refer to our last touch panel sector report for details:"Touch Panel Sector: In-cell vs. one-glass solution: Implications from Korean panel makers" by Narci Chang published on 26 March, 2012.
What is In-cell technology?

In-cell technology in touch panel trend
Thinner, lighter, and more flexible touch solution In-cell touch panel is a display panel integrated with touch sensor that is physically underneath either TFT or the color filter, placed between the TFT array substrate and the color filter substrate, as is the controller IC. Touch sensor can be: (1) Lightsensing elements (light-sensing); (2) Micro-switches (voltage-sensing); and (3) Capacitive electrodes (charge-sensing). Where are we in terms of the trend? Conventional add-on projected capacitive touch includes a sensor substrate with ITO pattern that senses the users touch. However, we have witnessed issues with durability under high-temperature photolithography, yield rate losses related to lamination, and others. Two options for eliminating the sensor substrate are sensoron-cover and in-cell/on-cell touch. With sensor-on-cover, the ITO pattern is on the cover lens (bottom side); with in-cell/on-cell touch, the sensor is integrated into one display panel.
Figure 1: Touch Panel type by category
Sensor Substrate
w/ Sensor substrate Touch Module Structure w/o Sensor substrate Panel Maker
Source: Display Search, J.P. Morgan
Cover Lens Type

Touch Module Maker 2D/2.5D/3D Add-On 2D SOC, One Glass 2D / 2.5D / 3D In/On-cell
Sensor Patterning
G/G or G/F/F By Separate ITO Patterning by Piece or Sheet In/On-cell Built-in Sensor
Lamination & Layer #

Cover Lens & Controller Panel
Touch Module Maker
Controller
Panel
Cover Lens
Market view on In-cell In-cell may be more economically viable for single models with big volume. Being not flexible, customization for touch panels seems to be a bottleneck for in-cell to see wider adoption.
In-cell vs. OGS (One Glass Solution)

Key advantages: easier integration and one-shop solution As for in-cell/on-cell touch, the sensors and controller IC are built into the panel, hence it requires only one lamination layer as OGS. This provides set-makers onestop solutions. Additionally, in-cell can match with any kind of cover lens while OGS cannot easily support 3D or curved lens design.
Table 1: Comparison of In-cell vs. OGS (One-Glass-Solution)
Sensor-on-cover OGS/SOC 3D Cover Lens Sheet type has difficulty forming 3D when ITO sensor is already on. Piece type has more difficulty with patterning on 3D form No need to match any kind of cover lens except tuning controller/IC Panel Source Brands have multiple sources of panel makers to match touch modules Brands have more limited selection of panel makers IC & Spec. Customization Easier to select, change, or tune performance from controller IC, sensor, and panel Good for integration, but not flexible for customization Inner Mechanics Additional FPC and controller IC still occupy inner mechanical room Good for integration on IC and signal cable
In-cell
Source: Display Search, J.P. Morgan, *SOC = Sensor on Cover
Key disadvantage: bottleneck lies in customization While easier integration or 3D cover lens provide benefits, it requires additional processes to mature; hence it leads to lower yield rate at an initial stage. Beside, 3D is limited to premium models. In addition, intensive integration could drive up the cost of customization if panel makers want to serve multiple customers. It could create noises which interfere with TFT-LCD ICs. This could lead to a decline in sensitivity. Who will use In-cell? The feasibility of customization ultimately depends on the scale of business. Brands with large volume seller (i.e. Apple; covered by Mark Moskowitz) can fully enjoy incell technology's benefit. Customization dilemma is not serious for OGS type as brands have flexibility choosing options; where to procure IC solutions, panel sources, and touch module makers.
Table 2: Who is working on what?
LightSensing In-Cell In-Cell In-Cell In-Cell In-Cell In-Cell In-Cell In-Cell In-Cell On-Cell VoltageSensing In-Cell In-Cell Charge-Sensing In-Cell In-Cell In-Cell On-Cell On-Cell On-Cell On-Cell Resistive On-Cell On-Cell Developing Phase MP in 2H12 MP (Galaxy) MP in 2H12 R&D R&D MP in 2H12 MP in 2H12 MP in 1H12 MP in 4Q12 R&D R&D
Sharp Samsung Mobile AUO Hitachi CPT Sony TMD LGD CMI HannStar Wintek
On-Cell In-Cell In-Cell On-Cell On-Cell
Source: Display Search, J.P. Morgan.
Possible scenarios: collaboration b/w panel and touch panel players In-cell and OGS/SOC involve cover lens and lamination processes and both approaches avoid the sensor substrate, making the device lighter. Unlike touch module makers, panel makers have to decide how to invest in cover lens finishing
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capacity. If set-makers allocated some or entire cover lens and lamination process, then touch module makers can still benefit, but will gain less revenue since only lamination is needed instead of the whole touch module. In this case, touch panel players (i.e. TPK) with strengths in cover lens finishing process and lamination can still benefit in our view.
In-cell touch panel cost structure

In-cell will save up to 20% compared to add-on type touch panel, assuming yield rate is mature As mentioned above, one key advantage of in-cell touch panel is integration of TFTLCD panel with touch sensor functionality. According to our estimates, it will reduce panel cost by approximately 20% (assuming same panel size). As Narci Chang, touch panel analyst, flagged in touch panel industry note (Recent concerns about tight key component supply appears to be overblown) published on 16 February, 2011, this will help alleviate set makers' burden in touch devices BOM. We believe TFT-LCD panel makers will enjoy attractive margins leveraging their vertical integration and gather increasing touch-embedded panel orders once yield rate is on right curve.
Figure 2: Cost structure comparison b/w In-cell and OGS
$, %
11% 8% 16%
Cover glass FPCB & Chip Touch sensor
Cost down ~20%
Cover glass FPCB & Chip TFT LCD + Touch control
+15% +10%
62%
TFT LCD
+70%
Panel Price $37
Panel Price $??
Source: J.P. Morgan estimates, *Above cost structure is assuming 3.5" TFT-LCD capacitive panel. Actual price may vary
Manufacturing cost comparison Aside from touch panel BOM difference, the manufacturing costs are theoretically lower in OGS than In-cell considering yield rates. (In-cell runs multiple processes on the color filter; OGS has separate processes for cover glass and color filter). Current in-cell's yield rate is expected to hover around 60-70% vs. OGS's at over 80% on average. Since In-cell has not been manufactured on a mass scale, it is difficult to gauge the price of In-cell type display module, but we believe the manufacturing costs would be higher than that of OGS solution since it does not have to scrap out the color filter even if it fails during photolithography process.
Table 3: In-cell touch panel BOM comparison (iPhone 4S vs. iPhone Next-series)
US$, % iPhone 4S (3.5") Component Cover glass Glass sensor Chip FPCB OCA Others TFT-LCD Total Price $ 4.2 6.0 1.7 1.0 0.3 0.8 23.0 37.0 Proportion 11% 16% 5% 3% 1% 2% 62% 100% Total 47.6 100% Next iPhone series (assuming 4") Component Cover glass Chip FPCB OCA Others TFT-LCD + Touch control Price $ 5.5 2.2 1.3 0.4 2.8 35.5 Proportion 11% 5% 3% 1% 6% 75%
Source: Display Search, J.P. Morgan estimates
How big is In-cell?

Methodology
Our in-cell supply/demand is based on below key assumptions.
Table 4: In-cell supply key assumptions
Line LGD AP2 LTPS Sharp Kameyama line Japan Display Ex-Sony Ex-TMD D2
Source: Company data, J.P. Morgan estimates
Gen 4.5 6.0 3.5 5.5
Glass substrate 730 1500 600 1300 920 1850 720 1500
Monthly glass capacity (K) 3Q12E 4Q13E 65 80 25 25 53 53 35 35 18 18
Yield rate 3Q12E 73% 58% 64% 63% 64% 4Q13E 80% 75% 76% 75% 76%
In-cell supply/demand
In-cell capacity to hover around 466K/Qtr by 2013E According to our estimates, we estimate total in-cell capacity to climb up to +450K/Qtr by end of 2013E on square meter basis. Major difference b/w adjusted capacity and max capacity comes from LGD's increasing allocation to previous technology line; TFT-LCD LTPS for previous iPhone series. Gap is expected to decrease as LGD increases its allocation from 4Q12E.
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Figure 3: Quarterly in-cell capacity by panel makers

Unit in 000sqm
250 200 150 100 50 0 3Q12E 4Q12E LGD AP2 LTPS 1Q13E 2Q13E 3Q13E Japan Display 4Q13E Sharp Kameyama line
Figure 4: Quarterly in-cell adjusted-capacity by panel makers

Unit in 000sqm
200 150 100 50 0 3Q12E 4Q12E LGD AP2 LTPS 1Q13E 2Q13E 3Q13E Japan Display 4Q13E Sharp Kameyama line
Source: Company data, J.P. Morgan estimates, *Adjusted-capacity = capacity x allocation (%)
Figure 5: Yield rate assumptions by panel makers

%
85% 80% 75% 70% 65% 60% 3Q12E 4Q12E LGD AP2 LTPS 1Q13E 2Q13E 3Q13E Japan Display 4Q13E Sharp Kameyama line
Figure 6: UTR assumptions by panel makers

%
100% 95% 90% 85% 80% 3Q12E 4Q12E LGD AP2 LTPS 1Q13E 2Q13E 3Q13E Japan Display 4Q13E Sharp Kameyama line
Average yield rate to be 68% in 2012E and 76% in 2013E As of 1H12, we estimate industry average yield rate is around 60-70%. According to our industry check, LGD seems to be on right track and should soon be ready for commercial production. Despite lower yield rate compared to LGD, we believe Sharp and Japan Display will catch up with LGD in terms of yield rate and start fullscale production in 3Q12E. Once mass production takes off, we forecast all panel makers to run the line at full-capacity.
Figure 7: Quarterly in-cell supply by panel makers

Unit shipments in millions
25 20 15 10 5 0 3Q12E 4Q12E LGD 1Q13E Sharp 2Q13E Japan Display 3Q13E 4Q13E
Figure 8: Quarterly in-cell supply M/S by panel makers

%
100% 80% 60% 40% 20% 0% 3Q12E 4Q12E LGD 1Q13E Sharp 2Q13E Japan Display 3Q13E 4Q13E 32% 29% 36% 29% 37% 29% 36% 29% 37% 29% 37%
37%
31%
35%
34%
35%
34%
34%
Quarterly supply to reach 60M after full-scale production We expect panel makers to kick-in full-scale production in late 2Q12E and its quarterly supply to reach +50M by end of 4Q12E. 1Q13E onwards, we estimate incell panel demand to climb above 60M once yield rate curve moves up. Within panel makers, Sharp is expected to be the major supplier followed by Japan Display and LGD. Going into 2013E, we expect LGD to increase its M/S similar to Japan Display. In-cell demand to pick-up in 2013E; 27M/126M in 2012E/2013E Assuming next iPhone series adopt in-cell panels, we estimate they will account for roughly 20% of total shipments in 2012E. For 2013E, we forecast in-cell demand to reach 126M units, accounting +80% of 2013E iPhone shipments. Given plenty of supply over demand, we do not expect in-cell panel demand to cause supply shortage risks.
Figure 9: Quarterly in-cell demand
45 40 35 30 25 20 15 10 5 0 40 29 27 14 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 28 28 30
Figure 10: Quarterly in-cell supply/demand

70 60 50 40 30 46 27 52 58 60 61 40 28 28 30 61 40
10
20 10 0 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E
iPhone w in-cell (new iPhone)

iPhone w/o in-cell
In-cell Supply
In-cell Demand to panel makers (different from end-demand)
Sensitivity reveals supply to range from 85-101M in 2012E, 207-250M in 2013E Above supply/demand analysis is based on our base case assumption of panel size (4.0" and average yield rate 68%/76%). Depending upon panel size and yield rate variances, in-cell panel supply may vary as large as 11% to our view.
Table 5: Unit outputs sensitivity analysis by panel size and yield rate
Panel size in inches, Yield rate in %, Unit output in millions 2012 Unit Output Panel Size = 4.0" Panel Size = 4.3" 2013 Unit Output Panel Size = 4.0" Panel Size = 4.3"
Avg Yield Rate = 68% (base) 98 85 Avg Yield Rate = 76% (base) 239 207
Avg Yield Rate = 71% (bull) 101 88 Avg Yield Rate = 79% (bull) 250 216
In-cell ASP and revenue trend

Initial In-cell panel ASP to be $48 and decrease 10% Y/Y next year Currently, we believe iPhone 4S G/G structure (including TFT array) is around $37 (3.5) and in-cell initial price point should not be lower than that, per our assessment. In table 4, we assess the potential in-cell display panel cost structure and estimate initial ASP to be $48, assuming mature yield rate on par with TFT-LCD LTPS. Panel price is derived from cost saving of glass sensor, increasing manufacturing cost, and linear increase in other components. Given limited suppliers and better yield rate, we expect in-cell panel price to show moderate decline of 10% Y/Y in 2013E. In-cell quarterly total revenue to be around $2 billions On a quarterly basis, we estimate total in-cell revenue to be around $2 billion. As yield rate climbs up on the curve, we forecast quarterly revenue to reach $2.1 billion in 2Q13E. According to unit output base assumptions, we foresee Sharp to generate the largest in-cell revenue followed by LGD and Japan Display.
Figure 11: Quarterly in-cell revenue by panel makers
Unit in US$ millions
900 800 700 600 500 400 300 200 100 0 3Q12E 4Q12E LGD 1Q13E Sharp 2Q13E Japan Display 3Q13E 4Q13E
Figure 12: Quarterly in-cell total revenue and panel price trend
Unit in US$ millions, US$
2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E In-cell revenue
48
50 46 45 43 42 40 48 46 44 42 40 38 36 Panel Price assumptions
In-cell total revenue accounts for ~19% of total iPhone COGS On annual basis, panel makers are projected to generate over $4 billion revenue, which accounts 9% of iPhone COGS in 2012E. Provided panel is the most expensive single component in smartphone, we forecast its proportion to total iPhone COGS to increase to 19% once panel makers begin full-year production.
9
Figure 13: Annual in-cell revenue by panel makers

Unit in US$ millions
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2012E LGD Sharp Japan Display 2013E 1,188 1,311 1,097 2,733 2,921 2,298
Figure 14: Annual in-cell total revenue and % out of iPhone COGS
Unit in US$ millions, %
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 19% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
9%
7,951 3,596
2012E In-cell revenue 2013E In-cell % to iPhone COGS
Total in-cell revenue may go as high as $4.8bn / $10.5bn in 2012E/2013E Given uncertainty of our panel price and unit output assumptions, we illustrated sensitivity analysis to give color on total revenue range. Depending upon panel price and unit output variances, we estimate total in-cell revenue to range from $2.6~4.8bn in 2012E and $5.8~10.5bn in 2013E.
Table 6: Revenue sensitivity analysis by panel price and unit output
Panel Price in US$, Unit output in millions, Revenue in US$ millions 2012 Revenue, US$ million Panel Price ($40) - bear Panel Price ($47) - base Panel Price ($54) - bull 2013 Revenue, US$ million Panel Price ($36) - bear Panel Price ($42) - base Panel Price ($49) - bull
Unit (bear case): -15% 2,598 3,056 3,515 Unit (bear case): -15% 5,745 6,759 7,772
Unit (base case) 3,056 3,596 4,135 Unit (base case) 6,759 7,951 9,144
Unit (bull case): +15% 3,515 4,135 4,755 Unit (bull case): +15% 7,772 9,144 10,516
In-cell technology beyond iPhone

Works under high-volume single model brand As we have illustrated in the technology comparison section, Apple seems to be most suitable brand to adopt the in-cell in near-term. Apple has kept singular model policy across different mobile applications and we believe there is a chance that Apple may consider choosing in-cell for other applications if it works well with iPhone. In this case, +50M new iPad series may be candidates for in-cell technology. iPad with in-cell can generate +22% more revenue to TFT-LCD Assuming new iPad (to be launched in 2013E) was manufactured with in-cell display, we forecast TFT-LCD players to generate $8.5 billion vs. $7.0 billion in non in-cell case. Touch panel players may lose +60% revenue opportunity (assuming no touchpanel supply at all in in-cell panel); and their 2013E revenue from iPad could decline to $1.3bn compared to $3.3 in non in-cell case.
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Figure 15: Apple and market tablet PC shipment

Unit in millions, %
160 140 120 100 80 60 40 20 0 58% 61% 59% 70% 60% 50% 40% 30% 20% 10% 0% 2011 iPad shipments 2012E Total Tablet PC shipments 2013E iPad % (RHS)
Figure 16: LCD & Touch Panel Revenue opportunity from iPad
US$ millions
12,000 10,000 8,000 6,000 4,000 2,000 0 1,467 2,431 2011 2012E Panel
1,290 2,552 8,477 4,926 2013E (w in-cell) Touch
3,282
6,934
2013E (w/o in-cell)
Panel Sales +22% vs. w/o in-cell
Touch panel BOM needs to be reduced Comparing module (TFT-LCD + Touch Panel) costs' burden in touch device's BOM, it represents over 37% of the tablet PC BOM and 18% of the smartphone BOM according to our estimates. As total BOM must be reduced to enable more attractive price points, we see increasing need of cost reduction efforts. In-cell on Tablet PC panel can theoretically reduce +7% of total BOM; hence we expect panel makers to jump into tablet PC developing in-cell in long-term after firstly touching base on smartphone touch panel.
Figure 17: Smartphone Touch Panel market demand
Unit in millions, %
1,400 1,200 1,000 800 600 400 200 0 2011 In-cell demand 2012E 2013E 2014E 2015E In-cell demand % Total smartphone touch panel demand
Figure 18: (Touch Panel + LCD array) % to total BOM comparison

%
21% 17% 13% 3% 0%
25% 20% 15% 10% 5% 0%
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
63% 82%
18%
Smartphone
37%
Tablet PC
Source: iSuppli, J.P. Morgan
Stock implications
LGD and Sharp stand out to us as the winners Given limited supply and strong position with in-cell, we pick LGD and Sharp to be key beneficiary names in the panel space. LGD and Sharp seem pretty confident about in-cell adoption and we believe in-cell will create strong top-line and bottomline opportunity, which could be positive catalysts for the share price.
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Table 7: Potential beneficiary for in-cell touch panel technology

Technology In-cell Winners LGD, Sharp, TMD Losers TPK & Wintek. However, TPK could remain in the supply chain given its superior lamination yield rate. Lamination is TPK's best strength. Sintek, Laibo (The need for ITO sensor is eliminated, all ITO sputtering is made by TPK/Wintek on cover glass)
OGS/Touch-on-lens
Source: J.P. Morgan.
TPK
Market Cap comparison: TFT-LCD vs. Touch Panel

Touch Panel on boom until mid-2011 since TPK IPO After financial crisis, both TFT-LCD and Touch panel players' market cap moved inline direction until mid-2010. Since TPK's IPO, touch panel market cap began to move up on back of strong Apple supply chain story while TFT-LCD players suffer from deteriorating supply/demand dynamics. Beginning from mid-2011, however, touch panel players reverted into showing stiff correction and we witnessed similar market cap trend between two names.
Figure 19: Market Cap trend of TFT-LCD and Touch panel players
US$ millions
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan-08
12,000 10,000 8,000 6,000 4,000
TPK IPO
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
2,000 -
TFT-LCD
Touch Panel (RHS)
Source: Bloomberg, TFT-LCD includes LGD/Sharp/AUO/CMI, Touch Panel includes TPK/Wintek/Melfas/Iljin Display/J Touch/ELK
TFT-LCD clearly trading on discount to revenue generation Until mid-2009, both TFT-LCD and Touch panel have witnessed similar market cap to revenue multiple trend and nicely rebounded after financial crisis. Moving into 2010, Touch panel began trading at higher multiple compared to TFT-LCD on Apple supply chain story and it recorded robust multiple expansion from mid-10 to mid-11.
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Figure 20: Market Cap to Revenue trend (2008 - Present)

X, Multiple = Market Cap / Revenue
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 TFT-LCD Jul-10 Jan-11 Touch Panel Jul-11 Jan-12
Source: Company data, Bloomberg, TFT-LCD includes LGD/Sharp/AUO/CMI, Touch Panel includes TPK/Wintek/Melfas/Iljin Display/J Touch/ELK
However, in-cell/on-cell emergence and weak IT demand has dragged down touchpanels multiple to similar level of TFT-LCD and they are each trading at 1.2x (TFTLCD) and 2.3x (Touch panel) as of now. Recent multiple contraction seems market has already priced in risks associated with Touch-panel. TFT-LCD deserves higher multiple on in-cell opportunity JPM Asia tech team forecasts TFT-LCD players' revenue to continuously increase while Touch panel players witness a shrinking trend. Upon increasing revenue trend, we believe panel makers with a strong position in in-cell technology deserve higher multiple going forward. We illustrated revenue impact of in-cell to each players in the below section.
Figure 21: Market Capitalization to Revenue trend (2008~)
Multiple (X)
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 TFT-LCD Touch Panel Jul-12 Oct-12
Figure 22: Revenue projection of TFT-LCD and Touch Panel

12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-11 Jul-11 Jan-12 TFT-LCD Jul-12 Jan-13 Touch Panel (RHS) Jul-13 3,000 2,500 2,000
Mainly due to shrinking TPK top-line
1,500 1,000 500 -
Source: Company data, Bloomberg, J.P. Morgan estimates * TFT-LCD includes LGD/Sharp/AUO/CMI, Touch Panel includes TPK/Wintek/Melfas/Iljin Display/J Touch/ELK
Source: Company data, J.P. Morgan estimates * TFT-LCD includes LGD/Sharp, Touch Panel includes TPK/Wintek/Melfas/Iljin Display/J Touch/ELK
Implications on LGD
Revenue Impact According to our estimates, we estimate LGD to generate approximately $1.3/2.6 billion in 2012E/2013E, each accounting for 5% and 10% of total revenue. Along with strong top-line growth, we believe in-cell panel business to positively contribute to LGDs operating level.
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Earnings impact Previously we forecasted smartphone display to account for 26% of total LGD's OP in 2012E. Detailed margins are not provided, however, we cautiously forecast in-cell to contribute more to total OP than current smartphone display.
Figure 23: In-cell revenue contribution to LGDs business
30,000 25,000 20,000 15,000 10,000 5,000 0 2012E LGD total revenue
12%
10%
10% 8%
5%
6% 4% 2% 0% 2013E LGD (in-cell) revenue In-cell % out of total revenue
Implications to Sharp
Recent development from Sharp Sharp announced at end-2011 that it would likely introduce in-cell technology 2013 and not 2012. However, the company recently commented that it will base the timing of the introduction on clients needs. The company has yet to make any comments on production lines, production volume, yield, or price. However, based on changes in the tone of managements comments, we think Kameyama plant No. 1 (6G LTPS line), scheduled to begin full-scale production this summer, is likely to produce smartphone panels using in-cell technology. While we think Kameyama plant No. 2, which uses IGZO technology, is not likely to use in-cell technology, the company commented its latest version of IGZO is compatible with in-cell technology and we therefore think panels for tablet PCs could use in-cell technology starting from 2013. Cost impact As the equipment used in Kameyama plant No. 1 was supplied by a major smartphone maker, we think fixed costs are low and risk has therefore been minimized. However, we think prices will also be kept low, making margins narrower than those on other lines. On the other hand, because Sharp purchased the equipment used in its Kameyama plant No. 2 itself, we think yield improvements on this line will more easily translate into broader margins.
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Figure 24: In-cell revenue contribution to LGDs business

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Sharp LCD revenue
19% 12%
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
2012E Sharp (in-cell) revenue
2013E In-cell % out of total revenue
Implication to Japan Display

Japan Display is an unlisted LCD panel maker formed in 2012 through the integration of the small- and medium size LCD panel businesses of Sony, Hitachi, and Toshiba (Toshiba Mobile Display, TMD). While information on the company is limited because it is not listed, TMD, like Sharps Kameyama plant No. 1, has been loaned manufacturing equipment (5.5G, LTPS) by a major smartphone maker and we thus expect Japan Display to produce smartphone panels using in-cell technology in the TMD plant.
Implications for Touch Panel players

On the flip side, touch panel makers (i.e. TPK and Wintek) could see negative impact on its revenue and earnings if in-cell gains market acceptance quickly. Currently, we believe the market has discounted the potential losses of iPhone 5 orders from touch panel makers, but we believe the market could be overly pessimistic about the leading touch panel makers revenue opportunities in other areas like tablet market growth and touch on NB or AIOs. Currently, more than 90% of the design-ins models for touch on NBs are based on OGS given easier conversion costs among different models and ease of manufacturing process. The size migration and the better margin would likely give touch panel makers another boost on earnings in 2H12 and 2013, in our view. In short, we believe the touch panel market opportunities are expanding significantly, especially if measured in square meters and revenues. We summarize the touch panel market condition by market segment: (1) smartphone market become less attractive for touch panel makers: TFTLCD makers are gaining market shares in smartphone area especially given Apple could potentially switch to in-cell; leading touch panel makers could gain market shares through OGS, but technology-laggards and film-based makers continue to lose ground. Given the technology improvement and the capacity build, the margin for smartphones touch panels has become marginal. Most of the second-tier touch panel makers barely make any profits in this market segment.
15
(2) tablets market could be a big swing factor: we estimate the market is growing by 54%/ 31% in 2012/2013, and Apples market share to be 61%/59% in 2012/2013. We do not rule out the possibility that Apple could adopt in-cell for iPad in the longer term, but technology and cost hurdles remain to be resolved first. This could be a drag on touch panel makers' valuation multiple since if this happens, it could wipe out TPK/Wintek's operating profits by 30-40% for 2012/2013, per our estimate. Again, this is Apples binary decision, and this is a downside risk for touch panel maker like TPK and an opportunity for TFT-LCD makers like LGD and Sharp. (3) NBs and AIOs benefits OGS manufacturers: we estimate the touch on NB would represent 5-7% penetration of total market size of 238 million units in 2013. Desktop PC represents another 154/152 million unit market, but penetration could be less than 1% in 2012/2013, per our estimate. We have seen Intel and Microsoft clearly pushing touch panel adoption in the NB market in Computex. OGS seems to be the most practical solution for this market in terms of weights, thickness, and costs (over 90% touch on NB models are OGS-based). We believe eventually touch panel would become an essential part of PCs along with the touch panel prices decline. We also believe there is a great potential that Apple could follow suit by integrating touch into its NB/AIO series of products in the future. Hence, we believe leading touch panel makers like TPK could still enjoy its industry leadership in the next couple of years. Of note, one 14 touch panel is nearly twice as large as a 10 tablet in areas, hence it could fill up touch panel makers capacities quickly, especially given Intel's agreement with touch panel makers that put touch panel makers at front of the priority in this market segment.
16
Appendix I: In-cell supply/demand model

In-cell capacity and yield rate assumptions by company
Quarterly capacity in 000s sqm and yield rate assumption in %, Based on Base case scenario Adjusted Quarterly capacity (K sqm) LGD AP2 LTPS Sharp Kameyama line Japan Display Ex-Sony Ex-TMD D2 Total Yield rate assumptions (%) LGD AP2 LTPS Sharp Kameyama line Japan Display Ex-Sony Ex-TMD D2 Average
Gen 4.5 6.0 3.5 5.5
1Q12 0 0 0 0 0 0
2Q12E 0 0 0 0 0 0 2Q12E 73% 58% 64% 63% 64%
3Q12E 113 177 136 41 95 425 3Q12E 75% 60% 67% 66% 67% 66%
4Q12E 136 177 136 41 95 448 4Q12E 78% 65% 70% 69% 70% 70%
1Q13E 145 177 136 41 95 458 1Q13E 80% 70% 73% 72% 73% 74%
2Q13E 153 177 136 41 95 466 2Q13E 80% 72% 76% 75% 76% 76%
3Q13E 153 177 136 41 95 466 3Q13E 80% 75% 76% 75% 76% 77%
4Q13E 153 177 136 41 95 466 4Q13E 80% 75% 76% 75% 76% 77%
2012E 62 88 68 20 47 218 2012E 77% 63% 68% 68% 69% 68%
2013E 151 177 136 41 95 464 2013E 80% 73% 75% 74% 75% 76%
Gen 4.5 6.0 3.5 5.5
1Q12 70% 55% 61% 60% 61%
In-cell panel supply by company

Unit output based on 4 panel (mn units), M/S (%), Based on Base case scenario Unit output LGD Sharp Japan Display Ex-Sony Ex-TMD Total supply M/S by unit output (%) LGD Sharp Japan Display Ex-Sony Ex-TMD D2 Total
Gen 4.5 6.0 3.5 5.5
1Q12 0 0 0 0 0 0
2Q12E 0 0 0 0 0 0 2Q12E NA NA NA NA NA NA
3Q12E 14 17 15 4 10 46 3Q12E 31% 37% 32% 9% 22% 100%
4Q12E 18 19 15 5 11 52 4Q12E 35% 36% 29% 9% 21% 100%
1Q13E 20 21 17 5 12 58 1Q13E 34% 37% 29% 9% 20% 100%
2Q13E 21 22 17 5 12 60 2Q13E 35% 36% 29% 9% 20% 100%
3Q13E 21 23 17 5 12 61 3Q13E 34% 37% 29% 9% 20% 100%
4Q13E 21 23 17 5 12 61 4Q13E 34% 37% 29% 9% 20% 100%
2012E 32 36 30 9 21 98 2012E 33% 36% 30% 9% 21% 100%
2013E 82 88 69 21 48 239 2013E 34% 37% 29% 9% 20% 100%
Gen 4.5 6.0 3.5 5.5
1Q12 NA NA NA NA NA NA
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In-cell panel revenue by company

Unit in $ millions, Panel Price in US$, Based on Base case scenario Revenue LGD Sharp Japan Display Ex-Sony Ex-TMD Total Panel Price assumptions
Gen 4.5 6.0 3.5 5.5
1Q12 NA NA NA NA NA NA
2Q12E NA NA NA NA NA NA
3Q12E 544 649 553 165 388 1,745 48
4Q12E 643 662 544 162 382 1,850 46
1Q13E 653 696 554 165 389 1,903 45
2Q13E 672 699 563 168 395 1,934 43
3Q13E 717 776 601 179 421 2,094 42
4Q13E 692 749 580 173 407 2,020 40
2012E 1,188 1,311 1,097 327 770 3,596 47
2013E 2,733 2,921 2,298 685 1,612 7,951 42
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Companies Recommended in This Report (all prices in this report as of market close on 15 June 2012) LG Display (034220.KS/W22300/Overweight), Sharp (6753) (6753.T/412/Overweight), TPK Holding Co., Ltd. (3673.TW/NT$454.50/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for TPK Holding Co., Ltd. within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: LG Display, Sharp (6753), TPK Holding Co., Ltd.. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Sharp (6753), TPK Holding Co., Ltd.. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: LG Display, Sharp (6753), TPK Holding Co., Ltd.. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Sharp (6753), TPK Holding Co., Ltd.. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Sharp (6753), TPK Holding Co., Ltd.. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Sharp (6753), TPK Holding Co., Ltd.. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from LG Display, Sharp (6753), TPK Holding Co., Ltd.. J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of LG Display and owns 18,538,460 as of 15-Jun-12. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.inquiries@jpmorgan.com with your request.
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Date 11-Oct-06
LG Display (034220.KS, 034220 KS) Price Chart
94,318 OW W56,000 80,844 OW W50,000 OW W70,000N W36,000 67,370 OW W40,000 OW W60,000OW W60,000 N W28,000 W40,000 OW W55,000 OW W42,000 W36,000 OW W45,000 N W24,000 OW OW W60,000OW W52,000 OW 53,896 Price(W) 40,422 26,948 13,474 0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11 Jan 12 N W31,000 W53,000 OW OW W50,000 OW W32,000 N W31,000 N W36,000 OW W55,000 OW W45,000
Rating Share Price (W) OW OW OW OW OW OW N N N N N OW OW OW OW OW OW OW OW OW OW OW 30400 32400 39600 42700 45000 49250 37600 32900 29600 20850 31450 31350 34800 30000 41350 41700 45450 37250 38550 34850 29550 30250 19150 28550
Price Target (W) 40000 45000 50000 56000 60000 70000 60000 36000 31000 24000 28000 31000 36000 40000 53000 55000 60000 55000 52000 50000 45000 42000 32000 36000 Price Target (Y) 2120 2550 2400 2000 1850 1500 1250 1050 750 610 550 650 770 900 1050 1250 750 690 700 900 850 700 650
10-Apr-07 03-Jul-07 10-Oct-07 31-Oct-07 03-Jul-08 10-Jul-08 20-Aug-08 17-Apr-09 10-Jun-09 17-Jul-09 12-Nov-09 06-Jan-10 01-Apr-10 23-Apr-10 17-Sep-10 13-Jan-11 28-Mar-11 01-Jul-11 22-Jul-11 13-Sep-11 28-Jan-12 Date 04-Oct-06
22-May-07 OW
02-Dec-08 N
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 11, 2006.
Rating Share Price (Y) N OW OW N N N N N N UW UW UW UW N UW UW N OW OW OW OW 2025 2185 2175 1850 1797 1577 1290 1003 687 599 662 889 1087 1018 1009 1226 867 738 595 698 643 656 509
Sharp (6753) (6753.T, 6753 JT) Price Chart
09-Mar-07 26-Jul-07 23-Oct-07 28-Apr-08 22-Jul-08 05-Sep-08 07-Oct-08 04-Nov-08
3,984
N Y1,250 N Y610
UW Y900
OW Y850
3,320
N Y2,000
N Y1,500 N Y750
UW Y770
OW Y900 Y650 OW UW Y690 OW Y700 N Y700
2,656 N Y2,120Y2,550Y2,400 OW OW Price(Y)
N Y1,850 Y1,050 Y550 Y650 N UW UW N Y1,050 Y1,250 Y750 N UW
1,992
15-Dec-08 N 03-Feb-09 15-Jul-09 03-Aug-09 14-Oct-09 17-Nov-09 21-Sep-10 06-Jun-11 14-Sep-11 16-Nov-11 12-Jan-12 02-Feb-12 24-Apr-12
1,328
664
0 Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 Dec 11
01-May-10 N
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 04, 2006.
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TPK Holding Co., Ltd. (3673.TW, 3673 TT) Price Chart
1,476 1,230
OW NT$800 OW NT$1,000 OW NT$1,200 OW NT$500 OW NT$700
984 Price(NT$) 738
Date 04-Jun-11 11-Aug-11 28-Oct-11 22-Feb-12 26-Apr-12
Rating Share Price (NT$) OW OW OW OW OW 936.00 719.00 581.00 490.00 385.00
Price Target (NT$) 1200.00 1000.00 800.00 700.00 500.00
492 246 0 Oct 10 Jan 11 May 11 Aug 11 Dec 11 Apr 12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 04, 2011.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Park, JJ: LG Display (034220.KS), LG Electronics (066570.KS), SK Hynix (000660.KS), Samsung Electronics (005930.KS) Chang, Narci: AU Optronics (2409.TW), Chimei Innolux Corporation (3481.TW), E Ink Holdings Inc. (8069.TWO), Epistar Corporation (2448.TW), Everlight Electronics Co., Ltd. (2393.TW), Inotera Memories, Inc. (3474.TW), Nanya Technology Corporation (2408.TW), TPK Holding Co., Ltd. (3673.TW), Taiwan Surface Mounting Technology (6278.TW), Wintek Corporation (2384.TW) Izumi, Yoshiharu: Anritsu (6754) (6754.T), Fuji Electric (6504) (6504.T), Fujitsu (6702) (6702.T), Hitachi (6501) (6501.T), Mitsubishi Electric (6503) (6503.T), NEC (6701) (6701.T), Nissin Electric (6641) (6641.T), Oki Electric Industry (6703) (6703.T), Omron (6645) (6645.OS), Panasonic (6752) (6752.T), Renesas Electronics (6723) (6723.T), Sharp (6753) (6753.T), Sony (6758) (6758.T), Toshiba (6502) (6502.T) J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012
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*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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In Cell Touch Technology

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In Cell Touch Technology

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Asia Pacific Equity Research

In-Cell & Touch Panel

Asia-Pacific Tech Research

Technology - Semiconductors JJ Park

(886-2) 2725-9899 narci.h.chang@jpmorgan.com J.P. Morgan Securities (Taiwan) Limited.

(81-3) 6736-8637 yoshiharu.izumi@jpmorgan.com JPMorgan Securities Japan Co., Ltd.

Panel & Touch YTD performance

40% 20% 0% -20% -40% -60% LGD

-11% -39% Sharp TPK -27% Wintek

Source: Bloomberg, J.P. Morgan estimates

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

How big is In-cell? ....................................................................6

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

What is In-cell technology?

Cover Lens Type

Lamination & Layer #

Touch Module Maker

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

In-cell vs. OGS (One Glass Solution)

Source: Display Search, J.P. Morgan, *SOC = Sensor on Cover

On-Cell In-Cell In-Cell On-Cell On-Cell

Source: Display Search, J.P. Morgan.

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

In-cell touch panel cost structure

Cover glass FPCB & Chip Touch sensor

Cost down ~20%

Cover glass FPCB & Chip TFT LCD + Touch control

Panel Price $37

Panel Price $??

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

Source: Display Search, J.P. Morgan estimates

How big is In-cell?

Gen 4.5 6.0 3.5 5.5

Monthly glass capacity (K) 3Q12E 4Q13E 65 80 25 25 53 53 35 35 18 18

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

Figure 3: Quarterly in-cell capacity by panel makers

Figure 4: Quarterly in-cell adjusted-capacity by panel makers

Source: Company data, J.P. Morgan estimates

Figure 5: Yield rate assumptions by panel makers

Figure 6: UTR assumptions by panel makers

Source: Company data, J.P. Morgan estimates

Source: Company data, J.P. Morgan estimates

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

Figure 7: Quarterly in-cell supply by panel makers

Figure 8: Quarterly in-cell supply M/S by panel makers

Source: Company data, J.P. Morgan estimates

Source: Company data, J.P. Morgan estimates

Figure 10: Quarterly in-cell supply/demand

20 10 0 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

iPhone w in-cell (new iPhone)

iPhone w/o in-cell

In-cell Demand to panel makers (different from end-demand)

Source: Company data, J.P. Morgan estimates

JJ Park (822) 758-5717 jj.park@jpmorgan.com

Asia Pacific Equity Research 16 June 2012

In-cell ASP and revenue trend

50 46 45 43 42 40 48 46 44 42 40 38 36 Panel Price assumptions