In Cell Touch Technology

www.morganmarkets.com

Asia Pacific Equity Research16 June 2012

In-Cell & Touch Panel A major breakthrough in display: Opportunity in smartphone and Tablet PC

Technology - Semiconductors

JJ Park AC

(822) 758-5717

[email protected]

J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Narci Chang AC

(886-2) 2725-9899

[email protected]

J.P. Morgan Securities (Taiwan) Limited.

Yoshiharu Izumi AC

(81-3) 6736-8637

[email protected]

JPMorgan Securities Japan Co., Ltd.

Helaine Kang

(82-2) 758- 5712

[email protected]

J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Rahul Chadha

(91-22) 6157-3261

[email protected]

J.P. Morgan India Private Limited

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.

Given uncertainty surrounding In-cell touch panel technology (“In-cell”), we illustrate (1) where In-cell is in terms of technology spectrum; (2) In-cell cost structure analysis; (3) quantify impact of In-cell for supply chains; and (4) implications for major LCD panel and touch panel makers.

What’s 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 Apple’s 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 In-cell panels (Oxide backplane) are used in iPad which theoretically reduces 7% of total BOM, then total In-cell revenue opportunity in iPadwould 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 Ticker RatingTP Price Upside Market cap P/B(x) P/E(x) ROE (%)

(LC) (LC) Downside (US$ B) 12E 13E 12E 13E 12E 13E

LGD 034220 KS OW 36,000 22,300 61% 6.9 0.8 0.7 14.3 5.8 5.4 12.4

Sharp 6753 JT OW 650 412 58% 5.8 0.7 0.6 na 4.9 2.2 13.7

TPK 3673 TT OW 500 455 10% 3.6 3.0 2.2 8.9 8.4 36.6 30.5

Wintek 2384 TT N 23 16 46% 0.9 0.7 0.7 31.6 19.8 2.2 3.4

Source: Bloomberg, J.P. Morgan estimates

Panel & Touch YTD performance%

Source: Bloomberg.

-11%

-39%

23%

-27%

-60%

-40%

-20%

0%

20%

40%

LGD Sharp TPK Wintek

Asia-Pacific

Tech Research

2


JJ Park(822) [email protected]

Table of ContentsWhat 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

AppendicesAppendix I: In-cell supply/demand model............................17

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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) Light-sensing 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 sensor-on-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

Source: Display Search, J.P. Morgan

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.

Sensor Substrate Cover Lens Type Sensor Patterning Lamination & Layer #

w/ Sensor substrate

Touch Module Structure

w/o Sensor substrate

Touch Module Maker

Touch Module Maker

Panel Maker

2D/2.5D/3DAdd-On

2DSOC, One

Glass

2D / 2.5D / 3DIn/On-cell

G/G or G/F/FBy Separate

ITO Patterning by Piece or

Sheet

In/On-cell Built-in Sensor

Cover Lens & Controller

Controller

Cover Lens

Panel

Panel

4



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 one-stop 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 3D Cover Lens Panel Source IC & Spec. Customization Inner Mechanics

OGS/SOCSheet type has difficulty forming 3D when ITO sensor is already on. Piece type has more difficulty with patterning on 3D form

Brands have multiple sources of panel makers to match touch modules

Easier to select, change, or tune performance from controller IC, sensor, and panel

Additional FPC and controller IC still occupy inner mechanical room

In-cellNo need to match any kind of cover lens except tuning controller/IC

Brands have more limited selection of panel makers

Good for integration, but not flexible for customization

Good for integration on IC and signal cable

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. Brandswith large volume seller (i.e. Apple; covered by Mark Moskowitz) can fully enjoy in-cell 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?

Light-Sensing

Voltage-Sensing

Charge-Sensing ResistiveDeveloping

PhaseSharp In-Cell In-Cell On-Cell MP in 2H12Samsung Mobile In-Cell In-Cell In-Cell On-Cell On-Cell MP (Galaxy)AUO In-Cell In-Cell In-Cell On-Cell On-Cell MP in 2H12Hitachi In-Cell On-Cell R&DCPT In-Cell R&DSony In-Cell On-Cell MP in 2H12TMD In-Cell MP in 2H12LGD In-Cell In-Cell On-Cell MP in 1H12CMI In-Cell On-Cell MP in 4Q12HannStar In-Cell R&DWintek On-Cell R&D

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

5



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 TFT-LCD 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 device’s 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$, %

Source: J.P. Morgan estimates, *Above cost structure is assuming 3.5" TFT-LCD capacitive panel. Actual price may vary

Cover glass

Cover glassTouch sensor

TFT LCDTFT LCD

+Touch control

FPCB & Chip

FPCB & Chip

Panel Price $37 Panel Price $??

62%

16%

8%

11%

+70%

+15%

+10%

Cost down ~20%

6



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") Next iPhone series (assuming 4")

Component Price $ Proportion Component Price $ Proportion

Cover glass 4.2 11% Cover glass 5.5 11%

Glass sensor 6.0 16% Chip 2.2 5%

Chip 1.7 5% FPCB 1.3 3%

FPCB 1.0 3% OCA 0.4 1%

OCA 0.3 1% Others 2.8 6%

Others 0.8 2% TFT-LCD + Touch control 35.5 75%

TFT-LCD 23.0 62%

Total 37.0 100% Total 47.6 100%

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 Gen Glass substrateMonthly glass capacity (K) Yield rate

3Q12E 4Q13E 3Q12E 4Q13E

LGD AP2 LTPS 4.5 730 920 65 80 73% 80%Sharp Kameyama line 6.0 1500 1850 25 25 58% 75%Japan Display 53 53 64% 76% Ex-Sony 3.5 600 720 35 35 63% 75% Ex-TMD D2 5.5 1300 1500 18 18 64% 76%

Source: Company data, J.P. Morgan estimates”

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.

7



Figure 3: Quarterly in-cell capacity by panel makersUnit in 000sqm

Source: Company data, J.P. Morgan estimates

Figure 4: Quarterly in-cell adjusted-capacity by panel makersUnit in 000sqm

Source: Company data, J.P. Morgan estimates, *Adjusted-capacity = capacity x allocation (%)

Figure 5: Yield rate assumptions by panel makers%


Figure 6: UTR assumptions by panel makers%


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 full-scale production in 3Q12E. Once mass production takes off, we forecast all panel makers to run the line at full-capacity.

0

50

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3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

LGD AP2 LTPS Sharp Kameyama line Japan Display

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3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E


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80%

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100%

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E


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Figure 7: Quarterly in-cell supply by panel makersUnit shipments in millions


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


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 in-cell 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 demandUnit shipments in millions


Figure 10: Quarterly in-cell supply/demandUnit shipments in millions


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.

0

5

10

15

20

25

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

LGD Sharp Japan Display

31% 35% 34% 35% 34% 34%

37% 36% 37% 36% 37% 37%

32% 29% 29% 29% 29% 29%

0%

20%

40%

60%

80%

100%

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E


-

27 28 28 30

40

29

14 10

7 6 6

05

1015202530354045

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

iPhone w in-cell (new iPhone) iPhone w/o in-cell

46 52

58 60 61 61

27 28 28 30

40 40

0

10

20

30

40

50

60

70

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

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

9



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 Avg Yield Rate = 68% (base) Avg Yield Rate = 71% (bull)

Panel Size = 4.0" 98 101

Panel Size = 4.3" 85 88

2013 Unit Output Avg Yield Rate = 76% (base) Avg Yield Rate = 79% (bull)

Panel Size = 4.0" 239 250

Panel Size = 4.3" 207 216


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 makersUnit in US$ millions


Figure 12: Quarterly in-cell total revenue and panel price trendUnit in US$ millions, US$


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.

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3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E


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48

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2,200

3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

In-cell revenue Panel Price assumptions

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Figure 13: Annual in-cell revenue by panel makersUnit in US$ millions


Figure 14: Annual in-cell total revenue and % out of iPhone COGSUnit in US$ millions, %


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 Unit (bear case): -15% Unit (base case) Unit (bull case): +15%

Panel Price ($40) - bear 2,598 3,056 3,515

Panel Price ($47) - base 3,056 3,596 4,135

Panel Price ($54) - bull 3,515 4,135 4,755

2013 Revenue, US$ million Unit (bear case): -15% Unit (base case) Unit (bull case): +15%

Panel Price ($36) - bear 5,745 6,759 7,772

Panel Price ($42) - base 6,759 7,951 9,144

Panel Price ($49) - bull 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 touch-panel 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.

1,188

2,733

1,311

2,921

1,097

2,298

0

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1,000

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2012E 2013E


3,596

7,951

9%

19%

0%2%4%6%8%10%12%14%16%18%20%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

2012E 2013E

In-cell revenue In-cell % to iPhone COGS

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Figure 15: Apple and market tablet PC shipmentUnit in millions, %


Figure 16: LCD & Touch Panel Revenue opportunity from iPadUS$ millions


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 demandUnit in millions, %


Figure 18: (Touch Panel + LCD array) % to total BOM comparison%

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 bottom-line opportunity, which could be positive catalysts for the share price.

58% 61% 59%

0%

10%

20%

30%

40%

50%

60%

70%

0

20

40

60

80

100

120

140

160

2011 2012E 2013E

iPad shipments Total Tablet PC shipments iPad % (RHS)

2,431 4,926

8,477 6,934 1,467

2,552

1,290 3,282

0

2,000

4,000

6,000

8,000

10,000

12,000

2011 2012E 2013E (w in-cell) 2013E (w/o in-cell)

Panel Touch Panel Sales +22% vs. w/o in-cell

0%3%

13%

17%

21%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400

2011 2012E 2013E 2014E 2015E

In-cell demand Total smartphone touch panel demand In-cell demand %

18%37%

82%

63%

0%

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30%

40%

50%

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100%

Smartphone Tablet PC

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Table 7: Potential beneficiary for in-cell touch panel technology

Technology Winners Losers

In-cell LGD, Sharp, TMD

TPK & Wintek. However, TPK could remain in the supply chain given its superior lamination yield rate. Lamination is TPK's best strength.

OGS/Touch-on-lens TPK

Sintek, Laibo (The need for ITO sensor is eliminated, all ITO sputtering is made by TPK/Wintek on cover glass)

Source: J.P. Morgan.

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 in-line 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 playersUS$ millions

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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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

TFT-LCD Touch Panel (RHS)

TPK IPO

13



Figure 20: Market Cap to Revenue trend (2008 - Present)X, Multiple = Market Cap / Revenue

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 touch-panel’s multiple to similar level of TFT-LCD and they are each trading at 1.2x (TFT-LCD) 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)

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

Figure 22: Revenue projection of TFT-LCD and Touch PanelUnit in US$ millions, %

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 LGD’s operating level.

0.0

1.0

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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

TFT-LCD Touch Panel

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Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

TFT-LCD Touch Panel

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Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

TFT-LCD Touch Panel (RHS)

Mainly due to shrinking TPK top-line

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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 LGD’s businessUnit in US$ millions, %


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 management’s 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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LGD total revenue LGD (in-cell) revenue In-cell % out of total revenue

15



Figure 24: In-cell revenue contribution to LGD’s businessUnit in US$ millions, %


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 Sharp’s 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: TFT-LCD 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.

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16



(2) tablets market could be a big swing factor: we estimate the market is growing by 54%/ 31% in 2012/2013, and Apple’s 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 Apple’s 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.

17



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) Gen 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E

LGD AP2 LTPS 4.5 0 0 113 136 145 153 153 153 62 151

Sharp Kameyama line 6.0 0 0 177 177 177 177 177 177 88 177

Japan Display 0 0 136 136 136 136 136 136 68 136

Ex-Sony 3.5 0 0 41 41 41 41 41 41 20 41

Ex-TMD D2 5.5 0 0 95 95 95 95 95 95 47 95

Total 0 0 425 448 458 466 466 466 218 464

Yield rate assumptions (%) Gen 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E

LGD AP2 LTPS 4.5 70% 73% 75% 78% 80% 80% 80% 80% 77% 80%

Sharp Kameyama line 6.0 55% 58% 60% 65% 70% 72% 75% 75% 63% 73%

Japan Display 61% 64% 67% 70% 73% 76% 76% 76% 68% 75%

Ex-Sony 3.5 60% 63% 66% 69% 72% 75% 75% 75% 68% 74%

Ex-TMD D2 5.5 61% 64% 67% 70% 73% 76% 76% 76% 69% 75%

Average 66% 70% 74% 76% 77% 77% 68% 76%


In-cell panel supply by company

Unit output based on 4” panel (mn units), M/S (%), Based on Base case scenario

Unit output Gen 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E

LGD 4.5 0 0 14 18 20 21 21 21 32 82

Sharp 6.0 0 0 17 19 21 22 23 23 36 88

Japan Display 0 0 15 15 17 17 17 17 30 69

Ex-Sony 3.5 0 0 4 5 5 5 5 5 9 21

Ex-TMD 5.5 0 0 10 11 12 12 12 12 21 48

Total supply 0 0 46 52 58 60 61 61 98 239

M/S by unit output (%) Gen 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E

LGD 4.5 NA NA 31% 35% 34% 35% 34% 34% 33% 34%

Sharp 6.0 NA NA 37% 36% 37% 36% 37% 37% 36% 37%

Japan Display NA NA 32% 29% 29% 29% 29% 29% 30% 29%

Ex-Sony 3.5 NA NA 9% 9% 9% 9% 9% 9% 9% 9%

Ex-TMD D2 5.5 NA NA 22% 21% 20% 20% 20% 20% 21% 20%

Total NA NA 100% 100% 100% 100% 100% 100% 100% 100%


18



In-cell panel revenue by company

Unit in $ millions, Panel Price in US$, Based on Base case scenario

Revenue Gen 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E

LGD 4.5 NA NA 544 643 653 672 717 692 1,188 2,733

Sharp 6.0 NA NA 649 662 696 699 776 749 1,311 2,921

Japan Display NA NA 553 544 554 563 601 580 1,097 2,298

Ex-Sony 3.5 NA NA 165 162 165 168 179 173 327 685

Ex-TMD 5.5 NA NA 388 382 389 395 421 407 770 1,612

Total NA NA 1,745 1,850 1,903 1,934 2,094 2,020 3,596 7,951

Panel Price assumptions 48 46 45 43 42 40 47 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 [email protected] with your request.

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20



Date Rating Share Price (W)

Price Target (W)

11-Oct-06 OW 30400 40000

10-Apr-07 OW 32400 45000

22-May-07 OW 39600 50000

03-Jul-07 OW 42700 56000

10-Oct-07 OW 45000 60000

31-Oct-07 OW 49250 70000

03-Jul-08 OW 37600 60000

10-Jul-08 N 32900 36000

20-Aug-08 N 29600 31000

02-Dec-08 N 20850 24000

17-Apr-09 N 31450 28000

10-Jun-09 N 31350 31000

17-Jul-09 N 34800 36000

12-Nov-09 OW 30000 40000

06-Jan-10 OW 41350 53000

01-Apr-10 OW 41700 55000

23-Apr-10 OW 45450 60000

17-Sep-10 OW 37250 55000

13-Jan-11 OW 38550 52000

28-Mar-11 OW 34850 50000

01-Jul-11 OW 29550 45000

22-Jul-11 OW 30250 42000

13-Sep-11 OW 19150 32000

28-Jan-12 OW 28550 36000

Date Rating Share Price (Y)

Price Target (Y)

04-Oct-06 N 2025 2120

09-Mar-07 OW 2185 2550

26-Jul-07 OW 2175 2400

23-Oct-07 N 1850 2000

28-Apr-08 N 1797 1850

22-Jul-08 N 1577 1500

05-Sep-08 N 1290 1250

07-Oct-08 N 1003 1050

04-Nov-08 N 687 750

15-Dec-08 N 599 610

03-Feb-09 UW 662 550

15-Jul-09 UW 889 650

03-Aug-09 UW 1087 770

14-Oct-09 UW 1018 900

17-Nov-09 N 1009 1050

01-May-10 N 1226 1250

21-Sep-10 UW 867 750

06-Jun-11 UW 738 690

14-Sep-11 N 595 700

16-Nov-11 OW 698 900

12-Jan-12 OW 643 850

02-Feb-12 OW 656 700

24-Apr-12 OW 509 650

0

13,474

26,948

40,422

53,896

67,370

80,844

94,318

Price(W)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Jan12

LG Display (034220.KS, 034220 KS) Price Chart

OW W56,000 N W31,000 N W36,000OW W55,000 OW W45,000

OW W50,000OW W70,000N W36,000 N W31,000OW W53,000 OW W50,000OW W32,000

OW W40,000OW W45,000OW W60,000OW W60,000N W24,000N W28,000OW W40,000OW W60,000OW W55,000OW W52,000OW W42,000OW W36,000

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Oct 11, 2006.

0

664

1,328

1,992

2,656

3,320

3,984

Price(Y)

Sep06

Jun07

Mar08

Dec08

Sep09

Jun10

Mar11

Dec11

Sharp (6753) (6753.T, 6753 JT) Price Chart

N Y1,250N Y610 UW Y900 OW Y850

N Y2,000 N Y1,500N Y750 UW Y770 OW Y900OW Y650

N Y2,120OW Y2,550OW Y2,400 N Y1,850N Y1,050UW Y550UW Y650N Y1,050N Y1,250UW Y750 UW Y690N Y700OW Y700


Initiated coverage Oct 04, 2006.

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Date Rating Share Price (NT$)

Price Target (NT$)

04-Jun-11 OW 936.00 1200.00

11-Aug-11 OW 719.00 1000.00

28-Oct-11 OW 581.00 800.00

22-Feb-12 OW 490.00 700.00

26-Apr-12 OW 385.00 500.00

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 stock’s 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 analyst’s coverage universe can be found on J.P. Morgan’s 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

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 12%IB clients* 51% 45% 34%

JPMS Equity Research Coverage 43% 48% 9%IB clients* 70% 61% 53%

*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.

0

246

492

738

984

1,230

1,476

Price(NT$)

Oct10

Jan11

May11

Aug11

Dec11

Apr12

TPK Holding Co., Ltd. (3673.TW, 3673 TT) Price Chart

OW NT$800

OW NT$1,000 OW NT$500

OW NT$1,200 OW NT$700


Initiated coverage Jun 04, 2011.

22



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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised April 18, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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