J.P. Morgan -Global Display

www.jpmorganmarkets.com

Asia Pacific Equity Research21 May 2014

Global DisplayWhat's in Apple's pipeline? New features and implications for Asian supply chain

Technology - Semiconductors

Narci Chang AC

(886-2) 2725-9899

[email protected]

Bloomberg JPMA NCHANG <GO>

J.P. Morgan Securities (Taiwan) Limited

JJ Park AC

(822) 758-5717

[email protected]

Bloomberg JPMA PARK <GO>

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

Rod Hall, CFA AC

(1-415) 315-6713

[email protected]

Bloomberg JPMA HALL <GO>

J.P. Morgan Securities LLC

Masashi Itaya AC

(81-3) 6736 8633

[email protected]

Bloomberg JPMA ITAYA <GO>

JPMorgan Securities Japan Co., Ltd.

Yumi Tanaka AC

(81-3) 6736-8603

[email protected]

JPMorgan Securities Japan Co., Ltd.

William Chen AC

(886-2) 2725-9871

[email protected]

Bloomberg JPMA WCHEN <GO>

J.P. Morgan Securities (Taiwan) Limited

Jay Kwon

(82-2) 758-5725

[email protected]

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

See page 18 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 inmaking their investment decision.

Based on our supply chain visits, and well expected in the market, there could be a series of new products coming out in 2H14/1H15 from Apple. This includes a bigger iPhone, an iWatch, and a bigger iPad. In this report we analyze the potential design changes from technology aspect and examine pros/cons of each of these technologies. This exercise does not represent a finalized spec of the Apple products but provides some implications to relevant supply chains in Asia.Apple (AAPL.US, OW) is covered by Rod Hall.

“Sapphire laminates” for iWatch and iPhone 6S? – We believe the supply chain has been actively developing a cover substrate that joints the merits of sapphire material and glass. This is supported by a series of events from U.S. based equipment maker GT (GTAT.US, NC) and Apple’s patent filing, along with our supply chain checks in Asia, which indicates selective high-end iPhone models (5.5”) could carry a sapphire-glass hybrid cover. Consumers may see scratch-free sapphire screens for smartphones soon, implying a 100x bigger market than home buttons for the sapphire industry.

Same technology, bigger screen – We expect next iPhones to carry bigger screens (4.7” and 5.5”), but based on the same in-cell technology, contrary to some market beliefs of other touch panel technologies. We continue to pick up indications that there are two new sizes in the working pipeline, but it is too far off volume production to be sure about the timing. We also expect a 12.9” iPad Pro to come out in 1H15.

Other spec changes in Apple products – Upcoming iPad Air and iPad mini may carry sapphire home buttons, benefiting STC directly. The high-end iPhone model (5.5") may also carry OIS in the camera module, which would improve image quality. Alps, Largan, LG Innotek, and Sharp would benefit.

Key beneficiaries in Asia – Display component makers, LGD (OW), JDI (OW), Sharp (OW), and Minebea (OW), would be direct beneficiaries of iPhone size upgrades. LGD also would supply iWatch OLED screen. TPK (N), Nissha Printing (N), Nitto Denko (N), and Zeon (OW) would benefit from larger-size iPad. Asian sapphire material makers such as STC (OW) would benefit directly from sapphire home buttons in iPad and indirectly if Apple adopts sapphire material in iWatch and 5.5" iPhone, in our view.

Potential Product Roadmap for Apple

Potential ProductName

Size Resolution PPI Display Technology

TouchPanel

Remark Supplier Candidates

iWatch 1.3”/1.6 320x320 348/278 Plastic OLED On-cell Sapphire-glass hybrid cover

LGD (OLED), TPK & GIS (cover lamination), GT (sapphire material)

iPhone 6 4.7” 1334x750 326 LTPS TFT-LCD In-cell Larger screen LGD, Sharp, JDI, Minebea (LGP), ZeoniPhone 6S 5.5” 1704x960 356 LTPS TFT-LCD In-cell Sapphire-glass

hybrid coverLGD, Sharp, JDI, Minebea (LGP), Zeon, TPK & GIS (cover lamination), GT(sapphire material), Zeon

iPad Pro 12.9” 2732x2048 265 LTPS/Oxide TFT-LCD

DITO film (GF2) Convertible LGD, Sharp, TPK, Nitto Denko, Nissha Printing, Zeon, and Radiant

Source: Display Search, J.P. Morgan

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Narci Chang(886-2) [email protected]

Table of Contents

Display for Upcoming Apple Products ...................................3

Sapphire cover for iWatch .......................................................................................4

“Sapphire Laminates” for iPhone.............................................................................6

Plastic OLED (“P-OLED”) for iWatch ....................................................................9

In-cell for iPhone 6/6S ..........................................................................................11

DITO-film for iPad ...............................................................................................13

Asian Display Stock Implications .........................................14

Appendix: Apple Product Display Spec ...............................17

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Display for Upcoming Apple Products

Based on our supply chain visits, we think there could be a series of new products coming out in 2H14/1H15 from Apple. This includes a bigger iPhone(s), iWatch, aconvertible iPad. In this report, we try to analyze the potential design changes from a technology point of view and examine advantages/disadvantages of each of these technologies. This exercise only provides a view on the potential design but does not represent a finalized spec of the Apple products. Apple (AAPL.US, OW) is covered by Rod Hall.

Table 1: Potential New Product Roadmap for Apple

Potential ProductName

Size Resolution PPI Display Technology TouchPanel

Remark Supplier Candidates

iWatch 1.3”/1.6” 320x320 348/278 Plastic OLED On-cell Sapphire-glass hybrid cover

LGD (OLED), TPK & GIS (cover lamination), GT(sapphire material)

iPhone 6 4.7” 1334x750 326 LTPS TFT-LCD In-cell Larger screen LGD, Sharp, JDI, Minebea (LGP), Zeon

iPhone 6S 5.5” 1704x960 356 LTPS TFT-LCD In-cell Sapphire-glass hybrid cover

LGD, Sharp, JDI, Minebea (LGP), Zeon, TPK & GIS (cover lamination), GT (sapphire material)

iPad Pro 12.9” 2732x2048 265 LTPS/Oxide TFT-LCD DITO film (GF2) Convertible LGD, Sharp, TPK, Nitto Denko, Nissha Printing, Zeon, and Radiant

Source: Display Search, J.P. Morgan

Figure 1: Potential size upgrades on Apple iPhones

Source: J.P. Morgan.

Bigger iPhone(s), iWatch, and a convertible iPad are around the

corner

4



Table 2: Revenue exposure to Apple

Apple as % of total salesFY14 FY15 Products

LGD 21% 22% iPhone, iPad, Macbook, iWatchSharp 15% 20% iPhone, iPad miniJDI 39% 42% iPhoneSTC 65% 65% iPhone and iPad (home buttons and camera lens cover)TPK 45% 41% iPhone and iWatch (only for the cover), iPad, iPad min ,

iPad Pro.Minebea 14% 16% iPhoneNitto Denko 9% 10% iPad, iPad mini, iPad ProNissha Printing 54% 53% iPad, iPad mini, iPad ProZeon 3% 3% iPad, iPad mini, iPad Pro, iPhone

Source: J.P. Morgan

Sapphire cover for iWatch

From our supply chain analysis, we believe there could be a number of new products under development, including a smartwatch (see “Smartwatch Market: Consumers are smarter than smartwatches”). There could be two sizes of iWatches - 1.3" & 1.6”. The resolution could be 320x320 pixels, similar to Samsung Galaxy Gear. Nevertheless, Samsung’s Galaxy Gear 2 features a 1.63” AMOLED screen with sapphire cover, whereas Apple's could be plastic OLED screen with sapphire-glass hybrid cover. This is in comparison to Sony Smartwatch 2’s 1.6” 220x176 pixels LCD screen with a glass cover.

We identify the sapphire industry (i.e. STC etc.) as one of the potential winning sectors under the smartwatch theme. Sapphire is a type aluminum oxide, transparent and almost scratch-free. It is so tough that it is the second strongest material (scores 9 on the Mohs scale) on earth after diamond. Roughly speaking, one smartphone screen could be 100x as big as Apple’s home button. A 1.5" square-shaped smartwatch could be 7x as big as Apple's home button. We believe Apple’s home button currently takes away around 10% of the industry sapphire ingot capacity (aside from GT); if sapphire is being placed on smartphones or wearables, the addressable market could expand significantly.

Figure 2: Sapphire usage in smartphones/wearables


If sapphire is being placed on smartphones or wearables, the

addressable market could grow

exponentially.

https://jpmm.com/research/content/GPS-1320515-0


5



Figure 3: Sony Smartwatch 2

Source: GigaOm

Figure 4: Samsung Galaxy Gear

Source: Digital Trends

Apple—GT deal

GT Advanced Technologies Inc. (GTAT US, Not Covered), a NASDAQ-listed U.S.-based sapphire equipment maker, announced in October 2013 that it had entered into a multi-year supply agreement with Apple to provide sapphire material.

According to the announcement, GT will own and operate ASF furnaces and related equipment to produce the material at an Apple facility in Arizona, where GT expects to employ over 700 people. Apple will provide GT with a prepayment of approximately US$578mn. GT will reimburse Apple for the prepayment over five years, starting in 2015. Although the agreement does not guarantee volumes, it does require GT to maintain a minimum level of capacity. GT will be subject to certain exclusivity terms during the duration of the agreement.

As we analyzed in our previous report “Sapphire Technology: First proof of margin recovery trajectory…”, published on November 15, 2013, we believe there is a chance that Apple's prepayment to GT could be dedicated for iDevice cover. From our supply chain analysis, Apple could be highly interested in using sapphire material for iWatch cover. The prepayment from Apple to GT (i.e. US$578 million) seems well above needed at the first glance if it is sole dedicated to iWatch cover.

On a ballpark estimate using the conventional sapphire furnaces, the amount would be enough to build over 100mn units of 1.5” sapphire screen annually. In this case, the direct opportunity for other sapphire vendors (such as STC) could be limited, but it will likely affect supply/demand to a great deal and boost the size of addressable market for sapphire. For reference, current industry-wide sapphire ingot capacity is around 72mn~96mn 2”-equivalent sapphire ingot per annum.

Sapphire vs. Gorilla Glass – Scratch-roof and/or shatter-proof?

Sapphire has an almost scratch-free attribute, but it also could be at several disadvantages as compared to Gorilla Glass:

1. Manufacturing cost: production time for sapphire substrate is 4,000 timesthat of glass substrate and physical properties (hardness) of sapphire

Why would Apple prepay for

sapphire materials?



6



substrates to make it difficult to machine/process. The market price of a Gorilla Glass smartphone screen would come under USD5 per unit, whereas the sapphire screen would cost USD20-25 for the same size. However, GTis targeting a price between USD10-15 per unit using their technology.

2. Transparency: Corning claims sapphire transmits 6% less light and can lead to optical distortion.

3. Weight: a single sapphire substrate is 67% heavier than a same-sized glasssubstrate, according to Corning.

4. Strength: There is little doubt that a sapphire screen is almost scratch-free but there have been constant debates whether sapphire screen is truly "shatter-proof". In our understanding, sapphire screen could be more brittle under certain circumstances. A test directly from Corning simulated durability test on both a piece of Gorilla Glass and an identical-sized 1mm thick piece of sapphire. Taking into consideration the test is performed under a controlled environment and by Corning who likes to promote the resilience of its own Gorilla Glass, the sapphire panel broke under the ring-on-ring test at about less than half the force – 161lbs vs. the 436lbs applied to Gorilla Glass, which remained intact.

Although the current sapphire cover price remains 6-8x that of Gorilla Glass, given that 1.3"-1.6" sapphire wafer may cost only <USD6, the sapphire cover’s cost premium over glass cover may be negligible when considering the benefit it bears(scratch-free), in our view.

“Sapphire Laminates” for iPhone

Perhaps the more interesting question is whether sapphire could be used for iPhone 6 screen. From our understanding, even with GT's new capacity, the global supply of sapphire could be in severe shortage if all iPhone 6’s will carry sapphire screen. Our industry visit suggests there could be only selective model(s) adopting sapphire screen, such as a 5.5" iPhone 6S model.

Connecting the dots

Back in March of 2012, a company named Twin Creeks Technologies, Inc. introduced a new production system it had created to manufacture photovoltaic (solar) cells that were cheaper and thinner, called Hyperion 3. Hyperion is an ion implanter that has the ability to cut silicon, silicon carbide, sapphire, germanium and other crystalline material substrates to the thickness of 20 microns - traditional methods cut these materials at 200 microns, hence enabling the production of lower cost thin substrates with minimal material loss. The technology involves a process to

1. Put a thick block of silicon is in Hyperion implanter

2. Shoot hydrogen ions onto the silicon block to the depth of 20 microns, which create a bubble layer on the block.

3. Move the wafer to the furnace and heat it, where the top layer separates from the block.

4. Repeat the process in order to produce more layers, and the block is used again and again.

What would happen when you

laminate sapphire and glass

together?

Twin Creeks introduced

“Hyperion 3” to manufacture

cheaper and thinner solar cells in March 2012

7



The manufacturing process for most conventional solar panels involves manufacturing a block of sapphire or other crystalline silicon and then slicing a 200micron-thick sheet off of it with a wafering saw.

On November 14, 2012, GT announced to have acquired certain capital assets and intellectual property (i.e. patent) of Twin Creeks Technologies, Inc. Though the ion implanter was invented for the use of semiconductor substrates and solar wafers, GT noted another use in its release. Using GT's own words in its press release, “GT expects to pursue the development of thin sapphire laminates for use in applications such as cover and touch screen devices”. “The Hyperion ion implanter has the potential to minimize, or in some cases eliminate, the need for wafering saws, which would significantly lower the cost of production.”.

Subsequently, Apple filed a patent called ‘sapphire laminates’ in September 2013, in which it discusses a variety of ways to laminate sapphire sheets together with other sapphire sheets or with glass.

GT then announced in October 2013 that it had entered into a supply contract with Apple to provide sapphire material. In September 2013, the U.S. Patent & Trademark Office published a patent application from Apple that lays out a fusion process that will add a sapphire laminate to future iDevices like iPhone, iPad and iWatch. Apple’s patent application describes its method of fusing a sapphire laminate sheet to a device’s cover glass. This new sapphire laminate layer will provide a stronger glass that is ultimately scratch-resistant.

Another supporting data were from GT, who guided annual revenue of US$600-800mn for FY14 vs. ~US$300mn in FY13. Assuming the incremental sales are for sapphire materials to Apple, that would equal 20-33mn units of sapphire smartphone covers, assuming an unit ASP of US$15. Additionally, we also learned from our supply chain visit that quite a few Asian vendors have been working on the projects that involve laminating a sapphire layer on the top of a glass layer.

Table 1: Apple sapphire supply chain

Ingot WaferCover glass

Lamination Display

iPhone 5S home buttonSapphire

Tech (KR)

Sapphire Tech (KR),

Crystal Applied (TW)

Biel Crystal (China),

Lens One (China)

N/A N/A

iPhone 5/5S camera lens coverSapphire Tech (KR),

Monocrystal (Russia), Namiki (JP)

Biel Crystal (China),

Lens One (China)

N/A N/A

5.5” iPhone sapphire cover GTBiel Crystal (China), Lens One (China)

TPK, GISLGD, JDI,

Sharp

iWatch sapphire cover GTBiel Crystal (China), Lens One (China)

TPK, GIS LGD


GT acquired Twin Creeks back in

November 2012 and target to apply Hyperion to manufacture

sapphire layers

Apple filed a “sapphire

laminates” patent in September 2013, then GT entered into a

supply contract with Apple in

October 2013

8



Apple’s “sapphire laminates” patent

With the “sapphire laminates”, Apple could stretch out the production and cost factors of sapphire enough to support manufacturing full-size display cover sheets for smartphones, not just small wearable panels, buttons or protective camera covers. This, in turn, could mean sapphire cover sheets that are harder and tougher than standard glass materials on existing iPhone much sooner than what the market is expecting.

Sapphire’s mineral name is corundum, and the chemical formula is Al2O3. This material has a high melting point and strong optical transmittance, and is only slightly less hard than diamond. Generally, sapphire is extraordinarily hard, with pure corundum defined to have 9.0 Mohs; as such, it is capable of scratching nearly all other minerals, or is basically “scratch-resistant” from anything but diamond.

With its hardness and transparent characteristics, among others, sapphire may be useful in a variety of applications. However, the same characteristics that are beneficial for particular applications commonly increase both the cost and difficulty in processing and preparing the sapphire for those applications. For example, the sapphire’s hardness makes cutting and polishing the material both difficult and time-consuming when using conventional processing techniques.

According to Apple’s patent filing, one method may take the form of a sapphire-to-sapphire structure, having a first sapphire sheet with a first sapphire plane type forming the major surface and a second sapphire sheet having a different sapphire plane type forming the major surface. The first and second sapphire sheets are fused (“laminated”) together to form the sapphire (Figure 5). Another method may take the form of a sapphire-to-glass structure, or a sapphire structure with a glass sheet in between two sapphire sheets (Figure 6).

Figure 5: Apple’s “sapphire laminate” patent – Sapphire-sapphire structure

Source: U.S. Patent and Trademark Office.

Figure 6: Apple’s “sapphire laminate” patent – Sapphire-glass structure

Source: U.S. Patent and Trademark Office.

Apple’s patent creates a cover

that could be scratch-free and

durable.

9



In our view, the use of a sapphire outer surface with a glass inner surface for the display may be used in future iDevices, potentially the 5.5” iPhone 6S, with the glass providing support (strength) for the display and the sapphire providing scratch resistance and durability advantages.

Plastic OLED (“P-OLED”) for iWatch

Plastic OLED production status at LGD

LGD could be the sole vendor for iWatch. We conducted hypothetical P-OLED analysis (see our previous note) to see how much iWatch could contribute to LGD's sales and OP. Based on LGD’s stated planned capacity (14K/month at 4.5G by year-end), we think LGD could fully support all iWatch panel demand. Overall contribution to its sales will be relatively small in 2014 but the growth potential will be significant, in our view.

As of 1Q14, LGD is producing plastic OLED panels from Gen 4.5 Fab (MG size 730x920mm, 6K/month capacity) at Paju E2 line and kicked off first MP line with

LGE’s first plastic OLED smartphone (G-Flex). Management has continuously shared its focus toward P-OLED and plans to prioritize reducing production cost over near-term profit as economies of scale are yet secured. Regarding required capex, LGD did not disclose details yet (2014E total capex of W3.5 trn). However, company expects two-thirds of it will be spent toward LTPS and OLED.

OLED Advantages

TFT-LCD currently dominants the small electronic devices, but OLEDs offer many advantages over TFT-LCD. We think Apple could be potentially adopting plastic-OLED screen with LGD being the main supplier:

Thinner and lighter, and could be flexible - OLED substrates can be either plastic or glass whereas for TFT-LCD, the substrates are glass. As such, OLED can be thinner, lighter, and flexible.

Brighter - OLED screen is brighter. Because the organic layers of an OLED are much thinner than the corresponding inorganic crystal layers of an LED, the conductive and emissive layers of an OLED can be multi-layered. Also, TFT-LCDs require two layers of glasses (color filter and array glass), and glass absorbs some light. OLEDs do not require glass.OLED displays offer excellent color saturation, high contrast and fast response. OLED is suitable for use in small devices, especially those involving video playback.

Less power consumption under dark background - OLEDs do not require backlighting like TFT-LCDs. The light is emitted from organic layers. LCDs work by blocking areas of the backlight to make the images that you see, while OLEDs generate light themselves. Because OLEDs do not require backlighting, they consume much less power than TFT-LCDs. This is especially important for battery-operated devices such as cell phones. However, one thing to note is OLED may consume more power in white background relative to TFT-LCD. That is why for some of the OLED products in the market, such as Samsung’s Galaxy Gear, the background is dark.


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Better viewing angle - OLEDs have large fields of view, about 170 degrees. Because TFT-LCDs work by blocking light, they have an inherent viewing obstacle from certain angles. OLEDs produce their own light, so they have a much wider viewing range. OLED offers 25x better sunlight readability than TFT-LCD’s. This is especially important for smartwatches.

Figure 7: OLED structure


Problems with OLED

OLED seems to be a suitable technology for smartwatches, but it also has some problems:

Lifetime - While red and green OLED films have longer lifetimes (46,000 to 230,000 hours), blue organics currently have much shorter lifetimes (up to around 14,000 hours. The decay of OLED materials would be limited lifetime.

Manufacturing - Manufacturing processes are expensive right now. Most OLED screens for smartphones and smartwatches use

Water - Water may damage OLEDs upon direct contact.

11



In-cell for iPhone 6/6S

In-Cell vs. other touch

The touch panel structure for iPhone 6/6S may not deviate much from the iPhone 5 series. We think it is likely based on in-cell. In-cell is still priced more expensively than any other touch panel alternatives, but given the improved yield rate after two years of learning-curve, the manufacturing costs has declined considerably. Still, given a differentiated process, in-cell still faces the key challenges of: (1) higherfront-end costs, (2) lower sensitivity, and (3) lower optical performance. However, as in-cell provides strong cover glass strength, thinner form factor, and lighter weight, it looks to be more appealing to Apple, especially with Apple having such a big volume for single model to cover the front-end costs. We believe Apple’s main suppliers will remain LGD, JDI, and Sharp.

Figure 8: iPhone touch panel roadmap


Table 3: Touch-panel technology comparison

Strength Sensitivity Thickness Optical Cost Mechanical Flexibility

Glass/Glass A A B A C+ AIn-cell B+ C A B C B-Touch on Lens B+ C+ A B C C+Glass/Film B+ B B+ C B BOne Glass Solution C C+ A B A C+On-cell (OLED) A B A A+ C C

Source: J.P. Morgan

Figure 9: Touch panel solutions


What Apple likes about in-cell

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Other types of in-cell

To avoid patent infringement, JDI, FocalTech, and LGD have developed different types of in-cell panels to penetrate into other non-Apple brands, especially targeting Chinese smartphone markets. It may not be easy to promote in-cell solutions to non-Apple customers as initial front-end costs (e.g. tooling costs) remain higher than existing solutions and that most smartphone brands desire customized design. But once the innovation curve tapers off, we may see increasing adoption of standardized in-cell display panels as that could bring down the average production costs when volume increases.

Table 4: In-cell solution comparison

Lead Promoter

Panel Maker

Touch IC maker Structure Products

AppleJDI, Sharp, LGD

Broadcom iPhone 5/5C/5S

JDI JDI Synaptics Sony Xperia V

FocalTech Tianma FocalTech Coming soon in 2H14

LGD LGD Synaptics Coming soon in 2Q14

Source: J.P. Morgan

13



DITO-film for iPad

DITO-film vs. other touch

Similar to iPhone, we think the display supply chain for new size of iPad (12.9”) will remain similar to that of iPad Air and iPad mini – that is, ITO films from Nitto Denko, Nissha Printing pattern the film, and TPK/GIS laminate the cover glass with DITO film sensor. Hon Hai group would be in charge of final touch module and display lamination.

As illustrated in Table 3 before, although DITO film is not optimal solution for any one particular attribute, it does offer a balanced act among strength, sensitivity, thickness, optical performance, cost, and mechanical flexibility. This is especially true when in-cell still struggles to reach satisfactory sensitivity performance on >7” screen.

Figure 10: iPad touch panel roadmap


14



Asian Display Stock Implications

Table 5: Revenue exposure to Apple

Apple as % of total sales

FY14 FY15 ProductsLGD 21% 22% iPhone, iPad, Macbook, iWatchSharp 15% 20% iPhone, iPad miniJDI 39% 42% iPhoneSTC 65% 65% iPhone and iPad (home buttons and camera lens cover)TPK 45% 41% iPhone and iWatch (only for the cover), iPad, iPad min ,

iPad Pro.Minebea 14% 16% iPhoneNitto Denko 9% 10% iPad, iPad mini, iPad ProNissha Printing 54% 53% iPad, iPad mini, iPad ProZeon 3% 3% iPad, iPad mini, iPad Pro, iPhone

Source: J.P. Morgan

Figure 11: Apple display supplier YTD share price performance

Source: Bloomberg, J.P. Morgan. Share price is based on May 19, 2014 close price.

LG Display (034220.KS, OW, covered by JJ Park)

Apple will represent around 21%/22% of LGD’s FY14/FY15 revenues, based on our estimate. Of note, 4.7” screen is 38% bigger than 4” screen, and 5.5” screen would be 89% bigger than 4" screen. This implies ASP increase. LGD would also be the sole vendor for iWatch’s plastic-OLED display, in our view. Overall contribution to its sales will be relatively small in 2014 but the growth potential will be significant, in our view. Apple’s new product launches, including the plastic OLED-based iWatch and large-screen iPhone, will serve as positive share price catalysts. On iPad, we expect LGD to take over 50% of the market share in each of the iPad model.

7% 9%

-20%

-44%

26%31%

-11%

5%

-12% -9%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Apple LGD Sharp JDI Minebea TPK Nissha Nitto Denko

Zeon STC

15



Figure 12: iPhone display panel ASPUS$

Source: J.P. Morgan

Figure 13: iPhone panel demandUnit: K units

Source: J.P. Morgan

Sharp (6753.JP, OW, covered by Narci Chang)

Apple will represent around 15%/20% of Sharp’s FY14/FY15 revenues, based on our estimate. Sharp splits the iPhone orders with LGD and JDI around 1/3 each, While Sharp also garners around 40% allocation in iPad mini, by our estimate. We have not factored in any contribution from iPad Pro. Sharp is also one of the two vendors for Apple's camera modules, splitting the order with LG Innotek.

Japan Display (6740.JP, OW, covered by Narci Chang)

Apple will represent around 39%/42% of JDI’s FY14/FY15 revenues, from 22%/31% in FY12 and FY13. The rising revenue contribution is main due to potential ASP increase from iPhone 6/6S. We have not factored in any contribution from iPad series in our FY14 estimate, however, given JDI's LTPS capacity increase, there could be chance that Apple would adopt JDI's panels for iPad series in FY15, in our view.

Sapphire Tech (123260.KS, OW, covered by Narci Chang)

Apple will represent 65%/65% of STC's revenue in FY14/FY15, by our estimate. STC currently supplies both sapphire wafers for home buttons and sapphire wafers for camera lens cover for Apple. In addition, we think there is high chance for iPad to adopt sapphire home buttons. Despite muted Apple orders in 1H14, the company is keeping high production to prepare for 2H14 demand. iPhone market could have ~170mn units per year, but iPad is adding another 80mn units per year. With STC’s further-improving production yield, we think STC is fully prepared to enjoy the economies of scale.

Additionally, although we do not expect iWatch or iPhone sapphire screen to directly benefit Sapphire Tech, once Apple opens up the market that is hundreds times bigger than home button, and at least , we think the industry will experience meaningful shortage will drive the sapphire material price up, therefore benefiting all sapphire material makers.

-5

10 15 20 25 30 35 40 45 50

2011 2012 2013 2014E 2015E

iPhone 4/4S iPhone 5/5S/5C iPhone 6

-

20,000

40,000

60,000

80,000

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

E

2Q14

E

3Q14

E

4Q14

E

1Q15

E

2Q15

E

3Q15

E

4Q15

E

Apple iPhone 4/4S panel demand

Apple iPhone 5/5S/5C panel demand

Apple iPhone 6 panel demand

16



TPK (3673.TT, OW, covered by Narci Chang)

Apple will account for 45%/41% of STC's revenue in FY14/FY15, by our estimate. TPK has been the primarily lamination partner for Apple on iPad/iPad mini. We expect TPK to remain main lamination supplier on iPad Pro. However, the contribution is unlikely to offset the weak touch-NB momentum. As Apple's Mac series sell roughly 17mn units per year, non-Apple NB remains several times bigger than that, and the touch adoption rate appears to rise slowly.

On the other hand, we expect TPK to engage in sapphire-glass lamination business for possibly iWatch and iPhone. TPK has been supplying “Vertu” smartphone that uses sapphire cover. We think TPK will benefit from the rising demand for sapphire cover market but the earnings contribution will be limited (we estimate 15% of revenue and 9% of gross profit in 2015). Contrary to the market expectation, as we think TPK only engages in lamination, the margins are unlikely to be higher than corporate average, in our view.

Minebea (6479.JP, OW, covered by Masashi Itaya)

We forecast Apple’s share of sales at 14% for FY14 and 16% for FY15. Three companies (Minebea e-LITECOM, Omron) have supplied LED backlights for the iPhone, but we expect Minebea’s share to increase as products become thinner. We forecast Minebea’s share to rise to 70% in FY2014, and think further upside is also possible. Moreover, although we do not factor this into our current estimates, we see potential new business opportunities for the company if LED backlights for the iPhone also become thinner.

Nitto Denko (6988.JP, N, covered by Masashi Itaya)

We forecast Apple’s share of sales at 9% for FY14 and 10% for FY15. We estimate that Nitto Denko is supplying 100% of Apple’s requirements for ITO film for film sensors for the iPad. We also put its share of thin polarizing film for the iPhone and the iPad at around 50%. The company is expanding capacity for PVA-coated polarizing film, which allows even greater thinness. It expects to supply the product for a specific customer’s new models, and we think this customer is Apple.

Nissha Printing (7915.JP, N, covered by Yumi Tanaka)

We forecast Apple’s share of sales at 54% for FY14 and 53% for FY15. We estimate that Nissha Printing is the sole supplier of DITO film sensors (manufactured by processing ITO film sourced from Nitto Denko) for Apple’s iPad Air and iPad mini series. Because it is the only company with the technology to mass-produce DITO film sensors using cyclo-olefin polymer (COP) film, we think it will very likely be the sole supplier for the iPad pro as well. Nissha Printing’s earnings structure is heavily tilted to DITO film sensors for the iPad, making trends in this business a swing factor for its earnings and share price.

Zeon (4205.JP, OW, covered by Yumi Tanaka)

We forecast Apple’s share of sales at 3% for FY14 and FY15. We estimate that Zeon is the sole supplier of diagonally stretched Zeonor Film (using COP film; the base material of DITO sensors) for Apple’s iPad Air and iPad mini series. Because it is the only company with the technology to stretch COP film diagonally, we think it will also be sole supplier if Apple continues to use DITO film sensors in the iPad Pro. In addition, we expect this product to feature as a new PVA protective film in next-generation iPhones, and look for growth in its applications to increase demand. Zeon boosted annual capacity for the product to 25 million m2 from 15 million m2 in the January-March quarter of 2014, a move we think reflects this development.

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Appendix: Apple Product Display Spec

Table 6: List of iPhone model display specModel iPhone iPhone 3G iPhone 3GS iPhone 4 iPhone 4S iPhone 5 iPhone 5C iPhone 5SResolution 480x320 480x320 480x320 960x640 960x640 1136x640 1136x640 1136x640Aspect ratio 3:2 3:2 3:2 3:2 3:2 16:9 16:9 16:9PPI 163 163 163 326 326 326 326 326Height 115 mm 115.5 mm 115.2 mm 123.8 mm 124.4 mm 123.8 mm Width 61 mm 62.1 mm 58.6 mm 58.6 mm 59.2 mm 58.6 mm Thickness 11.6 mm 12.3 mm 9.3 mm 7.6 mm 8.97 mm 7.6 mm Source: Apple

Table 7: List of iPad model display speciPad (1st

generation)iPad 2

iPad (3rd generation)

iPad (4th generation)

iPad Air iPad mini iPad mini 2

Resolution 1024x768 1024x768 2048x1536 2048x1536 2048x1536 1024x768 2048x1536Aspect ratio 4:3 4:3 4:3 4:3 4:3 4:3 4:3PPI 132 132 264 264 264 163 326Height 242.8 mm 241 mm 241.2 mm 241.2 mm 240 mm 200 mm 200 mmWidth 189.7 mm 186 mm 185.7 mm 185.7 mm 169.5 mm 134.7 mm 134.7 mmThickness 13.4 mm 9 mm 9.4 mm 9.4 mm 7.5 mm 7.2 mm 7.5 mmSource: Apple

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Companies Discussed in This Report (all prices in this report as of market close on 21 May 2014)Japan Display (6740) (6740.T/¥558/Overweight), LG Display (034220.KS/W28650/Overweight), Minebea (6479) (6479.T/¥991/Overweight), Nissha Printing (7915) (7915.T/¥1417/Neutral), Nitto Denko (6988) (6988.T/¥4673/Neutral), Sapphire Technology (123260.KQ/W32500/Overweight), Sharp (6753) (6753.T/¥260/Overweight), TPK (3673.TW/NT$225.50/Neutral), ZEON (4205) (4205.T/¥876/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. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: LG Display, Sharp (6753),Minebea (6479), TPK.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: TPK.

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.

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: TPK.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking TPK.

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 TPK.

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.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

Explanation of Equity Research Ratings, Designations 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.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. 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.jpmorganmarkets.com.

Coverage Universe: Chang, Narci: AU Optronics (2409.TW), Asahi Glass (5201) (5201.T), Epistar (2448.TW), Everlight Electronics (2393.TW), Innolux Corporation (3481.TW), Japan Display (6740) (6740.T), LG Innotek (011070.KS), Nippon Electric Glass (5214) (5214.T), Novatek Microelectronics Corp. (3034.TW), Sapphire Technology (123260.KQ), Seoul Semiconductor (046890.KQ), Sharp (6753) (6753.T), TPK (3673.TW), Wintek (2384.TW)

Park, JJ: LG Display (034220.KS), LG Electronics (066570.KS), Panasonic (6752) (6752.T), SK hynix (000660.KS), Samsung Electronics (005930.KS), Samsung SDI (006400.KS), Sony (6758) (6758.T), TSMC (2330.TW)

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Hall, Roderick B: A10 Networks (ATEN), ADTRAN (ADTN), Apple Inc. (AAPL), Aruba Networks (ARUN), BlackBerry (BBRY), Brocade (BRCD), Ciena Corp. (CIEN), Cisco Systems (CSCO), CommScope (COMM), Corning (GLW), Cyan (CYNI), F5 Networks (FFIV), Hewlett-Packard (HPQ), Infinera (INFN), Juniper Networks (JNPR), Motorola Solutions (MSI), QUALCOMM (QCOM), Riverbed (RVBD)

Itaya, Masashi: Alps Electric (6770) (6770.T), Anritsu (6754) (6754.T), Hirose Electric (6806) (6806.T), Ibiden (4062) (4062.T), Kinsus Interconnect Technology Corp (3189.TW), Kyocera (6971) (6971.T), Mabuchi Motor (6592) (6592.T), Minebea (6479) (6479.T), Murata Manufacturing (6981) (6981.T), NGK Spark Plug (5334) (5334.T), NOK (7240) (7240.T), Nidec (6594) (6594.T), Nitto Denko (6988)(6988.T), Rohm (6963) (6963.T), Samsung Electro-Mechanics (009150.KS), Sanken Electric (6707) (6707.T), Shinko Electric Industries (6967) (6967.T), TDK (6762) (6762.T), Taiyo Yuden (6976) (6976.T), Unimicron Technology Corp. (3037.TW)

Tanaka, Yumi: Hitachi Chemical (4217) (4217.T), JSR (4185) (4185.T), Nissha Printing (7915) (7915.T), ZEON (4205) (4205.T)

Chen, William: AAC Technologies Holdings (2018.HK), Advantech (2395.TW), AirTAC (1590.TW), BYD Electronic International (0285.HK), Catcher Technology (2474.TW), Chroma ATE (2360.TW), Compal Electronics, Inc. (2324.TW), Hiwin (2049.TW), Ju Teng International Holdings Limited (3336.HK), Largan Precision Co Ltd (3008.TW), Lite-On Technology Corporation (2301.TW), TSC Auto ID Technology (3611.TW), Tripod Technology Corp (3044.TW), Wistron Corporation (3231.TW)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 11%IB clients* 58% 49% 40%

JPMS Equity Research Coverage 45% 48% 7%IB clients* 78% 67% 60%

*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. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

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