Applied Materials: Here’s Why China Is An Important Market For The Diplay Equipment Business

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AMAT: Applied Materials logo
AMAT
Applied Materials

Strong investment in capacity addition and new technology is shaping up Applied Materials’ (NASDAQ:AMAT) display business. Growing TV demand and mobile investments are two key factors driving growth in the company’s display segment, which is witnessing an uptake in order rates. A weak consumer environment and an oversupply in the market had lowered demand for new LCD equipment  in 2012. However, Applied is now seeing a revival in the market, with rising display demand (in addition to higher semiconductor demand) driving its growth in the last few quarters.

Applied claims that enabled by materials innovation, the industry is witnessing the biggest changes in display technologies in decades. In the past two quarters, Applied booked over $600 million of display orders, which is over $100 million higher than its expectation. Applied expects the growing demand for TV and mobile displays to fuel demand for display equipment for the rest of the year as well. Higher resolution displays are becoming a major battleground for smartphones and tablets. In TVs, average screen sizes are growing significantly faster than historic norms.

Applied is one of the leading providers of manufacturing equipment for flat panel Liquid Crystal Displays (LCDs) used in TV, smartphone and tablets. We believe that China’s booming TV and smartphone markets offer significant opportunities for the company.

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Our price estimate of $19 for Applied Materials is inline with the current market price. See our complete analysis of Applied Materials here

China Is The Largest Market For Various Electronic Products

China is the world’s largest TV and mobile display market. [1] According to a report by BI Intelligence, China currently accounts for the largest share (~78%) of 4K Ultra HD television shipments. [2] The country also accounts for around 40% of the global smartphone demand. [3]

China is not only the most important end market for TV and mobile displays, but also the key center for display manufacturers. China is becoming an increasingly important market for Applied Materials, especially its display business. [4]

China Is An Important Market For Applied’s Long-Term Growth Potential

China has long been an important part of Applied’s growth strategy. Applied was the first first chip-maker to set up a service and support center in the region, back in 1984. The company now has 8 owned and leased office, plants and/or warehouse locations in the region.  In fiscal 2013, Applied derived 11% of its sales (determined by the location of customers’ facilities) from China. The company claims to be experiencing significant growth in the number of customers, suppliers as well as competitors  from the region.

Higher resolution, or 4K-compatible televisions, and rapid growth in higher resolution screens for mobile devices is increasing demand for display equipment  as these require more advanced manufacturing technology (equipment). Applied claims that the average TV size is growing 1.2 to 2 inches annually, which is significantly higher than historical norms. This trend is driving area growth in the 15%, range which the company believes is sufficient to support its investment in three new Gen 8.5 factories, which are being built in China as its customers compete to meet the growing TV demand in the region.

Applied recently announced that China-based LCD panel supplier BOE Technology has placed “significant” equipment orders for 8.5G and 5.5G production lines installed. [5] BOE is the largest flat panel display manufacturer in China and one of Applied’s most important customers in the region. (http://usa.chinadaily.com.cn/epaper/2013-08/12/content_16887402.htm) Applied also provides systems that enable Samsung and LG to make LCD displays.

Though Applied believes that China presents large potential markets for its products and the opportunity for growth over the long term, it expects lower projected levels of profitability and margins for certain products than historically have been achieved in other regions. [6] Applied is exposed to the the timing and extent of the expansion of manufacturing facilities in China, both by Chinese and by other display manufacturers.  Also a factor is the ability of non-Chinese manufacturers to obtain government approvals on a timely basis. [7]

Nevertheless, we believe that China will play a key role in driving Applied’s growth in the display market. The company believes that its growth momentum will continue throughout 2014, backed by stronger investment from its display customers.

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Notes:
  1. Applied Materials Press Release []
  2. Chinese Consumers And Manufacturers Are Having The Biggest Impact On The 4K TV Market, Business Insider, July 17, 2014 []
  3. Emerging markets, low-cost devices, 4G drive smartphone sales, The Economic Times, May 4, 2014 []
  4. BOE, Applied Materials partner up, China Daily, August 12, 2013 []
  5. Applied lands 8.5G and 5.5G fab equipment orders from BOE, Digitimes, July 4, 2014 []
  6. Applied Materials’ 2013 Annual Report []
  7. Applied Materials’ 2013 Annual Report []