display module sector - oriental patron...equity research display module sector tmt/ china riding on...

Mon, 29 Aug 2016

Equi ty Research Display module sector TMT/ China

Riding on Technology upgrade

Increasing adoption of LTPS/AMOLED display in smartphones, benefiting small-mid size LTPS/AMOLED display module player

ADAS adoption is a mid-term catalyst for automotive display player

Top pick Truly (732 HK, BUY, TP HK$4.90), and TCL Display (334 HK, BUY, TP HK$0.72)

Increasing penetration of LTPS/AMOLED in smartphones to lift small-mid size display panel/module player ASP and margin. LTPS/AMOLED penetration rate in China is expected to near double to 45%/19% in 2018E from 28%/9% in 2015 due to its high resolution, vivid colors and quick response, providing opportunities for LTPS/AMOLED panel and module manufacturers.

We see there are potential LTPS/AMOLED panel shortage to occur in 1H17E, given that 1) iPhone 8 is expected to switch from LTPS to AMOLED, attracting Korea, Japan and Taiwan panel suppliers to upgrade their LTPS production line to AMOLED; however, it normally takes 18 months to upgrade and RMB10bn+ for OLED evaporation equipment. 2) AMOLED yield rate is relatively low at 40%-50% for major Chinese players except Samsung Display which can hit 80%+ yield rate. We forecast shortage of LTPS panel to be 226mn/166mn units in 2016/2017E, and shortage of AMOLED panel to be 62mn/71mn units in 2016/2017E, benefiting Truly (732 HK) which will start mass production (MP) of its G4.5 LTPS/AMOLED panel plant in 4Q16/2H17E and TCLD (334 HK) which can secure LTPS panel supply from its sister company, CSOT as CSOT’s G6 LTPS plant will start MP by end of Dec 2016E.

LTPS module ASP is ~2 times of TFT module with 1%-2% higher GPM; AMOLED module ASP is 30% higher than LTPS module due to lower product yield rate while cost is almost the same, thus we believe GPM of small-mid size display panel/module player can be improved. TCLD will benefit the most given its product mix upgrade from non-laminated module to laminated module while Truly will also gain.

ADAS adoption to boost mid-term growth for automotive display module player. Advanced Driver Assistant Systems (ADAS) are automotive systems developed to assist, complement and eventually substitute the driver to control a vehicle. It is developed in four stages, and China is in the early stage of Level 1 with 2%-5% ADAS adoption rate. According to CAAM, ADAS market in China is expected to grow at 64.4% 5-years CAGR to US$5.0bn in 2020E.

We believe ADAS adoption will boost automotive display module market growth as it boosts automotive display upgrade to TFT displays and stimulates shipment as future cars will be equipped with 10 displays. Given automobile display module has high entry barrier due to its long life cycle of 5-10 years as compared to 0.5-1.0 years of smartphone display module, we see more stabilized ASP and 21% automobile revenue CAGR for Truly in the coming three years.

Initiate BUY on display module player with LTPS/AMOLED panel arm, as they can secure panel supply, have high bargaining power to secure order from top smartphone clients, and are less affected by panel shortage. Our top pick is Truly (732 HK, BUY) with TP HK$4.90 based on 12x FY17E PE and 15.5% 3-year EPS CAGR in FY15-18E given (1) its 4.5G plant which commences LTPS/AMOLED panel MP in Aug16E/2H17E, (2) fingerprint business’ explosive growth from FY16E onwards, (3) strong pipeline of automotive displays. We initiate BUY on TCL Display (334 HK) with TP HK$0.72 based on 12x FY17E PE given 22.7% 3-year EPS CAGR in FY15-18E. We expect TCLD to pick up earnings growth momentum from 2H16E onwards given (1) its improved product mix from LTPS and laminated modules and (2) riding on CSOT’s G6 LTPS plant to expand its LTPS module business from FY17E onwards..

Chloe Liu

+852 2135 0209

[email protected]

Yuji Fung

+852 2135 0236

[email protected]

Sector Report

Exhibit 1: Recommendations summary

Company Stock code Rating Target Price

Target

Valuation

Closed

Price

Current

Valuation

Potential

Upside

Truly Int’l 732 HK BUY HK$4.90 12x FY17E HK$3.45 8.4x FY17E 42.0%

TCL Display 334 HK BUY HK$0.72 12x FY17E HK$0.60 10.0x FY17E 20.0%

Source: Bloomberg, OP Research

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Table of Contents

Table of Contents ......................................................................................................................................... 2

Investment Summary ................................................................................................................................... 3

Increasing adoption of LTPS/AMOLED to lift small-mid size display panel/module player margin ................ 4

ADAS adoption to boost mid-term growth for automobile display player .....................................................15

Truly Int’l (732 HK) – All-around player ........................................................................................................18

Fingerprint ramp up as a short-term catalyst ...............................................................................................19

Truly is well positioned to ride on the increase of LTPS/AMOLED adoption and potential upside on panel

shortage ......................................................................................................................................................23

Automotive products keep robust growth ....................................................................................................29

Initiate BUY with TP HK$4.90 with 42% upside ...........................................................................................34

Investment Risks .........................................................................................................................................37

Management profiles ..................................................................................................................................38

Shareholding structure ................................................................................................................................39

Financial Summary – Truly Int’l (732 HK) ....................................................................................................40

TCL Display (334 HK) – Rising star of TCL .................................................................................................42

Pick up growth momentum with improved product mix ................................................................................43

LTPS will be a key growth driver from FY17E onwards ...............................................................................46

Riding on the integrated platform of TCL Group ..........................................................................................49

Initiate BUY with TP HK$0.72 based on 12x FY17E PE ..............................................................................53

Investment risks ..........................................................................................................................................55

Management profiles ..................................................................................................................................56

Shareholding structure ................................................................................................................................57

Financial Summary –TCL Display (334 HK) ................................................................................................58

Appendix I: Upgrade from LTPS panel to AMOLED panel ...........................................................................60

Appendix II: ADAS background ...................................................................................................................61

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Investment Summary Increasing LTPS/AMOLED display penetration and potential shortage of

LTPS/AMOLED panel. Smartphone LTPS/AMOLED panel shipment in China is

expected to grow at 13.8%/34.8% CAGR from 2015 to 2020E, riding on the

increasing penetration of 28%/9% in 2015 to 40%/30% in 2020E, as increasing

first-tier smartphone vendors are upgrading their models from a-Si to

LTPS/AMOLED, thanks to the high resolution, vivid colors, and quick response of

LTPS/AMOLED display. More importantly, Apple iPhone 8 is expected to switch

from LTPS to AMOLED display, thus Korean and Japanese panel producers are

upgrading their production line to AMOLED, and China panel producers are

actively setting up and ramping up their LTPS/AMOLED capacity. We expect

there to be LTPS/AMOLED panel shortage in 1H17E given 1) Korea, Japan and

Taiwan panel producers are gradually upgrading their production line to AMOLED

to meet Apple’s demand; 2) it takes 1-2 years for China panel producers to ramp

up their LTPS and AMOLED capacity, especially given the current low yield rate

of AMOLED at ~40%-50%. Another catalyst is new demand from VR display, as

AMOLED is the most appropriate display for VR since it significantly shortens

response time and solves time latency problem.

ADAS adoption boosts mid-term growth for automotive display module

player. We expect the global automotive market to upgrade from ADAS level 1/2

to level 3/4 gradually in the coming 10 years, given the increasing demand for

driving security and regulation requirement. According to CAAM, the ADAS

market in China will grow at 64.4% CAGR from 2015 to 2020E, and further grow

at 45.6% CAGR from 2020E to 2025E. We believe the adoption of ADAS will

boost automotive display upgrade, from non-TFT display to TFT display, and also

drive shipment growth. We expect global TFT LCD automotive display to grow at

6.6% CAGR from 2015 to 2020E compared to overall automotive display growth

of 3%, and the number of displays in the future smart car will increase to 10

displays from current 1-3 displays, driving the shipment growth. Besides, as

automotive display has longer lifecycle of 5-10 years, higher entry barrier, higher

GPM than smartphone display module, we believe it can stabilize ASP and GPM.

Top pick Truly (732 HK) given 1) its fingerprint business ramp up in FY16/17E

with HK$1.6bn/HK$2.0bn sales, representing 7.6%/8.8% of total sales, from

HK$90mn sales in FY15; 2) G4.5 plant with LTPS/AMOLED panel will begin mass

production from 4Q16E onwards, and well-positioned to capture the increasing

LTPS/AMOLED display demand and potential panel shortage; 3) strong pipeline

of automotive display in the coming 2-3 years with capacity expansion from G5

plant which will start mass production in 1Q18E. Our target price of Truly is

HK$4.90 based on 12x FY17E PE.

New BUY on TCL Display (334 HK) given earnings growth momentum is likely

pick up from 2H16E onwards, thanks to 1) product mix upgrade with an

increasing proportion of laminated modules, we expect the laminated modules

shipment penetration will keep increasing to 45%/57%/65% in FY16/17/18E from

19% in FY15, driving sales CAGR of 26% from FY15 to FY18E, as laminated

modules ASP is three times of non-laminated modules ASP; 2) stable supply of

LTPS panel from its sister company, CSOT, G6 plant which begin mass

production by Dec 2016 will help TCLD to increase its bargaining power to obtain

large orders from top-tier smartphone venders; 3) integrated platform of TCL

Group by setting up JV with CSOT which will start LTPS module MP from Oct17E

onwards. Our target price for TCLD is HK$0.72 based on 12x FY17E PE.

Smartphone LTPS/AMOLED panel

shipment in China is expected to

record 13.8%34.8% CAGR from

2015 to 2020E, riding on the

increasing adoption of

LTPS/AMOLED display from

28%/9% in 2015 to 40%/30% in

2020E

ADAS adoption will boost

automotive display upgrade to

TFT display and stimulate the

shipment growth

Top pick Truly (732 HK) with TP of

HK$4.90 based on 12x FY17E PE

We initiate BUY on TCLD (334 HK)

with TP of HK$0.72 based on 12x

FY17E PE

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81 108 148 228 261 294 286282

3339

47

7095 122 164 212

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

a-Si LTPS Oxide AMOLED

(mn units)

72%66%

58%

44%37%

31% 28% 24%

18%22%

28%

39%42%

45%42%

40%

8% 8% 9% 12% 15% 19%24%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016E 2017E 2018E 2019E 2020E


Increasing adoption of LTPS/AMOLED to lift small-mid size display panel/module player margin

Increasing penetration of LTPS/ AMOLED display in smartphone

The LTPS/AMOLED smartphone panel shipments in China are expected to grow

at a 5-year CAGR of 13.8%/34.8% to 282mn/212mn in 2020E from 148mn/47mn

in 2015 thanks to increasing penetration and extension of market share of China

smartphone vendors.

Exhibit 2: Smartphone panel shipments by display technology in China

Source: IHS, CINNO Research, OP Research

We estimate the LTPS/AMOLED penetration in China to improve from 28%/9% in

2015 to 40%/30% in 2020E as China’s leading smartphone vendors, such as

Huawei, Oppo, Vivo, Xiaomi, Meizu, etc, will drive up LTPS/AMOLED adoption

from 2H16E onwards.

Exhibit 3: LTPS/AMOLED penetration in China


Smartphone LTPS/AMOLED panel


record 13.8%34.8% CAGR from

2015 to 2020E

LTPS/AMOLED penetration in

China smartphones is expected to

hit 40%/30% in 2020E from

28%/9% in 2015

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46%

28%

30%43%

18% 14%

4%

25%

1%

38%24%

4%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Huawei OPPO Vivo Xiaomi Lenovo ZTE Coolpad Meizu

a-Si LTPS Oxide AMOLED2015

62%

48%

40%60%

24%

24%15%

56%

13%

45%32%

10% 10%23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


a-Si LTPS Oxide AMOLED2016E

Huawei, No.1 of China smartphone vendor, is expected to hit 62%/13%

LTPS/AMOLED adoption in 2016E from 46%/1% in 2015; Oppo, China’s No.2

smartphone vendor, is expected to hit 48%/45% LTPS/AMOLED adoption in

2016E from 28%/38% in 2015; Vivo, another brand of BBK camp, is expected to

hit 40%/32% LTPS/AMOLED adoption in 2016E from 30%/24% in 2015; and

Xiaomi, China’s No.4 smartphone brand, is expected to hit LTPS/AMOLED

penetration rate of 60%/10% in 2016E from 43%/0% in 2015.

Exhibit 4: Display technology penetration by top China smartphone vendors, 2015 vs. 2016E

Source: CINNO Research, OP Research

China-based smartphone vendors are grabbing global market shares rapidly, it is

expected that Huawei, Oppo and Vivo will rank 3rd/4th/5th of global smartphone

shipments in 2016E. Therefore, we expect high penetration of LTPS/AMOLED of

China smartphone models to drive LTPS/AMOLED panel demand and module

shipments.

We believe Truly and TCLD are well positioned to capture the display module

upgrade from 2H16E onwards. Hence, we estimate 13% revenue CAGR for

Truly’s touch panel for smartphone related business from HK$7.9bn in FY15 to

RMB12.4bn in FY18E and 26% revenue CAGR for TCLD display module

business from RMB2.2bn to RMB5.3bn.

Exhibit 5: Global ranking of top 10 smartphone vendors

2Q16

Ranking

2015

Ranking Company 2Q16 market share 2015 market share

1 1 Samsung 22.4% 22.7%

2 2 Apple 11.8% 16.2%

3 3 Huawei 9.4% 7.4%

4 8 Oppo 6.6% 3.3%

5 9 Vivo 4.8% 3.0%

- - Other 45.0% 18.8%

- - Total Shipment

(mn units) 343.3 1,432.9

Source: IDC, OP Research

We see an increasing adoption of

LTPS/AMOLED display in first-tier

China smartphone vendors’

model, including Huawei, Oppo,

Vivo

China smartphone vendors are

grabbing global market share

rapidly.

We see Truly and TCLD are

well-positioned to benefit from

the display module upgrade with

sales CAGR of 13% and 26% in

2015 – 2018E, respectively

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Exhibit 6: Latest/upcoming smartphone adopting AMOLED & LTPS technology

iPhone 7/7Plus

Samsung Galaxy On7

Pro Huawei P9 Plus Oppo R9 Plus Vivo X7 Plus

CPU Dual core A10 Quad-core 1.2Ghz

Cortex- A53

Quad core 2.5GHz

Cortex A72

Quad core 1.8 Ghz

Cortex-A7

Quad core 1.8 Ghz

Cortex-A72

Storage 32/64/128GB 16GB(up to 256GB) 64GB 64GB (up to 128 GB) 64GB

Display 4.7" /5.5" QHD LTPS 5.5” QHD AMOLED 5.5' AMOLED 6” FHD AMOLED 5.7” FHD AMOLED

Camera

16MP(rear)9MP (front)

Dual Cam for iPhone

7Plus

13MP(rear)5MP(front) Dual 12MP(rear)

8MP(front) 16MP(rear)13MP (front)

16MP(rear)16MP(front

)

SIM Single SIM Dual SIM Single SIM Dual SIM Dual SIM

OS iOS 10 Android 6.0.1 Android 6.0 Android 5.1 Android 5.1

Launch time Sep 2016 July 2016 May 2016 March 2016 July 2016

Xiaomi Redmi 3S Meizu m3s Lenovo Phab2 Pro One Plus 3 idol 4

CPU Quad core 1.4Ghz

Cortex A5

Octa-core 1.5Ghz

Cortex A53

Quad core 1.4GHz

Cortex A53

Dual core 2.15Ghz

Kyro

Quad core 1.7GHz

Cortex A53

Storage 16GB(up to 256GB) 16/32GB(up to 256GB) 64GB (up to 256GB) 64GB 16GB(up to 512GB)

Display 5” FHD AMOLED 5”FHD LTPS 6.4" FHD AMOLED 5.5” FHD AMOLED 5.2" FHD LTPS

Camera 13MP(rear)5MP(front) 13MP(rear)5MP(front) 16MP(rear)9MP

(front) 16MP(rear)8MP (front) 13MP(rear)9MP (front)

SIM Dual SIM Dual SIM Dual SIM Dual SIM Dual SIM

OS Android 6.0.1 Android 5.1 Android 6.0 Android 6.0.1 Android 6.0

Launch time June 2016 June 2016 Sep 2016 June 2016 3Q16

Source: OP Research

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JDI, 34%

Samsung, 22%

Sharp, 16%

Tianma, 12%

AUO, 7%

Century, 4%

BOE, 3% Innolux, 3% LGD, 1%

Catalyst 1: potential upside for shortage of LTPS/AMOLED panel

driven by iPhone’s adoption of AMOLED

Apple is expected to release its first AMOLED-based iPhone 8 in 2017E,

switching from LTPS and 100% of the AMOLED panel supply is expected to come

from Samsung Display. According to DigiTimes. Samsung Display will supply

Apple with 40mn/80mn/120mn units AMOLED panels in 2017/2018/2019E, and

supply China-based smartphone vendors with 99mn/150mmn AMOLED panels in

2016E/2019E.

Exhibit 7: Samsung Display's smartphone AMOLED panel supply

Customer (mn units) 2016E as % of total 2019E as % of total

Samsung (Galaxy series) 239 70.7% 290 51.8%

China-based smartphone vendors 99 29.3% 150 26.8%

Apple (iPhone 8 & onwards) 0 0.0% 120 21.4%

Total 338 100.0% 560 100.0%

Source: DigiTimes, OP Research

In 2015, JDI, Samsung and Sharp are the three largest LTPS panel supplier of

china smartphones, we expect they to upgrade some of their production lines

from LTPS to AMOLED, to catch up apple’s demand switch to AMOLED. Thus,

there may be a panel shortage of LTPS panel supply in 1H17E as LTPS is widely

adopted backplane technology for both IPS LCD and OLED.

Exhibit 8: 2015 China Top 10 Smartphone Brand LTPS/Oxide Panel Supplier


We also expect there may be shortage of AMOLED panel supply due to 1)

normally it takes 18 months to upgrade from LTPS to AMOLED, including

equipment order, equipment installation, and trial production. And CAPEX for

upgrade is at least RMB10bn for OLED evaporation equipment. 2) AMOLED yield

rate is relatively low at ~40%-50% for Chinese players except Samsung Display

can enjoy 80%+ yield rate, thus it takes time for suppliers to ramp up.

Shortage of panel provides ample opportunity for China’s panel suppliers such as

BOE, Tianma, Truly and CSOT, as their LTPS plants begin ramp up in 2016E and

AMOLED plants ramp up in 2017E-2018E.

Apple iPhone 8 is expected to

adopt AMOLED, and Samsung

will be its AMOLED panel

supplier

We expect there may be LTPS

panel shortage in 1H17E as the

three largest LTPS panel supplier

of China smartphones are

expected to upgrade some

production lines from LTPS to

AMOLED

We expect there may also be

shortage of AMOLED panel as

upgrade from LTPS to AMOLED

normally takes 18 months and

current AMOLED yield rate is at

~40%-50% only given increasing

penetration of AMOLED for

Chinese smartphone players

Potential shortage of

LTPS/AMOLED panel provides

opportunities for China panel

supplier

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Exhibit 9: Cost Comparison for 5 inch FHD Panels

US$ per pcs Rigid AMOLED Flexible AMOLED LTPS LCD

Material 6.3 10.9 9.4

- Array 0.3 1.2 0.3

- Cell 1.4 3.0 1.9

- Package 0.2 1.8 n.a.

- Module 4.4 4.9 7.2

Indirect expense 0.7 1.2 0.9

Labour 3.1 3.3 2.1

Depreciation 4.2 8.5 2.3

Yield 40%-80% ~60.4% ~90.3%

Total 14.3 23.9 14.7

Source: IHS, OP Research

We expect shortage of LTPS panels will be 226/166mn units in 2016/2017E, and

shortage of AMOLED panels will be 62/71mn units in 2016/2017E. Assuming: of:

1) 3.5/4/4.5/5.5/6 generation panel production line can cut 30/40/50/150/200 units

of screens per piece of glass; 2) 80%/80% utilization rate/yield rate for LTPS

panel production, 80%/70% utilization rate/yield rate for AMOLED panel

production; 3) LTPS penetration of global smartphone is 35%/40% in

2016E/2017E and AMOLED penetration of global smartphone is 20%/30% in

2016E/2017E.

Exhibit 10: Shortage of LTPS/AMOLED panel

(mn units) 2016E 2017E

Demand

Smartphone shipment 1,483 1,579

Penetration

LTPS 35% 40%

AMOLED 20% 30%

Total Demand

LTPS 513 632

AMOLED 297 474

Supply

Capacity

LTPS 449 728

AMOLED 419 719

Utilization rate

LTPS 80% 80%

AMOLED 80% 80%

Yield rate

LTPS 80% 80%

AMOLED 70% 70%

Total supply

LTPS 287 466

AMOLED 235 403

Shortage

LTPS 226 166

AMOLED 62 71

Source: Company, OP Research

We expect shortage of LTPS

panel to be 226/166mn units in

2016/2017E, and shortage of

AMOLED panel to be 62mn/71mn

units in 2016/2017E

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Truly is expected to commence its G4.5 LTPS/AMOLED panel mass production in

Aug16E/2H17E and TCLD’s sister company, CSOT will also start mass production

of G6 LTPS panel by end of Dec 2016E, we believe both Truly and CSOT will ride

on the increasing LTPS/AMOLED display penetration in smartphones and gain on

the potential LTPS/AMOLED panel shortage by securing stable LTPS panel supply

from their panel plant. The potential shortage of LTPS/AMOLED panel will help to

stabilize LTPS/AMOLED module pricing.

Exhibit 11: Truly and CSOT (TCLD’s sister company) LTPS/AMOLED

production line capacity and MP timetable

Company Gen Pieces/ month Location Status Technology

Truly 4.5 60k LTPS

Huizhou Aug16E MP LTPS

30k AMOLED 2H17E MP AMOLED

CSOT 6 30k LTPS Wuhan 1Q17E MP LTPS

Source: Truly, TCLD, OP Research

Truly is expected to start its G4.5

LTPS/AMOLED panel MP in

Aug16E/2H17E, and TCLD’s sister

company, CSOT will start its G6

LTPS panel MP by end of Dec

2016E

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6 8 9 12 20 0.7

2 11

17

50

0

10

20

30

40

50

60

70

80

2016E 2017E 2018E 2019E 2020E

VR Hardware VR Software

(US$ bn)

Display latency, 13.3ms, 69%

Rendering latency, 3ms,

16%

Process latency, 2ms,

10%

Tracking latecny, 1ms,

5%Total latency time: 19.3ms

Catalyst 2: VR creates new demand for AMOLED display module

Virtual Reality (VR) is the new trend in technology. Facebook invested US$2bn in

Oculus, Google invested US$542mn in Magic Leap, and Mircrosoft developed its

own HoloLeans. According to TrendForce, the market size of VR hardware in

2016E is expected to hit US$6bn, and grow at a 4-year CAGR of 35% to

US$20bn in 2020E, mainly driven by strong demand for premium gaming

experience. We see AMOLED display can capture such robust growth to reap

US$20bn VR hardware market by 2020E as it is the best solution for VR display.

Exhibit 12: Global VR market size from 2016E to 2020E

Source: TrendForce, OP Research

Many VR users experience motion sickness with symptoms like dizziness and

nausea when they wear VR devices. The main reason for that is latency, which

creates mismatch between the motion we see, among which, display latency is

the key factor, accounting for 69% of the total latency time. Normally, it takes

4-10ms to reflect image on LCD display, but AMOLED only needs 0.1-0.5ms as

AMOLED consists of small red, green and blue LED that directly create the

required color instead of filtering out white light. Therefore, AMOLED is the best

solution for VR display as it significantly shortens the response time at the

moment.

Exhibit 13: VR latency problem analysis – Oculus DevKit 1 for example

Source: Oculus, OP Research

Global VR hardware market is

expected to grow at 35% CAGR

from 2016E to 2020E

AMOLED display is the best

solution for VR display as it

significantly shortens response

time

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Currently, the VR mainstream products, including Oculus Rift, Sony PlayStation

VR, HTC Vive, and Gear VR all adopt AMOLED display, thus we see VR as a

mid-term catalyst for AMOLED demand, in apart from smartphone AMOLED

display penetration.

Exhibit 14: VR products in the market

Cardboard V2 Samsung Gear Huawei VR Xiaomi VR

HMD type Slide-on Slide-on Slide-on Slide-on

Vendors Google Samsung Huawei Xiaomi

Selling

price US$19.95 US$99.99 TBC TBC (RMB49 in test period)

Release

date Sep 2015 Dec 2015 Apr 2016 Aug 2016

Display N/A N/A N/A N/A

Resolution N/A N/A N/A N/A

Latency Depends on phone display <20ms <20ms Depends on phone display

Contain

platform

Android phone Galaxy S6, S6 Edge, Note 5.

S6 Edge+ (all use OLED

display)

Mate 8 (LTPS display)

P9 (LTPS display)

P9 Plus (AMOLED display)

Any cell phone with screen

size range from 4.7' to 5.7'

ex. Redmi Pro (OLED display)

Oculus Rift HTC Vive PlayStation VR Deepoon E2

HMD type Discrete Discrete Discrete Discrete

Vendors Facebook HTC Sony Deepoon

Selling

price US$599 US$599 US$399 RMB1,799 (US$270)

Release

date Mar 2016 Apr 2016 Oct 2016 Jun 2015

Display OLED OLED OLED Samsung AMOLED

Resolution 2160x1200 2160x1200 1920x1080 1920x1080

Latency <20ms <22ms <18ms <19ms

Contain

platform Oculus Home/SteamVR SteamVR/Viveport PS4 DK1, DK2

Source: OP Research

VR is a mid-term catalyst for

AMOLED display module player,

Truly is well-positioned to capture

the growth to compensate the

low-yield of its AMOLED panel

line

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Truly (732 HK) will commence G4.5 AMOLED panel mass production in 2H17E

with capacity of 30k pieces of glass per month. The AMOLED panel can be used

to produce Truly’s VR/AR related display products. Truly’s VR/AR related

products are summarized in the table below:

Exhibit 15: Truly’s VR/AR related business

Featured camera module solution Camera module & software assembly integrated solution

Dual camera recording

Oculomotor control

Gesture recognition

Iris recognition

188° super wide angle

Seamless assembly software

WIFI module integration

Customer A Customer I

Camera: Dual 1.2 megapixels Camera: Dual 10 megapixels

Aug 2016 MP 1Q16 MP

High definition display solution

Micro display/ AMOLED/ 2K display

Customer T Customer D

Display: 6 inch 2K Display: 5 inch FHD (AMOLED)

1Q16 MP Sep 2016 MP

Source: OP Research

Truly will commence G4.5

AMOLED MP in 2H17E, riding on

the mid-term VR growth.

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12.2

26.5

38.8

52.8

64.8

69.0

62.1 55.9

51.4 48.8

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

2016E 2017E 2018E 2019E 2020E

VR headset display Shipment ASP

(mn unit) (US$)

841.8

1,645.7

2,168.5

2,714.9

3,165.3

42.1 82.3 108.4 135.7 158.3

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2016E 2017E 2018E 2019E 2020E

VR headset display Market size Truly's potential market share

(US$ mn)

According to IDC, VR headset display shipment is expected to grow at 4-year

CAGR of 51.8% from 12.2mn in 2016E to 64.8mn in 2020E, which drives the total

market size to grow at a CAGR of 39.3% from US$842mn in 2016E to US$3.2bn

in 2020E.

Exhibit 16: Global VR headset display market size from 2016E to 2020E

Source: IDC, Oled-info, OP Research

Assuming Truly to gain 5% market share, we estimate Truly’s potential market

share from VR related business to be US$42mn in 2016E and would grow at

39.3% CAGR to US$158mn in 2020E, representing 3-4% upside on our current

sales estimate. We haven’t taken account of VR handset display revenue in our

forecast as we expect Truly AMOLED panel to be mass production in 4Q17E with

low yield.

Exhibit 17: Global VR headset market size vs. Truly’s potential market

share

Source: IDC, Oled-info, OP Research

VR headset display’s market size

is expected to grow at a 4-year

CAGR of 39.3% to US$3.2bn in

2020E

Truly’s potential market share

from VR related business is

US$158mn in 2020E

Mon, 29 Aug 2016

Display Module

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TCLD (334 HK)’s sister company, CSOT, also plans to establish its T4 plant for

AMOLED panel, without further confirmed details, we expect CSOT to commence

AMOLED mass production from 2019-2020E, thus bringing long-term VR growth

for TCLD as it can secure AMOLED panel supply.

TCLD’s sister company, CSOT

also plans to establish T4 plant

for AMOLED panel production, we

expect the MP to commence in

2019-2020E

Mon, 29 Aug 2016

Display Module

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0.4 0.5

5.0

33.0

0

5

10

15

20

25

30

35

2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Level 1 Level 2 Level 3 Level 4

(US$ bn)

ADAS adoption to boost mid-term growth for automobile display player

ADAS market in China is expected to grow at 45.6% four years CAGR

ADAS is developed in four stages: 1) Level 1 of driver assistance to provide

information and passive warning to driver, such as blind spot, drowsiness and

distance warning etc; 2) Level 2 of partial automation to briefly take active control

of the car in parking, prevent backing over unseen objects, and avoid collisions by

braking; 3) Level 3 of semi-automation to partially take over driving in certain

circumstances with driver’s control on dynamic driving environment and full

control in parking; 4) Level 4 of full automation to self-drive in all dynamic driving

tasks under all road and environmental conditions.

China is in the early stages of Level 1 with only 2~5% ADAS adoption rate. As the

demand for safety and convenience in driving keeps increasing, we expect ADAS

to experience robust growth in the following 10 years. According to China

Association of Automobile Manufacturers (CAAM), ADAS market size in China

would grow at a 5-year CAGR of 64.4% from US$0.4bn in 2015 to US$5.0bn in

2020E as China’s automobile steps in Level 2 by 2019E. In the expectation that

China’s automobile market would enter Level 3 in 2022E and approach Level 4 in

2025E driven by increasing ADAS adoption as ADAS technology gradually

matures, we estimate ADAS market size in China to hit US$33bn in 2025E,

representing a 5-year CAGR of 45.6%.

Exhibit 18: ADAS market size in China for 2015-2025E

Source: CAAM, OP Research

Adoption of ADAS to boost automotive display upgrade and

shipment growth

In the past displays in car were designed for entertainment like play music and

movies. In the early stage of ADAS development, displays had more functions

beyond entertainment. For example, drivers/passengers could read information

such as speed, distance and temperature collected by sensors on instrument

clusters and controlled part of car movement through touch panel monitors.

According to IHS, automotive display shipments will increase at 3.0% CAGR from

Body Text Body Text Body Text

Body Text ADAS is developed in four stages

and China is in the early stage of

level 1

ADAS market in China is

expected to record 64.4% CAGR

from 2015 to 2020E and 45.6%

CAGR from 2020E to 2025E

Automotive TFT display

shipments is expected to grow at

6.6% CAGR from 2015 to 2020E

thanks to automotive display

upgrade

Mon, 29 Aug 2016

Display Module

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6689

117 132 143 151 157 161 163 164

163

203221

233 241 248 253 256 257 259

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E

TFT LCD automotive display Others yoy% TFT LCD yoy%

(mn units) (%)

221mn units in 2015 to 256mn units in 2020E, driven by rapid-growing demand

for smart car with ADAS. TFT LCD as the mainstream of automotive display is

estimated to grow at 6.6% CAGR from 117mn units in 2015 to 161mn units in

2020E.

Exhibit 19: Global automotive display shipment for 2013-2022E


As ADAS technology matures, high-configuration intelligent cars in the future

would be equipped with 10 displays and 6 camera modules. We believe Truly will

capture the strong ADAS growth as it is the leading automotive TFT displays

supplier in China. Hence, we estimate 21% revenue CAGR in the coming 3 years

for automobile products for Truly.

Exhibit 20: Displays in future car

Source: Truly, OP Research

Future smart car would be

equipped with 10 displays,

stimulating automotive display

shipment growth

Mon, 29 Aug 2016

Display Module

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Long life cycle creates high entry barrier, stabilize ASP and margin

for automotive display module player

Car models normally have a long life cycle for 5 of 10 years, inclusive of 1)

pre-production period of 1.8 to 3.8 years from initial planning to design finalization;

2) production period of 9 months to 1 year from raw material preparation to final

production after testing; 3) post-production period of 3 to 6 years from production

launch to improvements based on customers’ feedback.

Exhibit 21: Life cycle of car model

Truly R&D Process Time consuming Description Truly shipment

Pre-production time 21 - 46 months

√ Initial planning 1-4 months Product planning/ marketing/engineering go over the big picture

√ Rough prototype building 2-6months Design team generate rough idea on the car model

√ Design refining 6 - 12 months One or two phases of builds have gone through for idea testing and

get verified for government regulations

√ Design finalization 12 - 24 months Prototypes are built and unveiled in public media

Production time 9 -12 months

Production and testing 9 - 12 months Purchase raw materials, recruit and train workers, testing on

preliminary products and retrofitting, mass production and storage √

Post-production time 36 -72 months

Sales & marketing 6 -12 months Car launched in the market √

Feedback and improvement 30 - 60 months Car manufactures collect customer usage feedback to launch

different series based on improved model √

Total life cycle time 66 – 130 months

Source: AutoNews, OP Research

The long life cycle creates high entry barrier for automotive components suppliers,

as it usually takes 1-2 years to obtain a car brand’s certificate. Besides, it also

stabilizes the ASP and gross profit margin as fewer competitors involved.

Truly enjoys a strong pipeline of automotive displays, and expected time for mass

production varies from FY16E-FY22E, which supports our estimate of robust

growth in automotive displays.

Exhibit 22: Truly’s major automotive disaply pipeline

Brand Volkswagen FAW Mazda Ssangyong Ferrari Dongfeng

Citroen Benz Porsche

Logo

Car model

Display

Size 9.19 inch 7 inch 7 inch 8.8 inch 9 inch 10.25 inch 12.3 inch

MP 2016-2020 2016-2020 2016-2021 2017-2022 2016-2021 2018-2023 2016-2021


Car models normally have a long

life cycle of 5-10 years

Long life cycle creates high entry

barrier, stabilizes ASP and GPM

Truly enjoys strong automotive

display pipeline.

Mon, 29 Aug 2016

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Truly Int’l (732 HK) – All-around player Fingerprint ramp up in FY16E, expected to contribute RMB1.6bn sales,

representing 7.6% of total sales Truly is well positioned to ride on the rapid adoption of LTPS/AMOLED

display and potential upside on 1H17E panel shortage Initiate BUY with TP HK$4.90 based on 12x FY17E PE

Fingerprint ramp up as a short-term catalyst. Truly launched its fingerprint business in FY15 with HK$90mn revenue, representing 0.5% of total revenue. In FY16E, Truly expanded its fingerprint capacity from 2.5mn units in 1Q16 to 7.5mn units in Jun16, to ride on the rapid adoption rate of fingerprint in smartphones. We expect global/China fingerprint penetration will increase from 29%/15% in 2015 to 67%/65% in 2018E, which drives an enormous demand for fingerprint modules, as fingerprint offers a clear differentiation from non-fingerprint module-applied smartphones and facilitates mobile payments. We estimate Truly will ship 50mn/80mn/104mn units fingerprint modules in FY16E, and contribute HK$1.6bn/HK$2.0bn/HK$2.1bn sales, representing 7.6%/8.8%/8.2% of total revenue.

Well positioned to ride on increase of LTPS/AMOLED display adoption. In 2015, LTPS/AMOLED penetration in China market was ~28%/9%, and it is expected to hit 39%/12% in 2016E, and 45%/19% in 2018E, thanks to the better display effect and decreasing costs as production yield rate improves. iPhone 8 is expected to adopt AMOLED, and we expect China smartphone vendors will also increase LTPS/AMOLED displays in smartphones. Hence, Truly is well positioned to ride on the increase in LTPS/AMOLED adoption via its G4.5 plant, which plans to start LTPS/AMOLED MP with 60k/30k monthly capacity in Aug16/2H17E. Moreover, Samsung Display will be iPhone8’s AMOLED display suppliers, we expect that an increasing number of Japan and Taiwan panel suppliers will upgrade their production lines from LTPS to AMOLED, to catch up with the coming AMOLED heat. Thus, we forecast a likely LTPS/AMOLED panel supply shortage in 1H17E, which will provide further potential upside for Truly.

Strong automotive display pipeline and capacity expansion of G5 plant. Truly ranks 8th in global automotive TFT display in 2015, and is expected to increase TFT display shipment penetration from 21% in FY15 to 22%/26%/34% in FY16/17/18E, as global TFT display shipment proportion is expected to improve from 53% in 2015 to 61% in 2018E. As TFT display enjoys a higher ASP which is 5-10 times of non-TFT display, we believe it will drive a steady growth of sales. Besides, Truly enjoys a strong pipeline of automotive products in the coming 2-3 years, which guarantees a steady sales growth. Truly’s G5 plant is planned to start MP in 1Q18E with 100k monthly capacity, providing strong support for automotive business expansion. We expect automotive displays revenue to record 21% 3-year CAGR from FY16E to FY19E.

We initiate BUY with TP of HK$4.90 based on 12x FY17E PE, 52% discount to peers. We estimate Truly to record a 10%/16% revenue/net profit CAGR from FY15 to FY18E, given its main clients, China smartphones venders are grabbing market share rapidly, and it is actively diversifying its business, including fingerprint and automotive display, which help on margin expansion.

Risks: 1) delay or slow ramp up of G4.5 and G5 plant; 2) ASP erosion is faster than expected.

Initial Coverage

BUY

Close price: HK$3.45

Target Price: HK$4.90 (+42.0%)

Key Data

HKEx code 732 HK

12 Months High (HK$) 4.53

12 Month Low (HK$) 1.54

3M Avg Dail Vol. (mn) 17.98

Issue Share (mn) 2,907.10

Market Cap (HK$mn) 10,029.49

Fiscal Year 12/2016

Major shareholder (s) Lam Wai Wah (44.5%)

Source: Company data, Bloomberg, OP Research

Closing price are as of 26/08/2016

Price Chart

1mth 3mth 6mth

Absolute % -15.9 10.9 93.6

Rel. MSCI CHINA % -20.6 0.2 74.4

PE

Company Profi le Truly International Holdings Limited, through

its subsidiaries, manufactures and sells liquid

crystal display products, electronic consumer

products including calculators, pagers, MP3

player, and electronic components.

Exhibit 23: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E

Revenue 21,416 19,427 21,006 23,230 26,011

Growth (%) 3.6 (9.3) 8.1 10.6 12.0

Net Profit 1,118.4 845.4 897.9 1,192.4 1,303.1

Growth (%) (31.0) (24.4) 6.2 32.8 9.3

Diluted EPS (HK$) 0.384 0.291 0.309 0.410 0.448

EPS growth (%) (33.1) (24.3) 6.2 32.8 9.3

Change to previous EPS (%)

0.0 0.0 0.0

Consensus EPS (HK$)

0.314 0.359 0.426

ROE (%) 16.0 11.9 12.1 14.7 14.4

P/E (x)

11.9 11.2 8.4 7.7

P/B (x) 1.4 1.4 1.3 1.2 1.1

Yield (%) 4.3 2.9 2.7 3.6 3.9

DPS (HK$) 0.150 0.100 0.093 0.123 0.134


0.0

1.0

2.0

3.0

4.0

5.0

Aug/15 Nov/15 Feb/16 May/16

HK$732 HK MSCI CHINA

0

2

4

6

8

10

12

14

16

Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16

Forward P/E Ratio

+1std.

avg.

-1std.

Mon, 29 Aug 2016


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0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1000

1200

1400

1600

1800

2014 2015 2016E 2017E 2018E 2019E 2020E

Fringerprint module shipment yoy%

(mn unit)

3%

15%

30%

50%

65%

19%

29%

40%

55%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2014 2015E 2016E 2017E 2018E

China Global

Fingerprint ramp up as a short-term catalyst

Rapid growth of fingerprint market and penetration of smartphone

The global shipment of fingerprint modules experienced rapid growth in 2015,

with ~65% yoy growth to ~550mn units. According to IHS, fingerprint module

shipment will continue the growth to hit ~1,240mn in 2018E, representing a

3-year CAGR of 30.3%. Meanwhile, the China/global smartphone fingerprint

penetration is expected to improve from 15%29% in 2015 to 65%67% in 2018E.

Exhibit 24: Global fingerprint module shipment from 2014 to 2020E


Exhibit 25: China/Global fingerprint penetration from 2014 to 2018E

Source: Statista, OP Research

Global fingerprint module

shipment is expected to record

30.3% CAGR from 2015 to 2018E.

China/global penetration is

expected to increase from

15%/29% in 2015 to 65%/67% in

2018E

Mon, 29 Aug 2016


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The rising penetration rate is the result of: 1) smartphone market players

following Apple’s adoption of fingerprint, making fingerprint modules a key

component in smartphone market. As fingerprint modules can be seen from the

outside, it offers a clear differentiation from non-fingerprint module-applied

smartphones and which customers find more attractive. 2) increasingly mobile

payments are adopting fingerprint for authentication, including Apple Pay, Alipay,

and Samsung Pay. We expect the penetration of mobile payments will continue to

improve in China market, thus driving the penetration of fingerprint modules in

smartphone.

Fingerprint industry value chain analysis

The key components of fingerprint module include sensor, metal loop, cover plate,

ect; among these components, the sensor is the most important. Currently, there

are mainly 8 integrated circuit (IC) developers, Authen Tec was acquired by Apple,

and provides sensor IC design for Apple exclusively, Synaptics mainly supports

Samsung and HTC, while other smartphone companies, like HuaWei, Oppo, Vivo

are supported by FPC (a Swedish company), Goodix and Silead (Chinese

companies), Crucial Tec (114120 KS), More DNA and Focal Tech (Taiwan

companies).

Truly procures sensors from China IC developers, eg. Goodix, Silead, and then

assemble them with metal loop, cover plate and other components.

Exhibit 26: Fingerprint value chain

Components Sensor Metal Loop Cover Plate Others Module

Process IC design Manufacturing Packing&Testing

Companies

Apple Authen Tec (US)

(acquired by Apple

in 2012)

TSMC (2330TT)

Xintech (3374 TT)

ASE (2311 TT)

WLCSP (603005

CH)

Sapphire Tech

Crystal Applied

Aurora (600666 CH)

ASE(2311 TT),

Sharp(6753 JP)

Samsung, HTC Synaptics

(Validity）(US)

SMIC (981 HK) TSHT (2185 CH)

JCET(600584 CH)

Aurora (600666 CH)

TDG (600330 SH)

O-film (002456 CH)

Truly (732 HK)

Q Tech (1478 HK)

CrucialTec (114120 KS)

Other brands

smartphones,

eg: Huawei,

Oppo, Vivo

Sweden: FPC

China: Goodix,

Silead, Microarray

Korea: CrucialTec

(114120 KS)

TW: More DNA,

Focal Tech

(3545 TT)

Source: OP Research

We believe fingerprint modules

are becoming a key component of

smartphones and it facilitates

mobile payments

Key components of fingerprint

module include sensor, metal

loop, and cover plate

Truly procures sensors from

China IC developers, Goodix,

Silead etc

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Truly keeps gaining market share with capacity expansion

Truly’s revenue from fingerprint module was HK$90mn in FY15, representing

0.5% of total revenue. Truly ranks number 3 for fingerprint module shipment in

1Q16 with 4mn shipment, jumping to number 2 in Apr 2016 with 3.2mn shipment.

Truly’s fingerprint shipment in 1H16 was 8.9mn, and we expect full year shipment

in FY16E to hit 50mn, given it expands capacity rapidly, from 2.5mn units/month

in 1Q16 to 7.5mn units/month in Jun16 and may further expand to 10mn

units/month by end of FY16E. Besides, utilization rate is expected to improve

from 60% in Jun16 to 90% in 4Q16E.

Exhibit 27: 2016 fingerprint shipment and target of leading suppliers

Company 1H16(mn units) FY16E target(mn units) 1H16 as % of FY16E target

O-film (002456 SZ) 70 120 58%

Truly (732 HK) 8.9 50 18%

Q Tech (1478 HK) 1.3 20 7%

Source: Company, O-film, Q-tech, OP Research

Exhibit 28: 2016 fingerprint monthly capacity of leading suppliers

Company Early 2016(mn units/month) By end of 2016(mn units/month)

O-film (002456 SZ) 18 22

Truly (732 HK) 2.5 7.5-10

Q Tech (1478 HK) 3.5 8-10

Source: Company, O-film, Q-tech OP Research

Currently, there are four types of fingerprint products, coating for low-to-mid-end

smartphones, while covered is used widely in mid-to-high end smartphones. Truly

has mastered the two technologies and will focus on promoting covered

fingerprint products, and targets to be global No.1 in terms of covered fingerprint

shipment in FY17E. Moreover, Truly is also schedules to start MP of underglass

fingerprint by end of 2016.

Exhibit 29: Type of fingerprint products

Coating Covered Underglass Aliveness Detection FPI

Economical solution for a

full range of mid-to low-end

smartphones

Unique oDLC surface

hardness solution matching

sapphire glass.

Truly has industry-leading

technology for indepth

customization. MP

expected by end of 2016.

Truly has leading

technology and potential

forMP in advance.

ASP: US$3.5-US$4 ASP: US$5


Truly enjoys fingerprint module ASP of HK$39.3 in 1H16, and targets to further

improve ASP by increasing covered module proportion.

Exhibit 30: 1H16 fingerprint ASP of leading suppliers

Company 1H16

O-film (002456 SZ) ~RMB36

Truly (732 HK) HK$39.3

Q Tech (1478 HK) RMB29.7

Source: Company, O-film, Q-tech OP Research

We expect Truly to record 50mn

fingerprint shipment in FY16E, as

capacity expands from

2.5mn/month in 1Q16 to 10mn

units/month by end of FY16E

Truly mainly produce coating and

covered fingerprint module, and

is targeting to be global No.1 in

terms of covered fingerprint

shipment in FY17E.

Truly enjoys fingerprint module

ASP of HK$39.3 in 1H16

Mon, 29 Aug 2016


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90

1,600

2,048 2,130

-

500

1,000

1,500

2,000

2,500

FY15A FY16E FY17E FY18E

(HK$mn)

Truly’s fingerprint clients include top tier China smartphone vendors, notably Vivo,

Gionee, Letv, Meizu and TCL.

Exhibit 31: Truly’s fingerprint products

Vivo X7/ X7 PLUS Vivo V3/ 3MAX Letv 1S/2S/2S Pro Gionee M5/S6 Pro TCL 750 Meizu Meilan 3S


Fingerprint module is expected to contribute HK$1.6bn revenue in

FY16E

Most Chinese fingerprint module companies produce coating solution, which has

lowest ASP of US$3.5-US$4.0. Cover solution has higher ASP of ~US$5, and

underglass ASP is even higher. Truly will focus on promoting covered solution in

FY16E, and is expected to hit HK$1.6bn revenue from fingerprint module in

FY16E with 50mn units sales volume.

Exhibit 32: Revenue of fingerprint products from FY14 to FY18E


Truly’s fingerprint clients include

Vivo, Gionee, Letv, Meizu and

TCL.

Revenue of fingerprint modules is

expected to record a 3-year 187%

CAGR to HK$2,130mn in FY18E

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81 108 148 228 261 294 286282

3339

47

7095 122 164 212

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016E 2017E 2018E 2019E 2020E


(mn units)

72%66%

58%

44%37%

31% 28% 24%

18%22%

28%

39%42%

45%42%

40%

8% 8% 9% 12% 15% 19%24%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016E 2017E 2018E 2019E 2020E


Truly is well positioned to ride on the increase of LTPS/AMOLED adoption and potential upside on panel shortage

Increasing penetration of LTPS/ AMOLED display in smartphone

The LTPS/AMOLED smartphone panel shipments in China are expected to grow

at a 5-year CAGR of 13.8%/34.8% to 282mn/212mn in 2020E from 148mn/47mn

in 2015 thanks to increasing penetration and extension of market share of China

smartphone vendors.

Exhibit 33: Smartphone panel shipments by display technology in China,


We estimate the LTPS/AMOLED penetration in China smartphone to improve

from 28%/9% in 2015 to 40%/30% in 2020E as China’s leading smartphone

vendors, such as Huawei, Oppo, Vivo, Lenovo, Meizu, etc, will increase

LTPS/AMOLED adoption from 2H16E onwards.

Exhibit 34: LTPS/AMOLED penetration in China


LTPS/AMOLED smartphone panel

is expected to grow at

13.8%/34.8% CAGR from 2015 to

2020E

LTPS/AMOLED penetration in

China smartphone is expected to

improve from 28%/9% in 2015 to

40%/30% in 2020E

Mon, 29 Aug 2016


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46%

28%

30%43%

18% 14%

4%

25%

1%

38%24%

4%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



62%

48%

40%60%

24%

24%15%

56%

13%

45%32%

10% 10%23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



Huawei, No.1 of China smartphone vendor, is expected to hit 62%/13%

LTPS/AMOLED adoption in 2016E from 46%/1% in 2015; Oppo, China’s No.2

smartphone vendor, is expected to hit 48%/45% LTPS/AMOLED adoption in

2016E from 28%/38% in 2015; Vivo, another brand of BBK camp, is expected to

hit 40%/32% LTPS/AMOLED adoption in 2016E from 30%/24% in 2015; and

Xiaomi, China’s No.4 smartphone brand, is expected to hit LTPS/AMOLED

penetration rate of 60%/10% in 2016E from 43%/0% in 2015.



China’s first-tier smartphone

vendors, including Huawei, Oppo,

Vivo and Xiaomi are all expected

to improve LTPS/AMOLED

penetration in their model

Mon, 29 Aug 2016


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Supply of LTPS/AMOLED ramp up from 2017E onwards

Currently, only Samsung can produce small-to-medium sized AMOLED panel

with satisfied yield, and Japanese companies (JDI and Sharp) dominate the

majority of LTPS panel supply. We see China panel suppliers, including CSOT,

Truly, BOE and Tianma are setting up and expanding their LTPS/AMOLED

production lines and capacity is expected to ramp up from 2017E onwards, while

Taiwan, Korea, and Japan panel suppliers focus more on AMOLED capacity

expansion.

Exhibit 36: Small and medium size LTPS & AMOLED lines operated in China

Company Gen pcs per month Location Status Technology

CSOT 6 15k (30k max) Wuhan 1Q17 MP LTPS

BOE

5.5 30k LTPS

Ordos 2014 MP LTPS

30k AMOLED 2Q16 MP AMOLED

6 45k LTPS

Chengdu 2Q17MP LTPS

48k AMOLED 2Q18MP AMOLED

Tianma

5.5 30k Xiamen 2015 MP LTPS

5.5

15k LTPS

Shanghai

1Q16 MP LTPS


6 30k Xiamen 3Q16 MP LTPS

6 30k Wuhan 2Q17 MP LTPS/AMOLED

Truly 4.5

60k LTPS

Huizhou

Aug16 MP LTPS


AUO 6 20k (30k max) Kunshan 4Q16 MP AMOLED

EverDisplay 4.5 15k Shanghai 3Q17 MP LTPS/AMOLED

6 TBC Shanghai 2Q18 MP AMOLED

GoVisionox 5.5 15k Kunshan 3Q16 MP AMOLED

Hon Hai 6 20k Guiyang, 2018 MP LTPS/AMOLED

6 24k Zhengzhou 2018 MP LTPS/AMOLED

Total 374k LTPS/257k AMOLED

Note: Total capacity is the maximum productivity of mother class, and AMOLED production line can produce LTPS as well

Source: Company data, OP Research

China panel suppliers are

expanding their LTPS/AMOLED

capacity from 2017E onwards,

while TW, Korea, and Japan

supplier focus more on AMOLED

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Exhibit 37: Small and medium size LTPS & AMOLED lines operated in Taiwan, Korea and Japan (patial)

Taiwan


AUO 3.5 8k (50 max) Linko, TW 2012 MP LTPS/AMOLED

4.5 15k (45 max) Singapore 2012 MP LTPS/AMOLED

Innolux 3.5 70k Chunan, TW 2013 MP LTPS/AMOLED

6 24k Kaohsiung, TW 2Q16MP LTPS

Total 189k LTPS/165k AMOLED

Korea


Samsung Display

4.5 55k Asan, KR 2012 MP Rigid AMOLED

5.5

105k Rigid AMOLED (phase I+II)

Asan, KR

2013 MP Rigid AMOLED

35k Flexible AMOLED (phase III) 2014 MP Flexible AMOLED

6

15k (phase I)

Asan, KR

2015 MP Flexible AMOLED

30k (phase II) 1Q17 MP Flexible AMOLED

45k (phase III) 2Q17 MP Flexible AMOLED

30k (phase IV) 1Q18 MP Flexible AMOLED

LGD

4.5 14k Paju, KR 2013 MP LTPS/Rigid AMOLED

6

40k (60k max) LTPS

Kumi, KR

1Q17 MP LTPS

7.5k (phase I) 1Q17 MP Flexible AMOLED

7.5k (phase I) 2Q17 MP Flexible AMOLED

Total 74k LTPS/344k Rigid AMOLED/

170k Flexible AMOLED

Japan (partial)


Sharp

3.5 18k Kameyama, JP 2012 MP LTPS

4 100k Kameyama, JP 2013 MP LTPS

4.5 13k Kameyama, JP 4Q17 MP AMOLED

6 22K Kameyama, JP 2014 MP LTPS

6 11.5k Kameyama, JP 4Q17 MP AMOLED

6 34.5k Kameyama, JP 4Q17 MP AMOLED

Japan Display

4.5 32k LTPS

Ishikawa, JP 2012 MP LTPS

4k (15k max) AMOLED 1Q18 MP AMOLED

4.5 46k Higasiura, JP 2013 MP LTPS

5.5 30K Nomi, JP 2013 MP LTPS

6 24k (50 max) Mobara, JP 2013 MP LTPS

6 25k Hakusan, JP TBC LTPS

Total 323k LTPS/ 74k AMOLED

Note: Total capacity is the maximum productivity of mother glass, and AMOLED production line can produce LTPS as well


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Truly’s G4.5 LTPS/AMOLED panel production lines capture increase

of LTPS/AMOLED display adoption in smartphone

Truly’s G4.5 production line is scheduled to begin mass production of

LTPS/AMOLED in Aug16/2H17E with capacity of 60k/30k pieces of glass per

month, yield rate is targeted to hit 90%/50%. We believe G4.5 plant captures

increase of LTPS/AMOLED display adoption in smartphones.

The G4.5 production line is under Truly (Hui Zhou), with Truly holding 53% stake

of the company, and the result of Truly (Huizhou) will be recorded as “share of

associate companies” in financial statements.

Exhibit 38: G4.5 production line in Huizhou

LTPS AMOLED

Expected MP time Aug16E 2H17E

Capacity 60k pieces/month 30k pieces/month

Target yield rate 90% 50%


We see potential LTPS/AMOLED panel supply shortage in 1H17E, given that an

increasing number of smartphone models are adopting LTPS/AMOLED display

and it takes time for panel suppliers to expand capacity and ramp up.

We expect shortage of LTPS panel will be 226mn/166mn units in 2016/2017E,

and shortage of AMOLED panel will be 62mn/71mn units in 2016/2017E.

Assuming: 1) 3.5/4/4.5/5.5/6 generation panel production line can cut

30/40/50/150/200 units of screens per piece of glass; 2) 80%/80% utilization

rate/yield rate for LTPS panel production, 80%/70% utilization rate/yield rate for

AMOLED panel production; 3) LTPS penetration of global smartphone is

35%/40% in 2016E/2017E and AMOLED penetration of global smartphone is

20%/30% in 2016E/2017E.

Shortage of LTPS/AMOLED panel is likely to stabilize ASP with increasing

penetration to drive display module shipment growth, we see Truly is

well-positioned to capture the rapid increase of LTPS/AMOLED smartphone

penetration in China.

Despite the G4.5 LTPS/AMOLED panel plant JV may record a loss in FY16/17E,

we see the panel arm helps Truly to be more defensive during panel shortage

time and increase its bargaining power to secure top-tier smartphone clients

order.

Truly’s G4.5 plant is expected to

commence LTPS/AMOLED MP in

Aug16E/2H17E with capacity of

60k/30k pieces of glass per month,

and target yield is 90%/50%

Truly holds 53% stake of the G4.5

plant, and result of the plant will

be recorded as “share of

associate companies” in financial

statements

We expect there may be

LTPS/AMOLED panel supply

shortage in 1H17E

We expect shortage of LTPS

panel to be 226mn/166mn units in

2016/2017E, and shortage of

AMOLED panel to be 62mn/71mn

units in 2016/2017E

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Exhibit 39: Shortage of LTPS/AMOLED panel

(mn units) 2016E 2017E

Demand

Smartphone shipment 1,483 1,579

Penetration

LTPS 35% 40%

AMOLED 20% 30%

Total Demand

LTPS 513 632

AMOLED 297 474

Supply

Capacity

LTPS 449 728

AMOLED 419 719

Utilization rate

LTPS 80% 80%

AMOLED 80% 80%

Yield rate

LTPS 80% 80%

AMOLED 70% 70%

Total supply

LTPS 287 466

AMOLED 235 403

Shortage

LTPS 226 166

AMOLED 62 71


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JDI, 18%

Sharp, 15%

AUO, 13%

LGD, 11%

CPT, 9%

Innolux, 8%

Tianma, 7%

Truly, 7%

Others, 12%2015

Total: 101.5mn units

Automotive products keep robust growth

Leading market player ranked 8th globally

Truly ranked 8th in global automotive TFT display in 2015 with 7mn units shipment,

representing 21% of total automotive display shipment, and TFT display shipment

is expected to maintain robust growth and represents an increasing proportion of

total shipment.

Exhibit 40: 2015 Global ranking of automotive TFT display by shipment

Source: Techno Systems Research, OP Research

Increasing TFT application in automotive display stimulates sales

Truly produced TFT display and non-TFT display for automobiles, the ASP of TFT

display/non-TFT display is HK$210/HK$25 in FY15, revenue of TFT

display/non-TFT display for FY15 is HK$1,490mn/HK$680mn, and the proportion

of TFT display revenue increased from 56% in FY14 to 60% in FY15. Given

global TFT display shipment penetration is expected to improve from 53% in 2015

to 61% in 2018E and TFT display enjoys a higher ASP (5-10 times of non-TFT

display), we expect Truly’s revenue of automotive displays will keep robust

growth with 21% CAGR from FY16E to FY19E.

Truly ranked 8th

in global

automotive TFT display in 2015

We expect TFT display’s

shipment penetration to keep

increasing and revenue to deliver

21% CAGR from FY16E to FY19E

Mon, 29 Aug 2016


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6689

117 132 143 151 157 161 163 164

163

203221

233 241 248 253 256 257 259

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E


(mn units) (%)

40.5%

43.8%

53.0%

56.7%

59.2%

61.0%62.0%

63.0%63.5% 63.4%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E

1,090 1,490

1,824 2,232

3,188 870

680

636

513

415 190

210 214 218 223

29 25 21 18

15

0

50

100

150

200

250

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY14A FY15A FY16E FY17E FY18E

Automotive TFT display revenue Automotive non-TFT display revenue

Automotive TFT display ASP Automotive non-TFT display ASP

(HK$)(HK$mn)

Exhibit 41: Global automotive display shipment from 2013 to 2022E


Exhibit 42: TFT automotive display shipment penetration from 2013 to

2020E


Exhibit 43: Sales and ASP of Truly’s automotive products


Mon, 29 Aug 2016


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0.4 0.5

5.0

33.0

0

5

10

15

20

25

30

35

2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Level 1 Level 2 Level 3 Level 4

(US$ bn)

ADAS as a mid-term catalyst for automotive display

Advanced Driver Assistant Systems (ADAS) are automotive systems developed

to assist, complement and eventually substitute the driver in the complex process

of controlling a vehicle, aiming to improve driving safety and efficiency. ADAS is

developed in four stages: 1) Level 1 of driver assistance to provide information

and passive warning to driver, such as blind spot, drowsiness and distance

warning etc; 2) Level 2 of partial automation to briefly take active control of the car

in parking, prevent backing over unseen objects, and avoid collisions by braking;

3) Level 3 of semi-automation to partially take over driving in certain

circumstances with driver’s control on dynamic driving environment and ful

control in parking; 4) Level 4 of full automation to self-drive in all dynamic driving

task under all roadway and environmental conditions.

China is in the early stage of Level 1 with only 2~5% ADAS adoption rate. As the

demand for safety and convenience in driving keep increasing, we expect ADAS

to experience robust growth in the following 10 years. According to China

Association of Automobile Manufacturers (CAAM), ADAS market size in China

would grow at a 5-year CAGR of 64.4% from US$0.4bn in 2015 to US$5.0bn in

2020E as China’s automobile steps into Level 2 by 2019E. In the view that

China’s automobile market would enter Level 3 in 2022E and approach Level 4 in

2025E driven by increasing ADAS adoption as ADAS technology gradually

matures, we estimate ADAS market size in China to hit US$33bn in 2020E,

representing a 5-year CAGR of 45.6%.

Exhibit 44: ADAS market size in China for 2015-2025E

Source: CAAM, OP Research

Additional application by ADAS for display panel besides

entertainment needs

In the past, displays in car were designed for entertainment like play music and

movies. In the early stage of ADAS development, displays have functions beyond

entertainment. For example, drivers can read information such as speed,

distance and temperature collected by sensors on instrument clusters and control

part of car movements through touch panel monitor. We expect automotive

display shipments to increase at 3.0% CAGR from 221mn in 2015 to 256mn in

ADAS has four stages and China

is in the early phase of stage 1

ADAS market in China is

expected to record 64.4% CAGR

from 2015 to 2020E and 45.6%

CAGR from 2020E to 2025E

Automotive TFT display is

expected to grow at 6.6% CAGR

from 2015 to 2020E thanks to

automotive display upgrade

Mon, 29 Aug 2016


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6689

117 132 143 151 157 161 163 164

163

203221

233 241 248 253 256 257 259

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E


(mn units) (%)

2020E, driven by rapidly-growing demand for smart cars with ADAS. TFT LCD as

the mainstream of automotive display is estimated to grow at 6.6% CAGR from

117mn in 2015 to 161mn in 2020E.

Exhibit 45: Global automotive display shipment from 2013 to 2022E


As ADAS technology matures, high-configuration intelligent cars in the future will

be equipped with 10 displays and 6 camera modules. We believe Truly will

capture the strong ADAS growth as it is the leading automotive TFT displays

supplier in China.

Exhibit 46: Displays in future car


Future car would be equipped

with 10 displays, stimulating

automotive display shipment

growth

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1,960 2,170

2,460 2,746

3,602

10.7%

13.3%11.6%

31.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2014 2015 2016E 2017E 2018EAutomotive products YoY%

(HK$mn)

Strong pipeline of automotive products

Truly currently provides central control, meter and color TFT to end customers,

including BMW, Audi, FIAT, Mercedes-Benz,, Nissan etc, and has a strong

pipeline for the coming 5 years. Given that the automotive display has higher

entry barrier, and normally needs 1-2 years to obtain end customers’ certificate,

we see it will help Truly to maintain robust 10%-30% yoy sales growth in the

coming three years to FY18E.

Exhibit 47: Truly’s major automotive disaply pipeline

Brand Volkswagen FAW Mazda Ssangyong Ferrari Dongfeng

Citroen Benz Porsche

Logo

Car model

Display

Size 9.19 inch 7 inch 7 inch 8.8 inch 9 inch 10.25 inch 12.3 inch

MP 2016-2020 2016-2020 2016-2021 2017-2022 2016-2021 2018-2023 2016-2021


G5 TFT production line provides strong supply for automotive

display expansion

Truly bought G5 TFT production line from Samsung, with capacity of 100k sheets

per month, the mass production expected to begin in 1Q18E, to provide solid

support for automotive display expansion.

Exhibit 48: Sales of automotive products from FY14 to FY18E


Truly enjoys strong pipeline of

automotive products and

expected to maintain 10%-30%

yoy sales growth to FY18E

Truly’s G5 TFT plant is expected

to start MP in 1Q18E, providing

solid support for automotive

display expansion.

Mon, 29 Aug 2016


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21,416 19,427

21,006 23,230

26,011

3.6%

-9.3%

8.1%

10.6%12.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

2014 2015 2016E 2017E 2018E

Revenue (HK$mn) YoY%

(HK$mn)

Initiate BUY with TP HK$4.90 with 42% upside

Steady revenue growth thanks to robust increase of Chinese

smartphone vendors and diversified business

We expect Truly to recover from revenue decrease in FY15, and experience ~10%

yoy revenue growth from FY16E onwards. Despite the slowdown in global

smartphone shipment growth, we believe it will be offset by fast growth of

Chinese smartphone vendors, including Huawei, Vivo and Oppo, which are also

Truly’s major clients. Besides, Truly is diversifying business, including fingerprint

and automotive displays to keep the steady growth.

Exhibit 49: Revenue from FY14 to FY18E


Improved product mix with higher GPM

In FY15, touch panel for smartphone related and smartphone displays without

touch panel accounted for the largest and second largest proportion of revenue,

representing 41%/19% of total revenue. Smartphone displays without touch panel

are mainly supplied to Samsung for its low end handsets, therefore its GPM is

relatively low, we expect its proportion of revenue will decrease from 19% in FY15

to 6% in FY16E, and further decrease to 1% in FY18E. Instead, the proportion of

automotive products/fingerprint module is expected to increase from 11%/0% in

FY15 to 12%/8% in FY16E and further increase to 14%/8% in FY18E, thanks to

G5 plant mass production start in 1Q18E (mainly for automotive displays) and the

ramp up and capacity expansion of fingerprint module. As automotive displays

and fingerprint module has higher GPM of ~15%/12%, we believe the (1)

improved product mix and (2) economics of scale of its fingerprint business can

help GPM expansion from 10.9% in FY15 to 11.4% in FY16E and 11.8% in

FY18E.

We expect Truly to record ~10%

yoy sales growth from FY16E

onwards, thanks to robust growth

of major clients, China top

smartphone vendors and

diversified revenue sources

including fingerprint and

automotive displays

We expect GPM expansion to hit

11.4% in FY16E from 10.9% in

FY15 thanks to upgraded product

mix.

Mon, 29 Aug 2016


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9% 11% 12% 12% 14%

11%14% 14% 14% 14%

44%41%

44% 47%48%

13% 15%16%

16% 16%23% 19% 6% 2% 1%

8% 9% 8%

0%

20%

40%

60%

80%

100%

2014 2015 2016E 2017E 2018E

Automotive products Industrial, medical, and other productsTouch panel for smartphone related Compact camera moduleSmartphone display (without touch panel) Fingerprint identification module

7.8%

5.2%

4.4% 4.3%

5.1% 5.0%

14.0%

11.6%10.9%

11.4%11.8% 11.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY13A FY14A FY15A FY16E FY17E FY18E

Net profit margin Gross profit margin

Exhibit 50: Revenue by segment from FY14 to FY18E


Exhibit 51: Overall GPM from FY13 to FY18E


1H16 result review. Revenue was up 2.2% yoy in 1H16 to HK$9.72bn, touch

related products for smartphone and compact camera modules recorded robust

growth of 23% and 18% yoy growth, while smartphones display without touch

panel was down 67% yoy, reflecting the upgrade of product mix. 2Q16 GPM

dropped to 10.6% from 12.2% in 1Q16, mainly due to panel price increase.

Management has actively renegotiated the products price to clients in 2H16E, to

transfer material costs increase, we see margin will gradually recover in 3Q16

onwards. Net profit was down 12.3% to HK$390mn, due to 1) HK$79mn

exchange loss, 2) HK$74mn share of loss from Huizhou associate. Huizhou

associate will start MP from Aug16E, we expect it to record HK$192mn/HK$77mn

/HK$77mn net loss in FY16/17/18E due to significant depreciation and interest

expenses, however, it can strengthen its market position by securing in-house

panel supply to module production, and increase bargaining power to obtain large

orders.

Initiate BUY with TP of HK$4.90 based on 12x FY17E PE, 52% discount to

peers. We believe Truly is well-positioned to ride on increasing LTPS/AMOLED

adoption in smartphones, fingerprint business ramp up and capacity expansion in

FY16E and strong automotive displays pipeline in the coming few years.

1H16 sales was up 2.2% yoy

thanks to robust growth of touch

related products for smartphones

and compact camera module. Net

profit was down 12.3% yoy due to

exchange loss and loss from G4.5

plant associate

Initiate BUY with TP of HK$4.90

based on 12x FY17E PE.

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Exhibit 52: Results summary

HK$ mn 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

2Q16

YoY

2Q16

QoQ 1H16 2H16E

Revenue 4,310 5,215 3,773 5,752 4,672 4,849 4,972 4,935 4,694 5,031 4% 7% 9,725 11,282

COGS (3,773) (4,556) (3,241) (5,088) (4,177) (4,242) (4,503) (4,383) (4,123) (4,497) 6% 9% (8,621) (10,000)

Gross profit 537 658 532 664 494 606 469 552 571 534 -12% -6% 1,104 1,282

Other income & gains (15) (7) (56) 34 15 17 (41) 34 (10) (44) -355% 328% (54) 41

Selling exp (83) (111) (106) (88) (107) (97) (111) (118) (84) (87) -10% 3% (171) (178)

Admin exp (124) (82) (81) (125) (92) (105) (89) (125) (116) (97) -7% -16% (213) (236)

Other opex 0 0 7 (7) 0 (8) (20) (1) 0 (3) -58% n.a. (3) (29)

Operating profit (EBIT) 315 458 295 478 310 414 208 341 361 302 -27% -16% 663 880

Provisions or other items 0 0 0 0 0 0 0 0 0 0 n.a. n.a. 0 0

Finance costs (19) (24) (10) (32) (26) (24) (28) (24) (29) (29) 22% 0% (59) (80)

Profit after financing costs 296 435 285 446 284 390 180 317 331 273 -30% -18% 604 800

Associated cos 0 (2) 9 (11) (11) (11) (7) (19) (27) (46) 305% 68% (74) (118)

Jointly controlled cos 0 0 0 0 0 0 0 0 0 0 n.a. n.a. 0 0

Pre-tax profit 296 433 294 435 273 379 173 299 304 227 -40% -25% 530 682

Tax (58) (111) (54) (114) (63) (87) (40) (5) (55) (46) -48% -18% (101) (138)

Minority interests (27) (30) (20) (37) (13) (40) 8 (38) (25) (11) -73% -57% (36) (39)

Net profit 211 292 219 284 198 251 141 256 223 170 -32% -24% 393 505

QoQ%

Revenue 21% -28% 52% -19% 4% 3% -1% -5% 7%

Gross profit

22% -19% 25% -26% 23% -23% 18% 3% -6%

Net profit 38% -25% 30% -30% 27% -44% 82% -13% -24%

YoY%

Revenue 8% -7% 32% -14% 0% 4% 2% 14%

Gross profit

-8% -8% -12% -17% 15% -12% 0% 26%

Net profit -7% -14% -36% -10% 13% -32% -12% 27%

Key ratios

GPM 12.5% 12.6% 14.1% 11.5% 10.6% 12.5% 9.4% 11.2% 12.2% 10.6% 11.4% 11.4%

Selling exp 1.9% 2.1% 2.8% 1.5% 2.3% 2.0% 2.2% 2.4% 1.8% 1.7% 1.8% 1.6%

Admin exp 2.9% 1.6% 2.2% 2.2% 2.0% 2.2% 1.8% 2.5% 2.5% 1.9% 2.2% 2.1%

EIT 19.7% 25.4% 19.1% 25.6% 22.1% 22.3% 22.1% 1.5% 16.7% 16.7% 16.7% 17.2%

Net margin 4.9% 5.6% 5.8% 4.9% 4.2% 5.2% 2.8% 5.2% 4.8% 3.4% 4.0% 4.5%


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Investment Risks

Demand for smartphone slows down. Smartphone shipment growth in China

slowed down in 2015 due to downward pressure of China’s economy. Truly as the

component supplier of Chinese smartphone brands may suffer from slower

revenue growth if Chinese smartphone shipment remains sluggish. However,

Truly’s expansion of its product portfolio to automotive products helps it to capture

the demand growth of automobiles in China and offset the slower growth of

smartphone business.

ASP erosion and margin pressure of smartphone display panel. ASP of

smartphone display module declined over 25% yoy in 2015 and the downtrend

remains due to fierce competition in the display panel market. Truly will still be

able to stabilize its margin in LTPS/AMOLED supply thanks to 1) increasing

penetration of LTPS/AMOLED in upcoming Chinese smartphone brands and 2)

earlier ramp up of its G4.5 LTPS/AMOLED plant in 4Q16E, compared to peers in

2017E-18E.

Delay of slow ramp up of G4.5 LTPS/AMOLED plant. Truly’s LTPS/AMOLED

production line in G4.5 plant is expected to commence mass production by

4Q16/4Q17. Any delay or slow ramp up resulting in low yield rate may impair

Truly’s profitability.

Intensifying competition in fingerprint module market. Increasing adoption

of fingerprint module in mid-to-high end smartphones are attracting new

competitors into the market. We see that there are many fingerprint

manufacturers, such as O-Film, Primax and SPEED has surpassed the original

leader CrucialTec and Dreamtech. The intensified competition may trigger price

war in fingerprint module market like the one in the camera module and touch

panel market

Mon, 29 Aug 2016


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Management profiles

Exhibit 53: Management profiles

Name Age Position Role and responsibilities Description

Mr. Lam Wai Wah 63 Chairman, Founder Overall strategic planning and business

development

Mr. Lam has over 39 years of experience in the

electronics industry.

Mr. Wong Pong Chun,

James

57 Chief Operating Offier

Internal control, risk management,

investors’ relationship, and external affairs

Mr. Wong joined the Group in 1987.

He has over 30 years of industry experience.

Mr. Cheung Tat Sang 60 Executive Director Sales of LCD products and other electronic

components

Mr. Cheung joined the Group in 1989.

He had been the sales manager for a number of

electronics companies for over 10 years.

Mr. Li Jian Hua 52 Non-executive Director Factory production management Mr. Li joined the Group in 1989.

He graduated from the Jilin University of Technology

and Engineering Management in 1987.

He is also the Managing Director of a PRC

subsidiary of the Company, Truly Opto-Electronics

Limited.

Mr. Ma Wai Tong 44 Chief Financial Officer,

Company Secretary

Overall strategy and financial affairs Mr. Ma joined the Group in January 2011.

He holds a Bachelor’s degree in Accountancy and a

Master’s degree of Professional Accounting from the

Hong Kong Polytechnic University.

He has 19 years’ experience of auditing.


Mon, 29 Aug 2016


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44.5% 7.3% 48.2%

Chan Kin SunLam Wai Wah

(Chairman)Public

Truly

Semiconductors

5G TFT

production line

4.5G AMOLED

production line

Truly contribution to registered capital: RMB6mn

Truly investment: RMB3.3bn (total RMB6.3bn)

Investment: RMB3.9bn

Truly (Shanwei)

100%100%

Huizhou Zhongkai

53%27.12% 100%

Huizhou

Investment

19.88%

Shareholding structure

Exhibit 54: Shareholding structure


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Financial Summary – Truly Int’l (732 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E

Year to Dec FY14A FY15A FY16E FY17E FY18E

Income Statement (HK$ mn)

Ratios

LCD Products 18,540 16,068 15,550 16,896 19,280

Gross margin (%) 11.6 10.9 11.4 11.8 11.8

Electronic consumer products 2,876 3,359 5,457 6,334 6,731

Operating margin (%) 8.1 6.6 7.3 8.0 7.8

Net margin (%) 5.2 4.4 4.3 5.1 5.0

Selling & dist'n exp/Sales (%) 1.8 2.2 1.7 1.7 1.8

Turnover 21,416 19,427 21,006 23,230 26,011

Admin exp/Sales (%) 2.0 2.1 2.1 2.2 2.3

YoY% 4 (9) 8 11 12

Payout ratio (%) 39.1 34.4 30.0 30.0 30.0

COGS (18,929) (17,305) (18,620) (20,478) (22,950)

Effective tax (%) 22.7 16.6 17.0 17.0 17.0

Gross profit 2,486 2,122 2,386 2,752 3,061

Total debt/equity (%) 76.8 68.9 107.1 122.0 110.1

Gross margin 11.6% 10.9% 11.4% 11.8% 11.8%

Net debt/equity (%) 25.1 38.9 36.8 36.3 49.1

Other income 79 25 (14) 64 68

Current ratio (x) 1.0 1.1 1.4 1.6 1.4

Selling & distribution (396) (433) (348) (404) (464)

Quick ratio (x) 0.9 0.9 1.2 1.4 1.2

Admin (429) (410) (449) (519) (603)

Inventory T/O (days) 29 37 37 37 37

R&D 0 0 0 0 0

AR T/O (days) 95 94 94 94 94

Other opex (7) (30) (32) (36) (40)

AP T/O (days) 109 119 119 119 119

Total opex (832) (873) (829) (958) (1,107)

Cash conversion cycle (days) 15 12 12 12 12

Operating profit (EBIT) 1,733 1,274 1,543 1,858 2,022

Asset turnover (x) 1.2 1.1 1.0 0.9 0.9

Operating margin 8.1% 6.6% 7.3% 8.0% 7.8%

Financial leverage (x) 2.5 2.6 2.8 3.1 3.1

Provisions 0 0 0 0 0

EBIT margin (%) 8.1 6.6 7.3 8.0 7.8

Finance costs (94) (103) (139) (222) (243)

Interest burden (x) 0.9 0.9 0.8 0.8 0.8

Profit after financing costs 1,640 1,171 1,404 1,636 1,779

Tax burden (x) 0.7 0.8 0.7 0.8 0.8

Associated companies & JVs (18) (48) (192) (77) (77)

Return on equity (%) 16.0 11.9 12.1 14.7 14.4

Pre-tax profit 1,622 1,123 1,212 1,559 1,702

ROIC (%) 15.2 10.8 11.9 13.1 12.3

Tax (373) (195) (239) (278) (302)

Profit from discontinued operations 0 0 0 0 0


Minority interests (131) (83) (76) (88) (96)

Balance Sheet HK$ mn

Net profit 1,118 845 898 1,192 1,303

Fixed assets 6,781 6,969 8,065 9,244 11,755

YoY% (31) (24) 6 33 9

Intangible assets & goodwill 0 0 0 0 0

Net margin 5.2% 4.4% 4.3% 5.1% 5.0%

Associated companies & JVs 735 1,224 1,032 955 878

EBITDA 2,494 2,212 2,495 2,913 3,321

Long-term investments 134 77 77 77 77

EBITDA margin 11.6% 11.4% 11.9% 12.5% 12.8%

Other non-current assets 298 235 235 235 235

EPS (HK$) 0.384 0.291 0.309 0.410 0.448

Non-current assets 7,948 8,505 9,410 10,511 12,945

YoY% (33) (24) 6 33 9

DPS (HK$) 0.150 0.100 0.093 0.123 0.134

Inventories 1,511 1,776 1,911 2,101 2,355

AR 5,578 5,004 5,411 5,984 6,700


Prepayments & deposits 4 5 5 6 6

Cash Flow HK$ mn

Other current assets 63 890 890 890 890

EBITDA 2,494 2,212 2,495 2,913 3,321

Cash 3,627 2,055 5,343 7,273 5,718

Chg in working cap 820 336 (113) (157) (163)

Current assets 10,784 9,730 13,560 16,253 15,669

Others 17 72 0 0 0

Operating cash 3,331 2,620 2,382 2,756 3,158

AP 5,657 5,652 6,082 6,688 7,496

Tax (457) (231) (1) (239) (278)

Tax 31 1 239 278 302

Net cash from operations 2,874 2,389 2,381 2,517 2,880

Accruals & other payables 0 0 0 0 0

Bank loans & leases 4,569 2,883 3,290 3,290 3,290

Capex (2,179) (1,439) (2,101) (2,323) (3,902)

CB & othe debts 0 0 0 0 0

Investments (600) (617) 0 0 0

Other current liabilities 33 43 43 43 43

Dividends received 0 0 0 0 0

Current liabilities 10,291 8,579 9,653 10,299 11,131

Sales of assets 9 6 0 0 0

Interests received 40 30 52 89 91

Bank loans & bonds 869 2,000 4,963 7,163 7,163

Others (116) (853) 0 0 0

CB & leases 0 0 0 0 0

Investing cash (2,847) (2,873) (2,048) (2,234) (3,810)

Deferred tax & others 49 60 60 60 60

FCF 28 (483) 333 283 (930)

MI 446 510 586 674 770

Issue of shares 0 0 0 0 0

Non-current liabilities 1,364 2,570 5,609 7,897 7,993

Buy-back (55) 0 0 0 0

Minority interests 0 0 0 0 0

Total net assets 7,077 7,086 7,708 8,569 9,491

Dividends paid (611) (378) (276) (331) (381)

Net change in bank loans 1,585 (543) 3,370 2,200 0

Shareholder's equity 7,077 7,086 7,708 8,569 9,491

Interests paid (94) (103) (139) (222) (243)

Share capital 58 58 58 58 58

Others 0 0 0 0 0

Reserves 7,019 7,027 7,650 8,511 9,433

Financing cash 825 (1,023) 2,955 1,647 (624)

BVPS (HK$) 2.45 2.43 2.44 2.65 2.95

Net change in cash 852 (1,506) 3,288 1,930 (1,555)

Exchange rate or other Adj (31) (66) 0 0 0

Total debts 5,437 4,883 8,253 10,453 10,453

Opening cash 2,806 3,627 2,055 5,343 7,273

Net cash/(debts) (1,774) (2,755) (2,837) (3,107) (4,662)

Closing cash 3,627 2,055 5,343 7,273 5,718

CFPS (HK$) 0.987 0.822 0.819 0.866 0.991


Mon, 29 Aug 2016


of 64

Exhibit 55: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE

Hist (%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Truly Intl Hldgs 732 HK 3.45 1,293 8.8 11.9 11.2 8.4 6.2 32.8 13.5 0.83 2.9 2.7 1.42 1.30 5.8 5.2 38.9 10.9 4.4 11.9 12.1 -15.9 10.2

HSI

22909.54

12.4 12.7 11.5 -2.9 10.3 5.9 2.15 3.6 3.4 1.18 1.15

9.6 9.1 4.7 11.3

HSCEI

9550.04

7.7 8.2 7.5 -6.1 9.7 3.8 2.14 3.9 3.6 0.94 0.90

12.2 11.0 6.6 11.1

CSI300

3307.09

14.8 13.8 12.2 7.4 12.6 10.6 1.30 2.2 2.1 1.82 1.66

12.3 12.1 3.2 8.0

Adjusted sector avg*

24.0 28.8 24.7 49.9 28.2 10.0 1.11 1.2 0.9 1.03 1.21 6.9 7.9 10.1 10.7 2.2 2.9 5.3 2.8 5.0

Tcl Display Tech 334 HK 0.60 157 0.3 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 6.2 N/A 226.0 8.9 -0.2 N/A N/A -6.2 -21.1

Varitronix Intl 710 HK 3.41 323 0.6 3.7 N/A N/A N/A N/A N/A N/A 52.9 N/A 0.59 N/A 5.1 N/A 0.0 N/A 12.1 16.3 N/A -4.2 -30.2

Q Technology Gro 1478 HK 2.74 366 0.4 23.3 11.8 9.5 98.0 23.5 42.1 0.28 N/A 1.9 1.87 1.72 13.8 8.7 0.0 10.9 4.6 9.9 15.5 56.6 81.5

Byd Electronic 285 HK 6.48 1,882 6.5 13.9 10.7 9.7 30.3 10.4 15.5 0.69 N/A 0.9 1.19 1.08 4.8 3.8 0.0 6.5 3.1 9.0 10.4 9.5 51.0

Shenzhen O-Fil-A 002456 CH 38.00 5,873 119.8 82.6 44.5 31.0 85.7 43.4 53.9 0.83 0.2 0.3 6.17 5.74 33.6 26.7 59.9 12.6 2.6 9.4 13.5 21.3 33.3

Boe Technology-A 000725 CH 2.45 12,799 82.4 53.3 39.5 30.2 34.8 30.6 19.8 2.00 0.8 0.9 1.11 1.07 9.0 7.6 6.6 19.8 3.4 1.0 3.1 4.3 4.3

Tianma-A 000050 CH 18.60 3,908 98.1 38.0 37.7 28.4 0.6 32.9 21.7 1.74 0.3 0.5 1.93 1.87 17.7 17.6 0.0 16.3 5.3 5.2 5.2 -7.7 -9.5

Au Optronics Cor 2409 TT 12.85 3,898 31.6 25.2 N/A 17.8 N/A N/A 19.3 N/A 2.7 2.5 0.72 0.67 2.9 4.3 14.9 11.1 1.4 -6.1 -0.2 1.6 42.5

Innolux Corp 3481 TT 11.65 3,654 22.8 10.7 N/A 49.4 N/A N/A -22.7 N/A 1.7 2.0 0.54 0.52 1.8 4.6 3.2 12.8 3.0 -6.8 -3.8 -1.7 19.1

Japan Display 6740 JP 140.00 831 12.5 N/A N/A 21.3 N/A N/A -69.3 N/A N/A 0.9 0.24 0.24 1.2 1.1 6.1 7.8 -3.2 -11.5 -1.5 -25.5 -28.9

Sharp Corp 6753 JP 131.00 6,445 23.3 N/A N/A 168.4 N/A N/A -121.7 N/A N/A 0.0 N/A 2.51 -16.4 15.6 N/A 9.5 -10.4 N/A -18.4 36.5 -10.9

Samsung Electron 005930 KS 1612000.00 204,123 350.3 12.8 10.4 9.6 22.6 8.9 12.9 0.80 1.3 1.6 1.14 1.31 3.4 3.1 0.0 38.5 9.3 10.2 12.8 5.6 25.7

Lg Display Co Lt 034220 KS 30500.00 9,755 30.9 11.3 23.0 12.5 -51.0 84.6 0.3 88.44 1.6 1.6 0.92 0.87 2.8 3.4 13.3 15.2 3.4 0.9 3.9 0.2 18.2

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


Mon, 29 Aug 2016

TCL Display (334 HK)

of 64

TCL Display (334 HK) – Rising star of TCL Improved product mix with increasing proportion of laminated

modules.

Riding on integrated platform of TCL Group, especially CSOT for LTPS modules.

Initiate BUY with TP HK$0.72 based on 12x FY17E PE.

Pick up growth momentum with upgraded product mix. TCLD is one of the

leading domestic smartphone LCD module manufacturers in China, it ranking 3rd

place with 5.9% market share in 1H16. Through vertical integration, we expect

TCLD to achieve significant growth with 26%/31% revenue/earnings CAGR from

FY15 to FY18E, thanks to 1) new customers gained 2) upgraded product mix with

an increasing proportion of laminated modules, 3) ramp up of LTPS modules

backed by sister company, CSOT’s G6 LTPS panel line from FY17E onwards.

LTPS is a key growth driver from FY17E onwards. LTPS smartphone

penetration in China is expected to reach 45% in FY18E from 28% in FY15.

TCLD plans to increase LTPS product sales to meet the future demand of HD

display modules for high-end smartphone manufacturers. As LTPS module ASP

is 2 times of TFT module ASP, we believe it will stimulate sales growth of 26%

CAGR from FY15 to FY18E. We expect LTPS will account for 27%/47% of total

revenue in FY16/17E from ~7% in FY15 thanks to CSOT’s panel supply. .

Riding on the integrated platform of TCL Group. TCLD’s sister company,

CSOT will commence mass production of its G6 LTPS production line from early

2017E with production capacity of 88mn units. Thus, from 2017E onwards,

TCLD’s LTPS panel supply can be secured by CSOT, which will help TCLD to

increase its bargaining power and obtain orders from top China smartphone

vendors. Moreover, the JV TCLD will set up with CSOT in Wuhan is expected to

start LTPS module mass production in Oct17E. We expect the mass production of

CSOT’s G6 plant and JV will help GPM expansion as it improves proportion of

LTPS module shipments which enjoys 1%-2% higher GPM and saves tariffs and

logistics expenses.

Initiate BUY with TP HK$0.72 based on 12x FY17E PE: With upgraded product

mix of more laminated modules and LTPS modules supported by CSOT, we

expect TCLD to record a 3-year EPS CAGR of 23% from FY15 to FY18E.

Risks: (1) Slowdown in LCD module demand in China, (2) ASP erosion in LCD

module market is faster than expected

Initial Coverage

BUY

Close price: HK$0.60

Target Price: HK$0.72 (+20.0%)

Key Data

HKEx code 334 HK

12 Months High (HK$) 1.55

12 Month Low (HK$) 0.59

3M Avg Dail Vol. (mn) 3.09

Issue Share (mn) 2,031.37

Market Cap (HK$mn) 1,239.13

Fiscal Year 12/2016

Major shareholder (s) TCL Group (36.8%)

Source: Company data, Bloomberg, OP Research Closing price are as of 26/08/2016

Price Chart

1mth 3mth 6mth

Absolute % -3.2 -19.7 -12.9

Rel. MSCI CHINA % -8.5 -30.6 -32.3

Company Profi le TCL Display Technology Holdings Limited

provides small-to-medium-sized display

modules. The Company is primarily engaged

in the research and development,

manufacturing, and sales and distribution of

LCD modules for handheld mobile devices

on an ODM basis. TCL Display Technology

has operations throughout Asia and sells its

products globally.

Exhibit 56: Forecast and Valuation Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E

Revenue 2,614.0 2,242.8 2,924.9 3,720.2 4,484.1

Growth (%) 35.0 (14.2) 30.4 27.2 20.5

Adj. net Profit 124.4 72.6 43.4 102.8 164.6

Growth (%) 90.8 (41.6) (40.3) 137.0 60.1

Diluted EPS (HK$) 0.000 0.053 0.026 0.061 0.097

EPS growth (%) n.a. n.a. (51.3) 137.0 60.1

Change to previous EPS (%) 0.0 0.0

Consensus EPS (HK$) n.a. n.a.

ROE (%) 78.5 78.8 22.7 31.4 35.7

P/E (x) 0.0 11.6 23.8 10.0 6.3

P/B (x) 0.0 8.0 3.6 2.6 1.8

Yield (%) 0.0 0.0 0.0 0.0 0.0

DPS (HK$) 0.000 0.000 0.000 0.000 0.000


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Aug/15 Nov/15 Feb/16 May/16

HK$334 HK MSCI CHINA

Mon, 29 Aug 2016


of 64

(size <3.5") feature phone,

9%

(size 3.5"-6") smart phone,

83%

(size >6") other mobile devices,

8%

Pick up growth momentum with improved product mix

Ranking 3rd in China small-to-medium size display module market

TCLD is one of the major providers of small-to-medium size display modules in

the PRC, engaged primarily in the research and development, manufacture,

sales and distribution of LCD modules for use mainly in mobile phones. TCLD

provides display modules (size <3.5”) for feature, (size 3.5” – 6”) for smartphone

and (size >6”) for other mobile devices. In FY15, smartphone display modules

accounted for the 83% of total revenue.

Exhibit 57: TCLD FY15 revenue breakdown


According to ASKCI Consulting, TCLD ranked 3rd

in smartphone LCD display

modules in 1H16 in terms of sales revenue. Among the top 10 smartphone LCD

display module manufacturers, only 4 companies have panel production line

support, TCLD is one of them, backed by sister company, China Star

Optoelectronic Technology (CSOT). Stable supply of panel is important for

module manufactures, as some large smartphone companies in China will only

place orders with module manufacturers which have their own panel production

line. Thus, we believe TCLD is well positioned to ride on CSOT to expand its

client base.

Exhibit 58: Top 10 smartphone LCD display module manufacturers in the PRC by sales revenue

(RMB million)

1H16

2015

Company Ranking Revenue Market share Ranking Revenue Market share Panel production line

Truly International (732 HK) 1 4,421 19.79% 1 8,958 22.45% √

BOE Technology (000725 CH) 2 2,189 9.80% 2 4,405 11.04% √

TCL Display Technology (334 HK) 3 1,319 5.90% 4 1,890 4.74% √

(Backed by CSOT)

Shenzhen DJN Optronics 4 1,015 4.54% 4 1,730 4.27%

BYD Electronic (285 HK) 5 907 4.06% 5 1,835 4.60%

Success Electronics (002289 CH) 6 742 3.32% 6 2,377 5.96%

Tianma Microelectronics(000050 CH) 7 655 2.93% 7 1,285 3.22% √

SZ COE (5371 TT) 8 563 2.52% 9 982 2.46%

Shenzhen TXD Technology 9 500 2.24% 8 1,169 2.93%

Lead Mobile Display 10 322 1.44% 10 852 2.13%

Source: ASKCI Consulting, OP Research

TCLD is the leading small and

medium size display module

providers in PRC

TCLD ranked 3rd in smartphone

LCD display module in 1H16 and

is one of the four module

manufacturers with panel

production line, backed by sister

company, CSOT

Mon, 29 Aug 2016


of 64

1,754 2,003

1,336 822 629 509

183

611

907 2,103 3,092

3,975

9%

23%

40%

72%

83%

89%

0%

20%

40%

60%

80%

100%

0

1,000

2,000

3,000

4,000

5,000

FY13 FY14 FY15 FY16E FY17E FY18E

Laminated Modules Non-laminated Modules

Laminated modules revenue proportion

(RMBmn)

98%93%

81%

55%

43%35%

2%7%

19%

45%

57%65%

35

45

38 41

48

52

0

10

20

30

40

50

60

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15 FY16E FY17E FY18E

Non-laminated modules Laminated modules Blended ASP (RMB)

(RMB)

Product mix improved with increasing laminated modules

penetration

TCLD’s display modules include laminated and non-laminated modules. In 1H16,

laminated modules shipment penetration hit 39% from 19% in FY15, and we

expect it will keep increasing to hit 45%/57%/65% in FY16/FY17/FY18E. As ASP

of laminated modules is 3 times of that non-laminated modules, we believe the

improved product mix will bring 3-years ASP CAGR of 11.2% to RMB52 in FY18E,

and thus revenue CAGR of 26% to RMB4,484mn in FY18E.

Exhibit 59: Laminated modules shipment penetration and blended ASP


Exhibit 60: Sales by segment from FY13 to FY18E


We estimate TCLD will record

26% revenue CAGR from FY15 to

FY18E, thanks to increasing

proportion of laminated module

Mon, 29 Aug 2016


of 64

Turnaround player after getting listed in 2015

TCLD listed on HKEx mainboard by reverse takeover in 1H15:

Exhibit 61: Milestones of TCLD Technology

Aug 2010 Proview International suspended trading in HKEx

Feb 2014 Proview International announced acquisition of TCLD with aggregate consideration of

HK$ 550mn:

1) HK$205.5mn by issuance of 587,142,857 shares at HK$0.35 per share;

2) HK$199.5mn by issuance of CB, convertible into 570,000,000 shares at HK$0.35 per

share;

3) HK$ 10mn by issuance of the bond B to a wholly-owned subsidiary of TCL Corp.;

4) HK$135mn by issuance of 385,714,286 shares at HK$0.35 per share.

Mar 2015 Share consolidation of every ten shares at HK$0.01 each into one share at HK$0.10.

Apr 2015 Proview International allotted 972,857,143 shares at HK$0.35 per share, TCL Corp. &

associates hold 49.9% of total shares.

Dec 2015 Mr. Lau disposed 64,000,000 shares (5.56% of total shares) and remained the 2nd

largest shareholder.

Dec 2015 TCL Corp. converted 569,999,996 conversion shares at HK$0.35 per share, and

increased its equity share from 49.9% to 66.5%.

Jun 2016 TCLD issued new shares by placing 258.2mn shares at HK$0.62 per share,

representing 13.04% of enlarged share capital

Jun 2016 TCLD entered into a MOU with CSOT to form a JV, for LTPS display module

production. TCLD will hold not less than 50% stake and total investment of RMB900mn


In FY15, TCLD recorded RMB70mn net loss, if exclude the one-off RMB142mn

listing expenses, the adjusted net profit should be RMB72mn, representing 42%

yoy decrease. The drop in FY15 net profit resulted from the 14.2% yoy decrease

of ASP and 2.9 ppt decrease in GPM to 6.2% while the sales volume remained

flat. We expect TCLD to achieve 26%/31% sales/net profit 3 years CAGR from

FY15 to FY18E, driven by: 1) orders from potential new clients as TCLD aims to

acquire two new clients in FY16E; 2) increasing order size from existing clients,

like Gionne, who jumped to 8th in PRC China mobile phone brands ranking in

1Q16; 3) upgraded product mix of higher laminated modules shipment

penetration to 45%/57%/65% in FY16/17/18E from 19% in FY15, and higher

LTPS modules shipment penetration to 9%/23%39% in FY16/17/18E from 0.5%

in FY15.

TCLD listed in HKEx by reverse

takeover of Proview International

Holdings Limited in Apr 2015

We expect TCLD to record

26%/31% sales/net profit CAGR

from FY15 to FY18E

Mon, 29 Aug 2016


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72%66%

58%

44%37%

31% 28% 24%

18%22%

28%

39%42%

45%42%

40%

8% 8% 9% 12% 15% 19%24%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016E 2017E 2018E 2019E 2020E


81108 148 228 261

294

33

3947

7095

122

0

100

200

300

400

500

600

700

2013 2014 2015 2016E 2017E 2018E


(mn units)

LTPS will be a key growth driver from FY17E onwards

Increasing LTPS penetration in China

We expect smartphone LTPS display shipments in China to record a

3-year-CAGR of 25.8% from 47mn in 2015 to 122mn in 2018E, thanks to

increasing penetration and extension of China smartphone vendors’ market

share.

Exhibit 62: Smartphone display shipments in China from 2013 to 2018E


LTPS penetration is China smartphone is expected to increase from 28% in 2015

to 45% in 2018E, given its appealing high resolution, vivid colors, and quick

response.

Exhibit 63: LTPS penetration in China


Smartphone LTPS display


record 3-year CAGR of 25.8% to

2018E

LTPS penetration in China

smartphone is expected to

increase to 45% in 2018E from

28% in 2015

Mon, 29 Aug 2016


of 64

46%

28%

30%43%

18% 14%

4%

25%

1%

38%24%

4%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



62%

48%

40%60%

24%

24%15%

56%

13%

45%32%

10% 10%23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



TCLD’s customers, including Huawei/Lenovo/Meizu, are expected to increase

their smartphone LTSP display penetration to 62%/24%/56% in 2016E from

46%/18%/25% in 2015.



China-based smartphone vendors are grabbing global market share rapidly. It is

expected that Huawei, Oppo, Vivo and Xiaomi will rank 3rd/4th/5th/6th in global

smartphone shipments in 2016E. Therefore, high penetration of LTPS of China

smartphone models will drive LTPS panel and module shipments.


2Q16

Ranking

2015

Ranking

Company

2Q16 market share

2015 market share

1 1 Samsung 22.4% 22.7%

2 2 Apple 11.8% 16.2%

3 3 Huawei 9.4% 7.4%

4 8 Oppo 6.6% 3.3%

5 9 Vivo 4.8% 3.0%

- - Other 45.0% 18.8%

- - Total Shipment

(mn units) 343.3 1,432.9


Margin expansion by increasing LTPS proportion

In FY15, LTPS sales contributed ~7% of total revenue, TCLD will continue this

trend and aims to further improve LTPS sales proportion to 24%/47% in

FY16/17E.

As TCLD’s LTPS module ASP is 2 times of its TFT module ASP, and enjoys

1%-2% higher GPM, we believe raising proportion of LTPS will help on margin

expansion and relieve ASP pressure.

We believe LTPS shipment in FY16/17/18E will hit 6mn/18mn/33mn units, with

RMB110/RMB99/RMB89 ASP in FY16/17/18E, LTPS sales will hit

RMB701mn/1,767mn/2,981mn in FY16/17/18E, representing 24%/47%/66% of

total sales.


rapidly grabbing global market

share rapidly

We believe TCLD will keep

increasing LTPS module

proportion, thus driving sales

growth and margin expansion

Mon, 29 Aug 2016


of 64

0

6

18

33

58

64

60

52

0.5%

9.0%

23.0%

39.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

10

20

30

40

50

60

70

FY15 FY16E FY17E FY18E

LTPS shipment Non-LTPS shipment LTPS shipment penetration

(mn unit)

231

110 99

89

38 35 33 29

0

50

100

150

200

250


LTPS ASP Non-LTPS ASP

(RMB)

157 701

1,767

2,981

2,086

2,224

1,954

1,503

7%

24%

47%

66%

0%

10%

20%

30%

40%

50%

60%

70%

-

1,000

2,000

3,000

4,000

5,000


LTPS Non-LTPS LTPS revenue proportion

Exhibit 66: Shipment by LTPS/Non-LTPS module


Exhibit 67: ASP of LTPS/Non-LTPS module


Exhibit 68: Revenue by LTPS/Non-LTPS module


Mon, 29 Aug 2016


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Riding on the integrated platform of TCL Group

Securing LTPS panel supply from sister company, CSOT, to increase

bargaining power for first-tier smartphone vendors orders

China Star Optoelectronic Technology (CSOT) is a hi-tech enterprise founded in

2009 in Shenzhen and 76% owned by TCL Group. CSOT is one of the major

large size display panel manufacturers ranking 5th and 6

th in 2014 and 2015.

Exhibit 69: Global ranking of top 6 TV display panel manufacturers

Rankings

2014 2015

Company Market Share Company Market Share

1 Samsung Display 22.4% LG Display 20.5%

2 LG Display 21.0% Innolux 19.2%

3 Innolux 20.3% Samsung Display 18.9%

4 AUO 11.6% BOE 13.2%

5 CSOT(SZ) 10.0% AUO 10.1%

6 BOE 5.8% CSOT(SZ) 9.5%

Others 9.0% Others 8.7%

Source: WitsView, OP Research

CSOT had two 8.5G LCD and AMOLED production lines in 2014 and is the major

TV panel supplier of TCL Multimedia (1070 HK). In order to diversify the product

portfolio, CSOT ventured into small and medium size panel market by building the

6G LTPS line in Wuhan in September 2014 with an investment capital of RMB

16.0bn.

On February 10th 2016, CSOT started trial operations of the first-ever 6G LTPS

line in Wuhan, and mass production is expected to begin in 1Q17E, being one of

the eight companies which can produce LTPS/AMOLED panel in China. The

maximum estimated production capacity will be 88mn units per year with

production value over RMB10bn.

Exhibit 70: 2016 Small and medium size LTPS & AMOLED lines operated in China


CSOT 6 15k (30k max) Wuhan 1Q17 MP LTPS/AMOLED

BOE

5.5 30k LTPS

Ordos 2014 MP LTPS


6 45k LTPS

Chengdu 2Q17MP LTPS

48k AMOLED 2Q18MP AMOLED

Tianma

5.5 30k Xiamen MP LTPS

5.5

15k LTPS

Shanghai

1Q16 MP LTPS


6 30k Xiamen 3Q16 MP LTPS

6 30k Wuhan 2Q17 MP LTPS/AMOLED

Truly 4.5

60k LTPS

Huizhou

Aug16 MP LTPS

30k AMOLED 2H17 MP AMOLED

6 TBC Huizhou TBC AMOLED

AUO 6 20k (30k max) Kunshan 4Q16 MP AMOLED

EverDisplay 4.5 15k Shanghai 3Q17 MP LTPS/AMOLED

6 TBC Shanghai 2Q18 MP AMOLED

GoVisionox 5.5 15k Kunshan 3Q16 MP AMOLED

CSOT is one of the leading large

size display panel manufacturer

owned by TCL Group, ranking

5th

/6th

in 2014/2015.

CSOT entered small and medium

size panel market by building the

6G LTPS line from September

2014.

CSOT started trial operations of

the first-ever 6G LTPS line in

Feb16 and MP is expected to

begin in 1Q17E.

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On 13 Jun 2016, TCLD announced that it had entered into a MOU with its parent

group 30.2% owned panel maker subsidiary, Wuhan CSOT, to form a JV that

TCLD would not less than 50% stake in the JV for expanding its LTPS display

module production capacity. Total investment for the JV is RMB900mn. The JV

will own 10 LTPS display module production lines with annual production capacity

of 50mn units (~57% of Wuhan CSOT’s LTPS panel total capacity). TCLD

expects completion of installation of the 10 production lines for the JV by Dec16E,

trial production in Jun17E and mass production in Oct17E. We haven’t taken into

account of JV in our forecast as currently only MOU is signed.

We believe the MP of G6 LTPS panel and JV will help TCLD secure LTPS panel

supply from CSOT, and increase its bargaining power to get orders from first-tier

China smartphone vendors. Moreover, the G6 plant will help TCLD to improve

ASP and GPM with an increasing proportion of LTPS module, besides, the JV is

set up near CSOT (Wuhan)’s panel plant, it can save logistic expenses, and tariffs

(currently LTPS panels are supplied by Sharp), thus further help margin

expansion.

Securing orders from sister group, TCL Communication (2618 HK)

and other China smartphone vendors

TCLC and Gionne are the largest customers of TCLD, accounting for over

27.8%/~25% of the total revenue in 1H16. As TCLC is undergoing its privatization

and restructuring its China business, we expect TCLD to benefit from the market

repositioning of TCLC in China market from FY17E onwards.

In 2Q16, 3 out of top 5 smartphone vendors are Chinese suppliers. Huawei, Oppo,

and Xiaomi stand in top 5 by surpassing LG, Coolpad and Sony. We expect

Chinese smartphone vendors to gain global market share from FY16E onwards

due to their increasing reputation and attractive price to performance ratio.

To diversify the risk of excessive reliance on TCLC and Gionne, TCLD has been

actively looking for more independent first-tier third party and gained 3 new

customers (Chino-e, Konka and Tecno) in FY15. TCLD will strive to acquire two

more core clients in FY16E.

TCLD will set up a JV with CSOT

in Wuhan, for LTPS module

production with 50mn units

capacity, expected MP time is

Oct17E.

We believe CSOT will help TCLD

secure LTPS panel, increasing

bargaining power to get order

from first-tier China smartphone

vendors, improve ASP and GPM.

Secure orders from TCLC and

other China smartphone vendors


expected to gain more market

share in 2016E.

TCLD has acquired 3 new clients

in FY15, and targets to acquire

two more core clients in FY16E.

Mon, 29 Aug 2016


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Rankings

2014 2015 2Q16

Company Market Share Company Market Share Company Market Share

1 Samsung 24.4% Samsung 22.7% Samsung 22.4%

2 Apple 14.8% Apple 16.2% Apple 15.3%

3 Lenovo+Motorola 7.2% Huawei 7.4% Huawei 8.2%

4 Huawei 5.7% Lenovo 5.2% OPPO 5.5%

5 LG 4.6% Xiaomi 4.9% Vivo 4.8%

6 Xiaomi 4.4% LG 4.2% Xiaomi 4.3%

7 Coolpad 4.2% TCL 3.5% Lenovo 4.1%

8 Sony 3.9% OPPO 3.3% LG 3.9%

9 TCL 3.3% Vivo 3.0% ZTE 3.1%

10 ZTE 3.1% ZTE 3.0% TCL 2.9%

Others 24.4% Others 18.8% Others 20.3%

Shipment Total

(Unit: mn) 1,301.7 1,432.9 343.3


Exhibit 72: TCLD’s suppliers, customers and strategic partners


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Exhibit 73: Riding on the integrated platform of TCL Group


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Initiate BUY with TP HK$0.72 based on 12x FY17E PE

Steady shipment growth with upgraded product mix. Shipment of 1H16

increased by 22.7% to 33.2mn units, mainly due to increased order from existing

clients, i.e. Gionee, and Tecno. Besides, laminated modules shipment penetration

increased from 19% in FY15 to 39% in 1H16, and LTPS shipment penetration

increased from 0.5% in FY15 to 5%-7% in 1H16. We expect FY16/17/18E

shipment to increase by 21%/10%/10% yoy as TCLD targets to acquire two more

core clients in FY16E and is grabbing market share by ranking 3rd

among

smartphone LCD module manufacturers in PRC in 1H16 from 4th in 2015. ASP is

expected to increase by 8%/16%/9% in FY16/17/18E, as laminated modules

shipment penetration will improve to 45%/57%/65% in FY16/17/18E from 19% in

FY15 and LTPS shipment penetration will improve to 9%/23%/39% in

FY16/17/18E from 0.5% in FY15. Thus, we expect sales will record 26% CAGR

from FY15 to FY18E.

Solid support from sister company, CSOT, whose G6 LTPS production line

starts MP from FY17E onwards. CSOT’S G6 LTPS production line is expected

to commence mass production from FY17E onwards, and from then CSOT can

provide LTPS panel supply to TCLD which helps TCLD to obtain large orders

from top China smartphone vendors. We expect TCLD’s GPM can be improved to

7.3% in FY18E from 6.2% in FY15 given an increasing proportion of higher

margin LPTS modules.

1H16 result review. Revenue was up 51.2% yoy to RMB1.45bn, thanks to 22.7%

shipment growth from existing clients, and 23.1% ASP growth from upgraded

product mix. GPM was down 3.5ppts yoy to 3.1%, due to the panel price surge.

Adj. net profit was down 90% yoy to RMB4mn driven by slump in GPM.

Management showed the confidence by improving GPM from 2H16E onwards as

they are now transferring the material costs increase to clients gradually. We

expect the FY16/17/18E GPM to be improved to 4.9%/6.5%/7.3%, respectively.

Initiate BUY with TP of HK$0.72: With better product mix of more laminated

modules and LTPS modules and stable panel supply by CSOT from FY17E

onwards, we expect TCLD to have a 3-year EPS CAGR of 31% from FY15 to

FY18E. We initiate our BUY rating on TCLD with a target price of HK$0.72 based

on 12x FY17E PE, representing 20% upside.

We expect shipment FY16/17/18E

to grow at 22%/10%/10% yoy and

ASP to grow at 8%/16%/9% in

FY16/17/18E, leading to 26%

CAGR of sales from FY15 to

FY18E.

CSOT’s G6 LTPS MP from FY17E

onwards helps TCLD to obtain

large orders from top China

smartphone vendors and margin

expansion.

1H16 sales was up 51.2% yoy

thanks to 22.7% shipment growth

and 23.1% ASP growth from

upgrade of product mix. Net profit

was down 90% yoy driven by

3.5ppts drop of GPM to 3.1%, due

to panel price surge.

We initiate BUY on TCLD with TP

of HK$0.72 based on 12x FY17E

PE.

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Exhibit 74: Results summary

RMBmn 1H13 2H13 1H14 2H14 1H15 2H15 1H16 1H16 YOY 2H16E

Revenue 608 1,329 1,169 1,445 959 1,284 1,450 51% 1,475

COGS (580) (1,183) (1,080) (1,295) (895) (1,208) (1,405) 57% (1,378)

Gross profit 28 146 88 150 64 76 45 -29% 97

Other income & gains 2 2 5 28 12 19 19 55% 5

Selling exp (9) (31) (22) (21) (12) (20) (18) 49% (22)

Admin exp (16) (28) (22) (32) (27) (24) (35) 31% (32)

Other opex 2 (3) (0) (0) (0) (142) (2) 517% 0

Operating profit (EBIT) 8 87 50 124 36 (92) 9 -76% 49

Provisions or other items 0 0 0 0 0 0 0 n.a. 0

Finance costs (1) (8) (6) (2) (3) (5) (8) 165% (6)

Profit after financing costs 7 79 44 122 33 (97) 1 -98% 43

Associated cos 0 0 0 0 0 0 0 n.a. 0

Jointly controlled cos 0 0 0 0 0 0 0 n.a. 0

Pre-tax profit 7 79 44 122 33 (97) 1 -98% 43

Tax (3) (17) (16) (26) 7 (13) 3 -55% (3)

Minority interests 0 0 0 0 0 0 0 n.a. 0

Adj. net profit 4 61 28 96 41 32 4 -90% 39

HoH%

Revenue 119% -12% 24% -34% 34% 13% 2%

Gross profit

416% -40% 70% -58% 19% -41%

117%

Net profit 1427% -53% 237% -57% -22% -87% 881%

YoY%

Revenue 92% 9% -18% -11% 51% 15%

Gross profit

212% 3% -28% -49% -29%

28%

Adj. net profit 611% 57% 43% -67% -90% 24%

Key ratios

GPM 4.7% 11.0% 7.6% 10.4% 6.6% 5.9% 3.1% 6.6%

Selling exp 1.5% 2.3% 1.8% 1.5% 1.3% 1.6% 1.3%

1.5%

Admin exp 2.6% 2.1% 1.8% 2.2% 2.8% 1.9% 2.4% 2.1%

EIT 39.4% 22.2% 35.6% 21.5% -22.3% -13.9% -505.7% 7.8%

Adj. net margin 0.7% 4.6% 2.4% 6.6% 4.3% 2.5% 0.3% 2.7%


Mon, 29 Aug 2016


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Investment risks

Unstable global economy decelerates the demand for smartphone and

other mobile devices: Downward pressure of global economy slows down the

shipment growth of smartphones from 27.7% yoy in 2014 to 10% yoy in 2015,

which bought negative effect on sales volume of upstream components such as

LCD panel. However, we expect TCLD can still improve the sales volume by

riding on the faster growth of China smartphone vendors and transition from LCD

to LTPS/AMOLED.

Intensifying competition in the LCD panel module market: LCD panel module

market is highly competitive with thin margins due to fewer technical differences

and monopoly of suppliers. Price war may be triggered and TCLD may lose its

market share in China to competitors such as BOE Technology. However, from

2017 onwards, TCLD will become one of the four modules manufacturers which

have panel supply support, which will help TCLD to obtain orders of top China

smartphone vendors and increase its bargaining power.

Market expects downward movement on LCD panel ASP and margin:

Smartphone display module market is facing the price erosion and margin due to

oversupply. However, we expect TCLD to be able to maintain its GPM by

increasing proportion of laminated modules and LTPS modules in the product mix

and develop ultra-thin touch modules to increase ASP.

Relying on the trading business with a few customers: The largest customers

of TCLD is TCLC, As a result, the business of TCLD is easily affected by the

operation of the largest customers, especially the TCL Corporation. However,

TCLD is actively looking for potential clients, and has already added 3 new

customers in FY15.

Mon, 29 Aug 2016


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Management profiles

Exhibit 75: Management profiles

Name Age Position Description

Mr. Yuan Bing 45 Chairman Mr. Yuan joined TCL Group from 1999. Mr. Yuan is the chairman of the board of directors of

T.C.L. Industries Holdings (H.K.) Limited and the vice president of TCL Corporation and is

responsible for the overall operation and management.

He was an executive director and the chief financial officer of TCL Multimedia Technology

Holdings Limited, a company whose shares are listed on the Main Board of the Stock

Exchange (stock code: 1070), from October 2006 to January 2009. He was the

vice-president of TCL Corporation from July 2007 to January 2011. He was the senior

vice-president of TCL Corporation from February 2011 to July 2011.

Mr. Yuan has over 23 years of experience in the consumer electronics products industry.

Mr. Li Jian 45 CEO Mr. Li Jian joined TCL in 1996. Mr. Li Jian is the chief executive director and is responsible

for the full operational management.

Before Mr. Li became the CEO, he served as deputy general manager of TCL Display from

April 2008 to September 2010, responsible for marketing issues.

Mr. Li has extensive experience in sales, company and regional management.

Mr. Li obtained Bachelor of Human Resource Management Science (Online Education)

from Nankai University in July 2009. Mr. Li graduated from Triangle Institute of international

business management and innovative leadership training held by Tsinghua University in

March 2011 and achieved the Ursuline College MBA in January 2013.

Ms. Yang Yunfang 41 CFO Ms. Yang Yunfang joined TCL group in 2006. Ms. Yang is the executive director and is

responsible for the overall operation and management.

Since July 2010, she served as financial director, responsible for financial management

and supervision.

Ms. Yang has extensive experience in accounting and Finance. Prior to joining TCL display

in 2002 March to July 2005, Ms. Yang served as accounting director in Minghui Industrial

(Shenzhen) Co., Ltd. Ms. Yang worked in SONY precision parts (Huizhou) Co., Ltd from

August 2005 to July 2006 at the operation management and finance department.

Ms. Yang graduated from Jiangxi University of Finance and Economics in July 1999, and

received a bachelor degree of accounting.

Mr. Zhao Yong 46 Executive director Mr. Zhao joined TCL Group in 2004. Mr. Zhao was appointed as an executive director after

Mr. Li Yuguo’s resignation, responsible for the overall operational management of TCL

Display.. Mr. Zhao is also the chief operation officer and director of CSOT since Sep 2011,

responsible for supply chain management and monitoring of engineering related matters.

Mr. Zhao obtained an EMBA decree at China Europe International Business School in Sep

2011.

Mr. Ouyang Hongping 39 Executive director Mr. Ouyang joined the TCL group in 2004. Mr. Ouyang is the executive director and is

responsible for the overall operation and management

From August 2004 to December 2008, Mr. Ouyang served as the chief engineer in TCL

Display. Since January 2009, Mr. Ouyang became the deputy general manager of TCL

Display, responsible for the supervision of engineering related issues, including the

development, procurement, production planning and management.

Mr. Ouyang has more than 10 years of experience in LCD industry, and was awarded as

"TCL Group Star Manager of the year” in 2004, 2005, 2009 and 2011.

Mr. Ouyang graduated from Nanchang University in July 1999 and received a bachelor

degree in industrial automation.


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36.77% 16.60% 38.90%7.73%

TCL AssociateTCLGroup Lau Ko Yuen, Tom Public

Shareholding structure

Exhibit 76: Shareholding structure


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Financial Summary –TCL Display (334 HK) Year to Dec FY14 FY15 FY16E FY17E FY18E

Year to Dec FY14 FY15 FY16E FY17E FY18E

Income Statement (RMB mn)

Ratios

Non-laminated Modules 2,003 1,336 822 629 509

Gross margin (%) 9.1 6.2 4.9 6.5 7.3

Laminated Modules 611 907 2,103 3,092 3,975

Operating margin (%) 6.6 (2.6) 1.8 3.4 4.4

Net margin (%) 4.8 3.2 1.5 2.8 3.7

Turnover 2,614 2,243 2,925 3,720 4,484

Selling & dist'n exp/Sales (%) 1.6 1.5 1.4 1.2 1.1

YoY% 35 (14) 30 27 21

Admin exp/Sales (%) 2.1 2.3 2.3 2.0 1.9

COGS (2,376) (2,103) (2,782) (3,480) (4,156)

Payout ratio (%) 0.0 0.0 0.0 0.0 0.0

Gross profit 238 140 142 240 328

Effective tax (%) 25.3 (9.4) 0.0 15.0 15.0

Gross margin 9.1% 6.2% 4.9% 6.5% 7.3%

Total debt/equity (%) 145.0 186.6 86.4 63.0 43.9

Other income 31 30 18 4 4

Net debt/equity (%) 40.2 Net cash Net cash Net cash Net cash

Selling & distribution (43) (33) (40) (43) (49)

Current ratio (x) 1.0 1.0 1.1 1.1 1.1

Admin (54) (52) (67) (74) (84)

Quick ratio (x) 0.8 0.8 0.9 1.0 1.0

R&D 0 0 0 0 0

Inventory T/O (days) 29 27 27 27 27

Listing expenses 0 (142) 0 0 0

AR T/O (days) 41 97 97 97 97

Other opex (0) (0) (1) (2) (2)

AP T/O (days) 84 141 141 141 141

Total opex (97) (227) (109) (119) (135)

Cash conversion cycle (days) (14) (16) (16) (16) (16)

Operating profit (EBIT) 172 (57) 52 125 197

Asset turnover (x) 2.3 1.8 1.9 1.8 1.8

Operating margin 6.6% -2.6% 1.8% 3.4% 4.4%

Financial leverage (x) 7.3 13.6 8.3 6.3 5.5

Provisions 0 0 0 0 0

EBIT margin (%) 6.6 (2.6) 1.8 3.4 4.4

Interest Income 2 2 5 4 5

Interest burden (x) 1.0 1.1 0.8 1.0 1.0

Finance costs (8) (8) (14) (8) (8)

Tax burden (x) 0.7 (1.1) 1.0 0.9 0.9

Profit after financing costs 167 (64) 43 121 194

Return on equity (%) 78.5 78.8 22.7 31.4 35.7

Associated companies & JVs 0 0 0 0 0

ROIC (%) 66.9 (43.8) 227.3 443.0 988.9

Pre-tax profit 167 (64) 43 121 194

Tax (42) (6) 0 (18) (29)



Balance Sheet (RMB mn)

Adj. net profit 124 73 43 103 165

Fixed assets 169 164 198 231 276

YoY% 91 (42) (40) 137 60

Intangible assets & goodwill 0 0 0 (0) (0)

Net margin 4.8% 3.2% 1.5% 2.8% 3.7%

Associated companies & JVs 0 0 0 0 0

Reported net profit 124 (70) 43 103 165

Long-term investments 14 18 18 18 18

EBITDA 214 (19) 92 166 242

Other non-current assets 8 10 10 10 10

EBITDA margin 8.2% -0.8% 3.1% 4.5% 5.4%

Non-current assets 191 193 227 260 304

EPS (RMB) 0.000 0.042 0.021 0.049 0.078

YoY% n.a. n.a. (51) 137 60

Inventories 187 158 209 262 313

DPS (HK$) 0.000 0.000 0.000 0.000 0.000

AR 291 598 779 991 1,195

Prepayments & deposits 120 99 129 164 197


Other current assets 231 0 0 0 0

Cash Flow (RMB mn)

Cash 203 287 483 602 764

EBITDA 214 (19) 92 166 242

Current assets 1,033 1,141 1,600 2,018 2,469

Chg in working cap 33 271 52 31 32

Others 0 (55) 0 0 0

AP 546 810 1,072 1,340 1,601

Operating cash 247 198 144 197 274

Tax 46 36 0 18 29

Tax (42) (20) (36) 0 (18)

Accruals & other payables 143 174 227 289 348

Net cash from operations 205 178 108 197 255

Bank loans & leases 106 137 180 180 180

CB & othe debts 175 0 0 0 0

Capex (73) (64) (73) (74) (90)

Other current liabilities 0 0 0 0 0

Investments 0 0 0 0 0

Current liabilities 1,016 1,157 1,479 1,827 2,158

Dividends received 0 0 0 0 0

Sales of assets 0 0 0 0 0

Bank loans & leases 0 0 0 0 0

Interests received 2 2 5 4 5

CB & othe debts 0 59 59 59 59

Others 0 28 0 0 0

Deferred tax & others 14 13 13 13 13

Investing cash (71) (34) (68) (71) (85)

MI 0 0 0 0 0

FCF 134 144 40 127 170

Non-current liabilities 14 72 72 72 72

Issue of shares 0 0 128 0 0

Buy-back 0 0 0 0 0

Total net assets 194 105 276 379 544


Dividends paid (75) (79) 0 0 0

Shareholder's equity 194 105 276 379 544

Net change in bank loans 25 54 43 0 0

Share capital 100 139 139 139 139

Interest paid (8) (5) (14) (8) (8)

Reserves 94 (34) 138 240 405

Others 9 0 0 0 0

Financing cash (49) (30) 156 (8) (8)

BVPS (HK$) 0.00 0.08 0.17 0.23 0.33

Net change in cash 85 113 196 119 163

Total debts 281 196 239 239 239

Exchange rate or other Adj (18) (30) 0 0 0

Net cash/(debts) (78) 91 244 363 526

Opening cash 136 203 287 483 602

Closing cash 203 287 483 602 764

CFPS (HK$) 0.000 0.129 0.064 0.117 0.151


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Exhibit 77: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth avg

t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2 (x)

EPS FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist

(%)

Div yld

FY1

(%)

P/B

Hist (x)

P/B

FY1 (x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist

(%)

ROE

Hist (%)

ROE

FY1 (%)

Sh px

1-mth %

Sh px

3-mth %

Tcl Display Tech 334 HK 0.60 157 0.3 11.6 23.8 10.0 (51.3) 137.0 22.7 1.05 0.0 0.0 8.01 3.59 (51.4) 10.8 Net cash 6.2 3.2 78.8 22.7 (4.8) (22.1)

HSI 22,909.54 12.2 12.7 11.5 (4.2) 10.2 5.4 2.36 3.6 3.4 1.18 1.15 9.7 9.1 3.4 12.2

HSCEI 9,550.04 7.6 8.2 7.5 (7.3) 9.6 3.3 2.48 3.9 3.6 0.93 0.90 12.3 10.9 5.1 11.7

CSI300 3,307.09 14.7 13.7 12.2 7.1 12.5 2.2 2.1 1.8 1.7 12.4 12.1 1.2 8.0

Adjusted sector avg* 22.1 25.3 22.0 18.9 23.4 6.4 1.2 1.5 1.1 1.0 1.1 5.6 6.7 8.9 12.2 3.3 2.2 5.5 (1.9) 20.0

Truly Intl Hldgs 732 HK 3.45 1,293 8.8 11.9 11.0 9.6 8.0 14.3 13.6 0.81 2.9 2.9 1.40 1.26 6.5 6.0 36.3 10.9 4.4 11.0 12.1 (16.1) 14.2

Byd Electronic 285 HK 6.48 1,883 6.4 13.9 10.7 9.7 30.3 10.4 15.5 0.69 N/A 0.9 1.19 1.08 4.8 3.8 0.0 6.5 3.1 9.0 10.4 8.7 51.8

Shenzhen O-Fil-A 002456 CH 38.00 5,870 117.7 82.6 44.5 31.0 85.7 43.4 53.9 0.83 0.2 0.3 6.17 5.74 33.6 26.7 59.9 12.6 2.6 9.4 13.5 12.5 35.1

Boe Technology-A 000725 CH 2.45 12,791 80.6 53.3 39.5 30.2 34.8 30.6 19.8 2.00 0.8 0.9 1.11 1.07 9.0 7.6 6.6 19.8 3.4 1.0 3.1 2.9 6.5

Tianma-A 000050 CH 18.60 3,906 100.0 38.0 38.3 28.9 (0.8) 32.5 21.2 1.80 0.3 0.5 1.93 1.88 17.7 17.6 0.0 16.3 5.3 5.2 5.2 (15.1) (8.6)

Au Optronics Cor 2409 TT 12.85 3,900 31.5 25.2 N/A 17.8 N/A N/A 19.3 N/A 2.7 2.4 0.72 0.67 2.9 4.3 14.9 11.1 1.4 (6.1) (0.2) 3.2 43.3

Innolux Corp 3481 TT 11.65 3,656 22.9 10.7 N/A 49.4 N/A N/A (22.7) N/A 1.7 2.0 0.54 0.52 1.8 4.6 3.2 12.8 3.0 (6.8) (3.8) (0.4) 21.4

Japan Display 6740 JP 140.00 838 12.7 N/A N/A 21.3 N/A N/A (69.3) N/A N/A 0.9 0.24 0.24 1.2 1.1 6.1 7.8 (3.2) (11.5) (1.5) (24.3) (28.2)

Sharp Corp 6753 JP 131.00 6,499 23.5 N/A N/A 168.4 N/A N/A (121.7) N/A N/A 0.0 N/A 2.51 (16.4) 15.6 N/A 9.5 (10.4) N/A (18.4) 37.9 (7.1)

Samsung Electron 005930 KS 1,612,000.00 204,786 349.2 12.8 10.4 9.6 22.6 8.9 12.9 0.80 1.3 1.6 1.14 1.31 3.4 3.1 0.0 38.5 9.3 10.2 12.8 5.4 24.4

Lg Display Co Lt 034220 KS 30,500.00 9,786 30.9 11.3 23.0 12.5 (51.0) 84.6 0.3 88.44 1.6 1.6 0.92 0.87 2.8 3.4 13.3 15.2 3.4 0.9 3.9 4.3 19.1

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


Mon, 29 Aug 2016

Display Module

of 64

LTPS backplane

LTPS-LCD AMOLED

LCD Injection OLED Injection

LTPS process portion: ~50% LTPS process portion: ~70%

Appendix I: Upgrade from LTPS panel to AMOLED panel

LTPS panel production line can be upgraded to AMOLED panel production line by

upgrading production process from injecting liquid crystal to make LTPS-LCD to

injecting organic light-emitting diode (OLED) to make AMOLED, as they use the

same LTPS backplane as the base material. Benefiting from the self-illuminated

nature, AMOLED panel is nearly 2/3 thinner than LTPS-LCD panel as it has fewer

layers such as Back Light Unit and Color Filter Glass.

Exhibit 78: Difference process of LTPS and AMOLED panel

Source: Tianma, OP Research

Exhibit 79: Cost Comparison for 5 inch FHD Panels

US$ per pcs Rigid AMOLED Flexible AMOLED LTPS LCD

Material 6.3 10.9 9.4

- Array 0.3 1.2 0.3

- Cell 1.4 3.0 1.9

- Package 0.2 1.8 n.a.

- Module 4.4 4.9 7.2

Indirect expense 0.7 1.2 0.9

Labour 3.1 3.3 2.1

Depreciation 4.2 8.5 2.3

Yield 40%-80% ~60.4% ~90.3%

Total 14.3 23.9 14.7


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Appendix II: ADAS background

Advanced Driver Assistant Systems (ADAS) are automotive systems developed

to assist, complement and eventually substitute the driver in the complex process

of controlling a vehicle, aiming to improve driving safety and efficiency. ADAS

provide features including Blind Spot Detection (BSD), Driver Drowsiness

Detection (DDD), Auto Emergency Brake (AEB), Front Collision Warning (FCW),

Automatic Parking System (APS), Lane Keeping System (LKS), Panorama

Parking Assist (PPA), Adaptive Cruise Control (ACC), Lane Departure Warning

(LDW), Pedestrian Collision Warning (PCW), Intelligent Headlight Control (IHC)

and Night Vision Device (NVD). Sensor devices such as video camera, infrared

camera, radar and LIDAR (Laser Imaging Detection Ranging) are adopted to

support these functions.

Exhibit 80: ADAS typical technology features

Name Blind Spot Detection

Driver Drowsiness

Detection

Auto Emergency

Brake

Front Collision

Warning

Automatic Parking

System

Lane Keeping

System

Short form BSD DDD AEB FCW APS LKS

Chinese 盲區監測疲勞預警自動緊急制動前車防撞預警自動泊車車道保持

Illustration

Description Detect vehicles in

driver's blind spot

Detect driver's

drowsiness and

provide warning

Track cars in front

and brake

automatically

Alert the driver if

closing in too quickly

on a car ahead

Automatically move

the vehicle from a

traffic lane into a

parking sot

Automatically keep

the car in the correct

lane

Example Volvo XC 60

Audi Q5

Haval H9

VW Tiguan

Toyota Highlander

Nissan Qashaqai

Nissan Murano

Luxgen 7

Ford Kuga

Nissan X-Trail

Audi Q3

Jeep Cherokee

Name Panorama Parking

Assist

Adaptive Cruise

Control

Lane Departure

Warning

Pedestrian Collision

Warning

Intelligent Headlight

Control

Night Vision Device

Short form PPA ACC LDW PCW IHC NVD

Chinese 全景泊車自我調整巡航車道偏離警示行人偵測警示遠近光動輔助夜視輔助

Illustration

Description Provide a panorama

view of the vehicle

when parking

Automatically adjust

speed to maintain a

safe distance from

traffic ahead

Alerts driver when the

vehicle begins to

move out of its lane

Detects pedestrian

ahead and warns the

driver

Automatically and

optimally controlling

the headlight during

night-time

Able to see clearly in

darkness

Example Haval H8

Geely GX9

Ford EDGE

Toyota Highlander

Hyundai Santa Fe

Jiangling X7

Nissan Qashqai

Luxgen U6

Toyota RAV4

Volvo XC60

Luxgen U6

Luxgen 7

Source: Gasgoo, OP Research

Mon, 29 Aug 2016

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Exhibit 81: ADAS Technology Overview

Source: Texas Instruments, OP Research

Mon, 29 Aug 2016

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24/08/2016 Chinasoft Intl 354 Reiterate BUY on solid 1H16 results BUY Chloe Liu/Yuji Fung

23/08/2016 HC International 2280 Core business in transition BUY Yuji Fung

23/08/2016 Xtep 1368 1H16 result is better than it looks BUY Walter Woo

23/08/2016 Dynagreen Environmental 1330 Expecting a robust 2H16E from 1H16 BUY Bruce Yeung

22/08/2016 Wasion Group 3393 1H16 profit decline as lower demand from power grid HOLD Bruce Yeung

18/08/2016 361 Degrees 1361 1H16 muted, but dividend surprised BUY Walter Woo

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