Corning And Samsung Shift Manufacturing Capacity From Korea To China

Corning (NYSE:GLW) and Samsung Display have signed a memorandum of understanding with the government of Wuxi New District, China, to set up a LCD glass manufacturing plant under a new joint venture. ^[1] The new entity will supply LCD glass substrates to Samsung’s LCD panel manufacturing facilities in China. The companies already have a similar joint venture in South Korea. The move to set up a plant in China was driven by the anticipated growth in the LCD TV industry in the country over the long term and the advantages that accrue from local sourcing. At present, China’s LCD TV end market constitutes more than 20% of the worldwide market, and this number is expected to rise in the future.

The Flat Panel Display (FPD) industry is currently going through a downturn due to declining prices of LCD glass caused by overcapacity. We, however, anticipate the continuing increase in demand along with slowing capacity addition to lead to a revival in the industry in the next couple of years. The plant is expected to begin production by the end of 2013, and we think this new entity is a step in the right direction for Corning.

We currently have a stock price estimate of $13 for the company, approximately 10% above its current market price.

See our complete analysis for Corning here

The new JV for China

Corning specializes in LCD glass substrate technology while Samsung Display specializes in LCD display. The complementary skill sets have resulted in the alliance and the set-up of the plant in China. The companies are currently in the process to sign a mutual agreement and construction on the new facility under the JV is expected to begin by end-2012 with production to start by end-2013. The new entity will supply LCD glass substrates to Samsung Suzhou LCD Co. Ltd. in China.

China: A large market with high growth potential

According to market research firm DisplaySearch, 44 million LCD TVs were shipped to retailers in China last year. This number is expected to rise to 56 million units by 2014. Also, China’s end market for LCD TVs constitutes more than 20% of the worldwide market. The large market size and the growth potential makes it an attractive destination for LCD panel manufacturers, including Samsung. Corning, which manufactures LCD glass substrates utilized by panel manufacturers, is partnering with Samsung in China to take advantage of this growth opportunity.

The companies already have a similar joint venture, Samsung Corning Precision, in South Korea. When the plant in China starts production, a portion of Samsung Corning Precision’s capacity at Korea will become idle. The local manufacturing of LCD glass in China instead of sourcing from Korea is anticipated to bring cost benefits to the JV over the long term, and thus benefit both Samsung and Corning.

Flat Panel Display (FPD) industry to revive

Even though companies in the FPD industry, including Corning, have been reeling under declining prices, the business environment is expected to improve over the next couple of years. Prices declined substantially from the beginning of 2011 due to overcapacity and oversupply of LCDs. However, as a result of continuously increasing demand for LCD TVs and negligible capacity additions in 2011 and 2012 so far, we anticipate the prices to improve in the next couple of years. Improved prices will drive margins and profits up again.

Overall, we think that the Wuxi plant of Corning-Samsung JV is being set up at a good time and is a step in the right direction for Corning.

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1. Corning and Samsung to Extend LCD Collaboration in China, July 24 2012, www.corning.com [↩]