Investment Conclusion
The production stoppage at Matsushita Battery Industrial's Osaka plant will
likely have a negative impact on LCD IT panel prices and memory prices.
According to our analysis, MBI's Osaka plant makes up 14% of global lithium-
ion notebook battery demand, translating into about 4mn packs for the next
quarter. The production stoppage at the plant essentially will reduce global
notebook battery supply by at least 4mn units in 4Q07, or 14% of global
demand based on our calculations.
Summary
* On decreased notebook shipment expectations, we think that LCD makers will
transition some of their notebook capacity into monitor panel lines. While
the transition takes place, we expect LCD notebook panel prices to drop first.
The additional monitor panel capacity should accelerate monitor panel ASPs
drop during the upcoming price-fall season from November 2007 to February
2008. For memory, we believe that the already weak DRAM market will be even
more negatively affected in the short term as 4Q NB shipments are likely to
be lower than expected. Nonetheless, we maintain our view on industry
fundamentals and continue to expect that 1Q08 will be the bottom for the
industry.
* Essentially, the fire incident at Matsushita battery plant further
bolsters our pricing assumptions for the LCD industry. During the next price-
fall season, we expect monitor panel prices to drop by 25%, notebook panels
by 15% and TV panels by 5%.
* According to our channel checks, MBI's largest customers are Toshiba and
Acer. In terms of MBI's client breakdown, Toshiba (3-Underweight, covered
by Steven Myers) accounts for 27% of MBI's total notebook battery shipments,
Acer (1-Overweight, covered by Alex Yang) 20%, and Dell (2-Equal weight,
covered by Harry E. Blount) 13%. The lithium-ion battery market for
notebooks has been experiencing a serious shortage. Considering some
notebook makers' high dependency on MBI, notebook panel shipments could take
a big hit going forward.
* If we assume that NBPC production decreases by 13% as a result of the
battery plant fire, this would make up around 5% of total PC production in 4Q.
Under this scenario, this may impact 13% of DRAM used for NBPCs, or 5% of
DRAM for total PCs. Taken as a whole, this may impact 3% of total DRAM for
the quarter.
* The rechargeable battery industry has been experiencing a shortage
following a series of recalls due to safety issues. The MBI fire incident
will likely further tighten the shortage situation in the notebook battery
market. As a result, we expect ASPs of rechargeable notebook batteries to be
strong going forward.
* We once again recommend investors accumulate LCD names in December 2007,
when most of the seasonal price declines would have taken place. Our
expectation of very tight supply in 2008 remains intact.
Fire at Matsushita's battery plant, negative for IT panel prices
According to Bloomberg, Matsushita Battery Industrial (MBI) halted production
of lithium-ion batteries at a factory in Osaka after a fire broke out on
September 30. MBI has lithium-ion battery plants in Japan and China. MBI's
global production capacity is 23mn cells per month based on 3Q07 capacity,
and the Osaka plant's capacity is 18mn cells per month (11mn for cylindrical
battery cells and 7mn for prismatic batteries for handhelds). In terms of
notebook battery capacity, the Osaka plant accounts for 84% of MBI's total
battery production capacity. According to our analysis, MBI's Osaka plant
makes up 14% of global cylindrical lithium-ion notebook battery demand,
translating into about 4mn units for the next quarter. Our checks with
battery industry sources indicate that the line recovery will likely take at
least three months; it could take longer if the line test takes longer.
We believe that the production stoppage at MBI's Osaka plant will have a
somewhat negative impact on the overall IT sector, including the LCD industry
and memory chip industry for the rest of 2007. The rechargeable notebook
battery market has been suffering a shortage. As a result, we forecast this
fire accident could reduce global notebook supply by 14% or 4mn units,
assuming three months of line stoppage.
While the fire incident will likely have a negative impact on LCD panel and
DRAM prices, we expect ASPs of rechargeable notebook batteries to remain
strong going forward.
The notebook battery industry's supply has been very tight. As a result,
notebook makers who depend on MBI for batteries will likely face further
difficulties in securing battery supply. This should decrease overall
notebook unit shipments. According to our industry checks, MBI's top clients
are Toshiba and Acer.
With decreased notebook shipments, LCD panel makers should experience more
aggravated slow seasonality, further bolstering our aggressive assumption of
25% monitor panel ASP drop during the upcoming price-fall season (from
November 07 to February 08). LCD makers will likely reallocate some of their
notebook production capacity to monitor panels, as they expect notebook
shipments to decline on battery shortage. This should aggravate monitor panel
oversupply during the upcoming price falling season, and accelerate ASP
declines.
On the flip side, we expect ASPs for cylindrical lithium-ion batteries to be
stable and strong. As the battery industry was already experiencing a
distinct shortage on quality issues, we think that there is no direct
beneficiary as a result of the fire. However, tighter supply in the market
should increase or maintain overall notebook battery ASPs.
Impact to DRAM Further Short-Term Negative
If we assume that NBPC production decreases by 13% as a result of the battery
plant fire, this would make up around 5% of total PC production in 4Q. Under
this scenario, this may impact 13% of DRAM used for NBPCs, or 5% of DRAM for
total PCs. Taken as a whole, this may impact 3% of total DRAM for the quarter.
According to our Taiwanese analyst, Alex Yang, he expects NB ODMs to record
shipment growth of 5-10% QoQ in 4Q07, below the historical 15-25% growth due
to component makers' capacity limitations.
We note that the DRAM market hit a peak in end-06, showing a downward trend
until the three-month rebound from May 07. After the short rebound, the DRAM
market began to show another decline from August. In light of the battery
plant fire, we believe that the already weak DRAM market will be even more
negatively affected in the short term as 4Q NB shipments are likely to be
lower-than-expected. Nonetheless, we maintain our view on industry
fundamentals and continue to expect that 1Q08 will be the bottom for the
industry.
Notebook supply decline to accelerate seasonal LCD price fall from November
According to our analysis, the fire incident will reduce global notebook
battery supply by 4mn units in 4Q07, or 14% of global demand. Currently, LCD
makers are enjoying very high margins in the notebook panel business. However,
we conclude that the decreased battery supply will likely negatively impact
notebook panel prices first, as panel makers reallocate their notebook
capacity to monitor production. The time it takes for panel makers to
transition a notebook line into a monitor line is about a month. During the
transition time, we expect notebook panel prices to decline. The next impact
will be on LCD monitor panels. We expect the additional monitor panel
production capacity should accelerate monitor panel ASP drop during the
price-fall season from November 2007 to February 2008.
Essentially, our ASP drop assumption during the upcoming price-fall season is
intact; a 25% drop for monitor panels, a 15% drop for notebook panels, and a
5% fall for TV panels. The fire incident at Matsushita battery plant further
supports our assumptions considering: 1) the plant caught fire on September
30, and 2) LCD makers would need to spend about one month transitioning some
of their notebook lines into monitor lines, early November is when the
additional monitor panel capacity would come into effect. Early November is
when we originally expected the seasonal price fall to begin. Overall, the
14% notebook supply decrease on the fire incident should translate into a 7-
8% monitor panel supply increase in 4Q07, as the average monitor panel size
is bigger than that of notebook panels.
We forecast the additional monitor panel capacity to drag monitor panel
prices by about 3%. If the fire broke out during a high demand season, there
would have been no material impact on overall panel prices. Unfortunately, we
think the monitor supply increase on the fire incident is taking place when
the LCD industry is on the verge of entering a price-fall season. We have not
modified our panel price estimates. We simply have become more confident on
our price cut assumptions.
We recommend investors accumulate LCD names in December 2007, when most of
the seasonal price declines would have taken place. Our expectation of 2008
exhibiting very tight supply is still intact.
We expect some notebook makers to face difficulties in securing batteries
According to our channel checks, MBI's customer base includes major global
notebook makers, such as Toshiba and Acer. In terms of MBI's client breakdown,
Toshiba accounts for 27% of MBI's total notebook battery shipments, Acer 20%,
and Dell 13%. The lithium-ion battery market for notebooks has been
experiencing a serious shortage. Considering some notebook makers' high
dependency on MBI, notebook panel shipments could take a big hit going
forward.
Acer, in particular, sources about 40% of its panel needs from Samsung
Electronics, 40% from LG.Philips LCD and 20% from AU Optronics (2-Equal
weight, covered by Naiwen Kerr). We think these panel suppliers should also
experience material notebook panel shipment declines as well.
Figure: MBI's Client Breakdown
Source: Lehman Brothers estimates
Strong notebook battery prices
The rechargeable battery industry has been experiencing a shortage following
a series of recalls due to safety issues. The MBI fire incident will likely
further tighten the shortage situation in the notebook battery market. As a
result, we expect ASPs of rechargeable notebook batteries to be strong going
forward.
