Japan Display is No Bright Idea for Average Investors
Apple AAPL -0.27% iPhone users stare at Japan Display's screens all day. But that doesn't make the company's initial public offering a good deal for ordinary investors.
Japan Display was formed from the wreckage of the loss-making liquid crystal display businesses of Hitachi, 6501.TO -1.99% Toshiba 6502.TO +0.91% and Sony 6758.TO -1.12% in 2012, with investment from a government-backed fund. The company's public listing is a success for the state-led restructuring, implemented in fear that Japan Inc. would lose technological competitiveness.
Combining technology from its three predecessors, the company boasts leading LCD capabilities, especially in compact and power-efficient "low temperature polycrystalline silicon" panels. The restructuring helped the company cleanse itself of "inefficient decision-making" by the former parent companies and created "an appropriately sized workforce," according to offering documents. The smartphone boom of the past few years helped the company get on its feet.
Japan Display excels in the sheer manufacturing prowess needed to crank out highly customized displays on tight production cycles for demanding smartphone makers, says IHS IHS +0.46% analyst Jim Masuda. Apple is its top customer, accounting for 32% of sales, followed by Sony at 10%.
In theory, Japan Display should have among the highest operating profit margins in the industry since it focuses on profitable panels that go into smartphones and tablets rather than larger, less lucrative TV-sized panels. Yet earnings before interest, taxes, depreciation and amortization were 13% of revenue in 2013, less than 18.5% for Korean rival LG Display, 034220.SE -2.46% and 17.3% for Taiwan-based Au Optronics, 2409.TW -1.46% despite these competitors producing more TV-sized panels.
The lower margins may come from having to invest in cutting-edge technology and manufacturing to please a big customer such as Apple. Operating in Japan also likely means the company's basic cost base is higher than in Korea or Taiwan, though the weakening yen should help to a degree. It's also possible that cost synergies resulting from three companies coming together didn't go far enough.
The offering hardly looks cheap. After crediting the company with proceeds from the IPO, shares at the price range announced Monday would go for around 1.3 to 1.5 times book value. LG Display and Au Optronics trade at 0.8 and 0.6 times book, respectively.
Investors would be right to wait to see if Japan Display can translate technological advantages into better profits. "Display me the money" should be their mantra.