Win-Win: Wintek Buys Third-generation TFT LCD Capacity from HannStar Displays
August 13th, 2007by David Barnes, Vice President of Strategic Analysis
On Friday, 10 August, HannStar Display (TSE 6116) and Wintek (TSE 2384) announced that Wintek would take possession of the entire 3rd-generation TFT LCD campus owned by HannStar Display (HSD) on 01 December 2007. In September 2006, Wintek purchased one of the two plants on this site in Yangmei, Taoyuan province, Taiwan. HSD received $184M, a board seat and 3.1% of Wintek shares from that sale. The current deal is an all cash sale of all the remaining assets at this site, including an office building and other facilities. The asset value is $274M, and HannStar Display expects to net $142M or about 52% of this value in cash. HSD plans to reduce its debt with the proceeds of this sale. If we add this cash to the Q2’07 balance sheet, HSD debt to equity would improve from 37% to 12%. The company would have less need to borrow operating capital to sustain its remaining 5th generation TFT LCD operations. On the other side of the deal, Wintek nearly doubles its TFT LCD capacity with a plant already converted to make small/medium panels. In addition, Wintek obtains control of the entire site, which may improve logistic efficiency.
The strengths and weaknesses of each party complement the other. HannStar is relatively weak in small/medium panel technology, and Wintek is relatively strong with long experience making STN products. In addition, Wintek has capacitive touch-panel technology. It supplies modules to Apple Computer. In 2006, Wintek derived 93.9% of its revenues from modules plus 3.7% from materials and semi-finished products (such as ITO-coated glass). Only 2.4% of sales came from TFT LCD backplanes. In contrast, only 4% of HannStar Display sales came from panels smaller than 12” during 2006. By Q2’07, that figure had fallen to 2% of revenue. HSD reported shipments of 20 million small,medium “chips” in Q2’07, meaning that few, if any, of these were assembled into modules by HSD. Such foundry business kept the old fab running but added little value. Selling all the third-generation TFT capacity to Wintek leaves HSD free to concentrate on making PC monitor modules for its Hannspree brand and for other brands. Wintek gets more TFT capacity to extend its product range as STN technology loses share to TFT LCD in mobile phones and other applications.
As shown in the following table, Wintek has suffered a decline in revenue. Problems with the Motorola mobile phone business in 2006 and falling prices for passive-matrix LCD created a management challenge. Expanding into active-matrix LCD may improve the company’s prospects.
SD and Wintek Recent Income (US$ millions) and Growth
Source: company disclosures and exchange rates from the US Federal Reserve Bank
The deal will have little impact on the total TFT LCD market. I calculate an inconsequential change in the rivalry index, based on TFT capacity distribution. According to my calculations, Wintek will have 80% more TFT LCD capacity in 2008 than in 2007, but HannStar Display will have only 9% less. Wintek should be in a better competitive position, and HSD should be able to reduce its organizational cost. HSD will certainly benefit from a stronger balance sheet. Wintek has not filed financials for Q2’07 but its debt-equity ration was 39% in Q1’07, indicating that it should have no problem taking on additional assets and liabilities. Overall, this looks like a win-win deal that benefits both companies.
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