Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Ashutosh Kumar Jha [ashutoshkumar-jha@uiowa.edu]

Display Technologies February 11, 2015

Information Technology Industry Rating Market Weight

Investment Thesis We have a neutral outlook for the display technologies sub-industry. The increase in square foot shipment of glass, primarily driven by the increased demand for TVs with larger screen sizes, has been offset by decline in average selling prices (ASPs). The trend in emerging markets to shift to lower devices is expected to continue, which means the ASPs would decline even further. This trend limits the revenue upside, and thus we give this sub-industry Market Weight Rating. Drivers of Thesis

Global TV shipment volume returned to slow growth in 2014, with a 1 percent increase and is expected to increase by 2 percent in 2015. Innovation within the TV segment in terms of size, resolution, color, and design will increase replacement of TVs. This will increase the total square foot shipment of glass.

Revenue from new emerging technologies is expected to double, growing 108 percent year-over-year in 2015. The Wearables category is expected to grow at 22 percent CAGR into 2018. New uses of glass should increase overall shipment volume, which will help to offset the fall in average selling prices.

Automotive electronics is expected to have continued growth. The TFT-LCD shipments for the instrument cluster in automobiles are expected to grow 48 percent to reach 30.2 million units this year, growing further to reach 50 million units in 2018. In-Car safety innovations will drive expanded use of dashboard screens.

Risks to Thesis

Pricing Pressure from online retailers and the trend in emerging markets to shift to lower devices are pulling down the average selling prices (ASPs). The 2015 forecasted ASPs for smartphones and tablets decreased 37.5 percent and 62.2 percent, respectively, in comparison to that of 2010.

As the smartphones category has matured, the revenue growth has slowed. Smartphones are expected to grow at 9.8 percent CAGR from 2014 through 2018, down sharply from 26.3 percent increase recorded from 2013 to 2014. In order to adjust to these slower growth rates, the specialty glassmakers will continue to face pressure to lower prices.

The Display industry is highly cyclical in nature and constantly faces problems with oversupply and scarcity.

Key Industry Statistics P/E (NTM) 15.2 P/Book 2.0 P/CF 10.3 EV/Sales 2.1 EV/EBITDA 9.7 ROE 12.0 Dividend Yield 2.5 Net Debt/EBITDA 1.5 Beta 1.0 Market Cap. (B) Samsung Electronics Co. $187.32 Toshiba Corp. $16.70 Sony Corp. $31.65 LG Electronics Inc. $8.81 Pioneer Corp. $0.696 TPV Technology LTD $0.547 Corning Inc. $31.31 Asahi Glass $7.47 Nippon Electric Glass Source : Factset

$2.44

12 Month Performance Industry Description

The Display technologies industry supplies thin-film liquid crystal display (TFT-LCD) glass and other advanced display products which are used in applications such as televisions, smartphones, tablets, notebooks, wearables, automotive electronics, gaming consoles, and other emerging technologies.This industry is heavily driven by the demand of these end products. As the total shipment of these electronic products increases, the demand for glass substrates goes up. Also, the increase in average screen sizes leads to increases in total shipment volumes of glass substrates.

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EXECUTIVE SUMMARY

The Display industry to a great extent is dependent on growth of the Consumer Electronics industry. Consumer electronics industry revenue is expected to reach an all-time high of $223.2 Billion in 2015. Global television shipment increased by 1 percent in 2014 and is expected to increase by 2 percent in 2015. The smartphone segment is expected to have a 6 percent increase in unit shipment, and tablets’ unit shipment is expected to go up by 3 percent. These increases in shipment of consumer electronics will drive the demand for display glass, but the revenue growth will be limited, as the increase in total unit shipment will be offset by the decline in average selling prices.

Companies in the electronics market are striving to innovate within the TV segment in terms of size, resolution, color, and design to provide a more immersive experience. Increased demand from consumers for larger screen size TVs has been observed. According to DisplaySearch, the demand for TVs with screen sizes greater than 50” increased by 46 percent. The average screen size of smartphones is also growing and is expected to grow from 5.5” to 6.5.” This trend increasing screen size is proving to be the primary driver for the display technologies industry. Larger size screens mean increase in total volume shipment of glass, and by producing larger glass sizes companies also benefit from economies of scale, which leads to lower production costs.

The demand for higher resolution and wider color gamut means growth in Ultra-High Definition TV shipments should continue. Shipments of Ultra HD displays generated revenue of $1.9 billion in 2014, a 517 percent increase from 2013. Emergence of innovative designs such as curved TVs also will have a positive impact on the industry by boosting TV replacement sales. These replacement sales should then increase the shipment for glass substrates.

Emerging technologies such as smartwatches, Wearables such as health and fitness devices, smart eyewear, digital book readers, digital white boards, and connected thermostats are building global momentum. Display glass demand has increased in the automotive electronics segment. In-car safety innovation has driven expanded use of dashboard screens. Display is believed to be part of the window to cloud environment. As all the data computing and storage moves to cloud, consumers demand for high-end display devices is expected to

increase. Also, with high speed internet connectively reaching the masses, video data streaming, which accounts for 50 percent and 45 percent of data used on smartphones and tablets, respectively, will boost demand for high quality display glasses.

Despite the positive future outlook with volume shipment growth, this industry suffers from constant pricing pressures. Also the industry by nature is highly cyclical and is often faced with problems of overcapacity and scarcity. Thus, we recommend market weight for the display technologies industry holdings in the portfolio.

INDUSTRYANALYSIS

Display industry companies are at the top of the supply chain. Generally there is 3–6 month time lag between sales of glass and sales of TVs. Historically, the industry is prone to severe cycles. The industry often is faced with shortages, which means lost sales, and overcapacity, which means sharp price drops.

Source: Corning

Usually glass substrate manufacturers deal in local currency, whereas panel makers who are next in the supply chain deal in US dollars. This means panel makers benefit from a strengthening dollar, whereas a glass manufacturer’s revenue numbers decline if it is a US-based company such as Corning Incorporated. Often these companies indulge in hedging programs to offset the effect of foreign currency volatility.

Source: CES 2015 press

The Display technologies industry is highly dependent on the performance of the consumer electronics industry. Consumer electronics comprises products such as smartphones, tablets, notebooks, televisions, wearables,

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2014 Spending (in billons of USD)

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audio devices, automotive electronics, gaming consoles and other emerging technologies.Global technology spending for 2014 was estimated to be 1.024 Trillion USD. Smartphones and tablets are forecasted to occupy 46 percent spending share in 2015, a 109 percent increase since 2011. They remain the top two categories in terms of sales in the industry.

Smartphones

Although the revenue growth from smartphones is slowing down as the technology matures, the continued growth in unit sales makes it the primary spending driver in the industry. According to CES, smartphones spending in 2014 was $ 374 billion, which accounted for 36.5 percent of total industry spending. Emerging markets, led by China, now leads the spending. Emerging markets (Emerging APAC, including China and India, Latin America, Middle East/Africa, and Central/Eastern Europe) took the lead in terms of unit volume as it accounted for 71 percent of total global unit volume in 2014. This was more than a 30 percent increase since 2010. The mature markets (North America, Western Europe, and Developed APAC) accounted for 29 percent of total global unit volume in 2014, a decline of more than 30 percent since 2010. In 2015, emerging markets are expected to make up three-quarters of the total global unit volume. China is expected to account for 45 percent of this total, 13 percent higher than the number in 2010.

Source: CES International 2015

Global unit volume for smartphones is expected to increase, but the growth is expected to be slower. Smartphones unit volume had a growth of more than 50 percent in each year from 2011 to 2013. Since then, as the technology has matured, growth has slowed down.

In 2014, unit volume increased by 28 percent. According to CES 2015, the expected growth for 2015 is 19 percent.

Source: GfK Digital World

Global smartphone revenue has also experienced similar slowdown in growth as unit volume. Although revenue growth for the year 2011, 2012, and 2013 were 53 percent, 40 percent and 30 percent, respectively, the expected growth rate for 2015 is 5 percent. This shows how drastically the revenue potential can reduce in this industry, which makes innovation that much more important.

Source: GfK Digital World

A major part of this revenue growth slowdown can be attributed to decline in average selling prices (ASPs) of smartphones over time. In emerging markets, a shift to lower-end devices is playing a major role in pulling down the ASPs. China has witnessed a host of homegrown brands that are bringing smartphones to the masses. The

Global Market: 2010 2011 2012 2013 2014 2015f

Global Unit Volume

(in Millions) 267 431 668 996 1,274 1,510

Mature Markets 60% 51% 41% 32% 29% 25%

Developing Markets 40% 49% 59% 68% 71% 75%

CHINA 13% 34%

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emergence of brands such as OnePlus, Xiaomi, and CoolPad is creating lot of pressure on global brands. Not only do these Chinese phones cost less, but they also match or exceed the specifications of other higher priced global brand phones.

Source: CES 2015

Online retailers are also putting some pricing pressure on the industry. Consumer electronics and appliances are the category with the highest percentage of showroom presence. Due to an increase in the online retailing industry, which runs on thin margins and faces high pricing competition, the electronics component industry also faces pricing pressure.

Although smartphones are the top category for sales in this industry, they are not the main drivers of the display segment as this segment depends on screen size. Nonetheless, the average screen size of smartphones has been going up and is expected to increase from 5.5 to 6.5 inches, which should provide some increase in terms of total square feet shipment of glass for smartphones.

Television (TV)

According to CES, LCD TV spending in 2014 was $374 billion, which accounted for 13 percent of total industry spending. TV is the third major driver in this industry in terms of sales, after smartphones and tablets. For display segments, TV is the primary driver, mainly due to larger screen size, which leads to more glass substrate shipment.

Source: GfK demand projector, CES 2015

After the recession in 2009, global TV volume increased 13 percent in 2010 and continued its positive growth in 2011, according to GfK demand projector data presented during CES 2015. After that period, TV volume declined in 2012 by 8 percent and did not grow at all in 2013. Global TV volumes have returned to slow growth in 2014, with a 1 percent increase and are expected to increase by 2 percent in 2015. Average screen size has increased and replacement purchases are occurring due to peoples’ preference for larger screen TVs.

The television market is a matured market, thus innovation is critical to offset growth slowdown. Consumers’ behaviors toward any new innovation can vary in two ways. Either they can get really excited about the new value propositions and features and jump in or they can wait and watch until a clear winner emerges and choices become easier.

Now, we are in a time of uncertainty where there is no obvious new force to accelerate the market. 3D has failed to fire consumers’ enthusiasm, while consumers face ongoing reductions in spending power due to weak economic conditions. Although oil price declines have been a relief to consumers, the trend shows that they are not yet spending those extra savings just yet. Also, the new mass market products, such as tablets and smartphones, cost the same (or less) than a TV and compete directly for some video usage.

Now, the question is whether the latest innovation in the market, the 4k Ultra HD TV, to which the future of the industry is tied, will indeed catch consumers’ imaginations. If it does, will its high cost cause a similar pause in the market line that followed Philips first plasma TV in 1997?

Looking at the forecasts for the 4K Ultra HD TV, it is clear that China is the major market for this technology. In 2013, 0.9 million was the demand for UHD TV, in which

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China accounted for 0.7 million. In 2015, the total demand is expected to rise to 23.3 million and China will make up 57 percent of this demand, i.e. 13.3 million. The UHD TV shipment in the US is also expected to increase.

Source: GfK, TV Demand Projector, December 2014

Preference for larger sizes has been observed even in the U.S. market, as the percentage of the unit shipments in 2014 with a screen size 40 inches or more was 7 percent, but the expectation of this number for 2018 is 63 percent.

Source: CEA, CE Sales and Forecasts

Tablets

According to the CES, tablets spending in 2014 was $68 billion, which accounted for 7 percent of total industry spending. Tablet unit volume growth has slowed down since 2012 as the technology has matured. Tablets still are the second major revenue driver for this industry, but over the last couple of years, the number has been

disappointing as it has seen negative growth in terms of revenue.

Source: CES International 2015

According to data presented at CES International 2015, tablet unit volume has been driven by developing markets. Developing markets, which accounted for 21 percent of total unit volume in 2010, has reached 41 percent in 2014. The expectation in 2015 is an additional 3 percent increase, making the total 44 percent, almost half of the world’s total unit volume. This additional increase is a result of decline in unit volume in North America and other mature markets.

Source: GfK Digital World

After the market downturn in 2009, tablet unit sales skyrocketed in 2011. The number increased by 285 percent and a further 110 percent in 2012. Tablet unit growth remained strong in 2013, increasing further by 74 percent. The expectation was that this trend of growth would continue in 2014, but the results have been disappointing, as the growth has slowed. Nonetheless, unit sales volume is expected go up year-over-year in the future.

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Source: GfK Digital World

Tablet revenue had a similar trend to unit sales in 2011, increasing by 226 percent compared to 2010, but since then the growth figure has been moderate up to 2013. Revenue growth in 2014 evidenced a negative trend. In 2014, revenue figures declined by 1 percent compared to 2013, and the expectation is that this decline could continue in 2015. The primary region for this decline has been the decrease in average selling prices (ASPs).

Source: CES 2015

In emerging markets, shift to lower end devices is playing a major role in pulling down the ASPs. A low cost model for all seems to be the formula for success in emerging markets. Pricing pressure from local companies in those regions forces global brands to reduce prices in order to remain competitive, which ultimately drives the ASP down.

Other Components

Apart from smartphones, tablets, and television, other devices are present in the market. The most prominent among those are laptop PCs and Desktop PCs, which jointly were responsible for 19 percent of total industry spending in 2014. Initially, laptop PCs were the primary reason for a reduction in market for desktop PCs, but currently, due to the emergence of smartphones and tablets, even laptop PCs have seen their market share decline.

Non-smart mobile phones and still digital cameras made up for 4 percent of total industry spending in 2014. Other technology devices such as audio devices, gaming devices, medical technological devices, and automotive electronics devices jointly accounted for 20 percent of total industry spending in 2014.

INDUSTRY TRENDS

Size Matters: Bigger is Better

Market data has shown that customers have a desire for larger screen sizes. This fact is further supported by the recent example of Apple iPhone 6. Apple iPhone unit sales increased beyond expectations even though the average selling price was increased by around 50 dollars. One reason for the unusual pattern was the increase in screen size. The iPhone 6 screen size was 4.7 inches compared to the iPhone 5 and 5s, which had 4-inch screens.

This love for larger screen size is more prominent in the TV market. According to DispaySearch, the share of LCD TVs 50 inches and above is expected to continue its growth in the future. This provides the display industry, the glass, and panel makers with a big opportunity that could turn into their main sales driver in the future.

Source: DisplaySearch ( In Millions)

Display Centric World

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Display is the window to the majority of devices. The world is moving into a cloud environment that provides infinite computing and storage. Display is the key component of smart devices in the cloud environment. This will lead to an increase of both demand and value for display.

The network revolution has already begun. High-speed connectivity is turning into a basic requirement. According to data from CISCO Data Meter, video makes up for 50 percent and 45 percent of data consumption on smartphones and tablets, respectively. This has led to the race to provide higher multimedia experiences among the companies to differentiate their products. This should be beneficial to the display industry.

Expansion of Business Portfolio

Source: Samsung Analyst Day

Companies in the industry are well aware of the price decline and know how important innovation is to retain the market share. Apart from innovating their product segment, companies strive to create new markets and developing innovative new products. Such activity not only differentiates their products, but also makes them market leaders and provides the companies with pricing power.

MARKETS AND COMPETITION

The major players in the electronics component industry are Samsung Electronics Co. Ltd., Sony Corporation, Panasonic Corporation, and LG Electronics Inc., all of which occupy a total of 45.3 percent of the overall market. Some of the most important success factors for a business in this industry include having contacts in key markets, access to the latest and most efficient technology and techniques, establishment of brand names, establishment of export markets, access to skilled workforces, and undertaking technical R&D.

Over the past five years, the profit margins have gone down for reasons such as weak revenue growth, overcapacity, pressure on average selling prices, and restructuring charges. Cost of materials is generally higher, but manufacturers with greater scale are likely to be in a better position to negotiate with suppliers on price and may also be in a better position to reduce unit costs.

Competition in this industry is high and the trend is steady. The competition is based on price, brand recognition, innovation, and international competition. Innovation is key in this market. Due to changes in customer demand, short product life cycles and fierce competition in this industry, firms must regularly upgrade existing products and successfully develop and introduce new products to remain or become relevant to customers.

Barriers to entry in this industry are high. The most important reasons for this are lack of access to technology and intellectual property, lack of large capital and skilled employees and dominance of existing players with brand name recognition. Globalization in this industry is high and the trend is increasing.

Source: IBISWorld

Samsung Electronics Co. Ltd.

Samsung is a South Korean company with a production network primarily in South Korea and China. It also operates in India, the United States, Southeast Asia, Eastern Europe and South America. Its products are divided into four groups: visual display business, digital appliances business, printing solutions business and health and medical equipment business. The company

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Samsung Electronics Co. Ltd. Sony Corporation

Panasonic Corporation LG Electronics Inc.

Others

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has successfully maintained its dominance in the TV segment, despite the slowdown of the market. Samsung is a market leader in world-flat panel TV and world-smart TV, both in terms of revenue and units sold, accounting for one-quarter and one-third of the market, respectively. Samsung subsidiary Samsung Display Company Ltd. claims to be the world’s largest maker of LCD panels for TVs, desktop monitors and PCs.

Sony Corporation

Sony Corporation, based in Japan, develops, designs, manufactures and sells various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets. Sony reports revenue under mobile products and communications, game, imaging products and solutions, home entertainment and sound, devices, pictures, music, financial services and other. Sony revenue is expected to decline due to declining prices of consumer electronics and increasing competition from other companies. Samsung and LG have made it increasingly difficult for Sony to compete in the TV market.

Panasonic Corporation

Panasonic Corporation is headquartered in Japan and manufactures and supplies consumer electronics. Panasonic has claimed cost leadership in the plasma display panels market. In December 2008, Panasonic and Sanyo entered into a capital and business alliance agreement for the purpose of pursuing extensive synergy effects. In 2010, Panasonic raised its stake in Sanyo to 80 percent. Although Panasonic has seen some growth over the recent past in term of volume sales of flat-panel TVs, DVD and Blu-ray disc players and recorders, its growth has been offset by falling prices for all the products.

LG Electronics Inc.

LG Electronics, based in South Korea, designs and manufactures consumer electronics, mobile communications and home appliances. It has five major segments: home entertainment, mobile communications, and home appliance, air conditioning and energy solution and vehicle components. Growth for LGE has come from increased market penetration in emerging markets and its ability to introduce new products at a lower cost to consumers by manufacturing in lower labor-cost countries, thus improving profit margins.

Others

TPV Technology Ltd., a Hong Kong-based company and Pioneer Corporation, a Japan-based company are two of many other companies operating in this industry. All these companies combine for 54.7 percent of the market share.

The glass substrates industry consists of three major companies: Corning Incorporated, Asahi Glass and Nippon Electric Glass, with Corning controlling around 50 percent of the total LCD market.

Corning Incorporated

Corning Incorporated is a Corning, NY-based manufacturer of glass, ceramics and related materials that are primarily used for industrial and scientific applications. Corning has six reportable business segments: display technologies, which manufactures glass substrates for active matrix liquid crystal displays; telecommunications, which manufactures optical fiber, cable products and equipment for the telecommunications industry; environmental technologies, which manufactures ceramic technologies and solutions for pollution control; specialty materials, which manufactures Gorilla Glass and advanced optics; and life sciences, which manufactures laboratory products.Corning is a world leader in display technologies and produces glass substrates primarily for liquid crystal displays (LCDs) in notebook computers, flat panel monitors, TVs and other consumer electronics. Corning's Gorilla Glass has become a standard in the consumer electronics industry and has significantly boosted the company's sales.

Asahi Glass

Asahi Glass Company (AGC) manufactures flat glass, automotive glass, display glass for electronics and glass for the solar energy industry. AGC's flat glass products include sheet glass, figured glass for construction, and mirrors and industrial glasses; its automotive glass products include laminated and tempered glass for automobiles; and, its display glass products include flat-play displays. Broken down by segment, AGC's glass and electronics businesses account for an estimated 81.0 percent of the company's total revenue.AGC Flat Glass produces architectural glass, while AGC automotive produces automotive glass for new vehicles and aftermarket replacement glass.

Nippon Electric Glass

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Nippon Electric Glass Co. Ltd., together with its subsidiaries, is engaged in the manufacture and sale of specialty glass products and glassmaking machinery primarily in Japan. The company offers glass for liquid crystal displays, plasma display panels, cathode ray tubes, and electronic and optical devices, as well as glass fibers. It also provides glasses for solar cells and solar power generation; cover glasses; heat-resistant glasses; and glass for building materials, as well as lighting, medical, laboratory, and other applications. The company operates in Japan, South Korea, Taiwan, China, the United States, Malaysia, and Europe. Nippon Electric Glass Co., Ltd. was incorporated in 1944 and is headquartered in Otsu, Japan.

Peer Comparisons

Source: Fastset

Samsung by far is the largest company in this industry in terms of market cap and enterprise value. Samsung controls 54.70 percent of the market share in this industry and trades at a very reasonable forward P/E of 10.2. Samsung price-to-book ratio of 1.14 is also about the industry average. Samsung earning per share is also considerably higher than its peers.

Source: Factset

Looking at some other profitability metrics, it is clear that Samsung is the only company that has been able to maintain healthy margins. Due to its geographical and business portfolio expansion, its Capex to Sales ratio is considerably higher. It has significantly higher returns on equity. All other companies in the industry appear to be struggling with their margins. Samsung looks set to dominate this industry moving forward.

Looking at the glass substrates industry, the situation is very similar. In this case, Corning Incorporated is the market leader with around 50 percent share of the LCD display industry after it took full control of Samsung Corning Precision Materials, one of its subsidiaries. Corning is considerably larger than its peers and has greater global presence. Corning’s next twelve-month P/E multiple is 15.5, which is significantly lower than its peers.

Source: Factset

Corning has higher earnings per share and is also valued highly as shown by higher EV to Sales ratio. Courtesy of its market leadership, Corning has maintained healthy margins compared to its peers. Also, Corning’s return on equity is considerably higher than its peers.

Source: Factset

Overall, the numbers remain in favor of Corning, showing that it will maintain its position as a market leader of the glass substrate industry in the future.

ECONOMIC OUTLOOK

Gross Domestic Product

Many high-income countries continue to struggle with the aftermath of the global financial crisis. Recovery in the high-income economies has been uneven, as some countries, such as the United States and the United Kingdom, have exceeded pre-crisis output peaks, but others such as countries in the Euro area are still below earlier peaks. Low-income countries continue to grow at a robust pace, despite a challenging global environment.

Company Name Ticker

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Samsung Electronics Co. 005930 KR 187.32 150.40 1277.82 2.98 127.09 10.2 1.14

Toshiba Corp 6502 JP 16.70 32.66 3.96 8.11 0.27 14.6 1.42

Sony Corp 6758 JP 31.65 32.30 27.19 6.71 -2.01 N/A 1.65

LG Electronics Inc 066570 KR 8.81 16.23 54.04 4.88 5.39 10.2 0.82

Pioneer Corp 6773 JP 0.696 1.01 1.88 3.42 0.43 4.4 1.02

TPV Technology LTD 903 HK 0.547 0.640 0.23 3.00 -0.03 N/A 0.34

Average 40.95 38.87 4.85 21.86 9.85 1.07

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Samsung Electronics Co. 005930 KR 1.4 10.03 10.02 -30.7 14.35 13.54

Toshiba Corp 6502 JP 1.7 3.09 2.55 72.56 2.31 6.35

Sony Corp 6758 JP 0.0 -4.05 -7.15 -19.44 2.33 -9.69

LG Electronics Inc 066570 KR 0.7 1.78 1.07 48.37 3.27 4.11

Pioneer Corp 6773 JP 0.0 1.22 -1.69 37.15 4.75 2.95

TPV Technology LTD 903 HK 0.5 0.26 -0.82 6.23 N/A -3.94

Average 0.72 2.06 0.66 19.03 5.40 2.22

Company Name Ticker

Market

Cap (B)

($)

Enterprise

Value (B)

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Corning GLW 31.31 30.88 24.47 8.52 1.55 15.57 1.6

Asahi Glass TYO: 5201 7.47 11.61 6.29 6.93 0.21 24.51 0.8

Nippon Electric Glass TYO: 5214 2.44 2.15 4.90 5.14 0.10 44.94 0.6

Company Name Ticker

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Corning GLW 2.11 19.88 25.45 -12.95 11.08 12.11

Asahi Glass TYO: 5201 2.3 4.61 1.18 36.39 8.45 1.44

Nippon Electric Glass TYO: 5214 2.8 2.07 3.09 -8.34 17.96 1.56

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Source: World Bank, GEP Forecast January 2015

According to the World Bank, global growth is expected to rise in 2015, to 3 percent and is expected to be at 3.2–3.3 percent in 2016–17. U.S. GDP growth was 5 percent in the fourth quarter of 2014. We expect the economy to stabilize and predict growth to settle at 3.4 percent in next six months. Healthy GDP growth is positively correlated with spending in consumer electronics industry and should promote growth in the industry.

Source: World Bank, GEP Forecast January 2015

The consumer electronics industry is reliant on the Asia-Pacific market. Healthy growth in the region, especially in China, should positively influence the market.

Consumer Confidence and Energy Prices

Consumer confidence is positively correlated to consumer spending. The prospect of healthy GDP growth and a low unemployment rate should promote consumer confidence. Also, declining energy prices have increased the savings for consumers. They have more spending power. Current data show that consumers are not spending the extra money and are saving it, but if the low oil prices continue for a long time, this will definitely

increase consumer spending, and the consumer electronics industry will be one of the major beneficiaries.

Exchange Rate

The majority of companies in this industry either have foreign operations and/or depend on the foreign market. This makes these companies susceptible to exchange rate volatility. In these circumstances, another thing to note is that if the companies hedge their position, volatility can be reduced; on the other hand, if a company does not hedge its position, sometimes volatility might work in the favor of the company and might lead to increased earning numbers. Another effect of exchange rate volatility is that some companies such as those in the U.S. that depend on exports, might be negatively impacted as the dollar becomes stronger and their product price becomes less competitive. Also, as the dollar becomes stronger the imported products become more attractive.

Interest Rates

Interest rates are expected to rise in mid-2015. The Fed wanted the inflation rate to reach the 2 percent mark before it increases the Fed fund rates, but the current inflation rate is 0.8 percent, which is significantly lower than the target. If interest rates do go up, this will impact the companies that are depend on high leverage. This will also impact the industry as a whole, as a large part of this industry is dependent on product R&D and innovation.

CATALYSTS FOR GROWTH

Innovation

Several factors influence the success of any company in this industry, but the most prominent factor is producing innovative products. Whichever company can come up with new quality glass—which provides some additional value proposition—grabs the attention of the consumer electronics manufacturers. Electronics companies also depend on glass manufacturers to innovate and produce advanced glass, which will enable electronics companies to create new products or entirely new markets, driving the demand for additional glass shipments.

Brand

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This industry is very competitive, and the company that can differentiate itself and its products will have significant advantage. A strong brand also helps a lot with stabilizing the retention rate and building a strong base of loyal customers.

Strong Supply Chain

This is a global industry that calls for strong relationships with distributors, manufacturers and suppliers or contacts within the global market for international trading purposes. Contacts in these markets will help firms become or remain established around the world in order to continue being profitable.

INVESTMENT POSITIVES

• Although many categories in the consumer electronics industry are reaching maturity, innovation within categories should provide growth opportunities. This will benefit the display technologies industry. Technology has a broad horizon and limitless opportunities lie ahead for businesses ready to change with the needs of customers. Technology spending is setting new records as people value premium features in term of size, resolution, color, functionality and design. A company that promotes innovation and can differentiate itself in order to become a market leader can prove to be great investment opportunity.

• Display is the window to cloud environment and device-to-device high-speed connectivity. Internet video streaming and cloud data storage is the latest trend in the industry with great growth potential. Companies providing those display glasses as well as the devices companies will be part of that success as they provide the necessary components for these massive system upgrades.

• Emerging technologies such as 4K Ultra-High Definition TV, smartwatches, wearables such as health and fitness devices, smart eyewear, 3D printers and connected thermostats are building global momentum and provide numerous opportunities. Also, as the world becomes more digital, new potential markets such as the video book market powered by the new AMOLED display becomes feasible. Although some caution is required to see how the market adopts these new devices. It will be interesting to see how long it takes for these technologies to become essential purchases rather than incidental purchases.

• The uses of glass in the automobile electronics segment is also set for substantial growth in the market as customers are willing to pay for better safety and control features as well as other value-added features such as navigation LED display, dashboard systems and advanced audio controls.

INVESTMENT NEGATIVES

• As several categories in the consumer electronics industry are mature or rapidly approaching maturity, the risk of potential revenue growth slowdown is ever present. Innovation and emerging technologies have potential to offset such decline but customers’ reactions toward those products and their purchasing behavior will add to the volatility of the industry.

• The average selling prices (ASPs) for several components in the industry have witnessed continual declines. The primary reason for this pricing pressure is the shift to lower-end devices in emerging markets. Low-end devices have become essential to penetrate lower consumer tiers in developing markets. This pressure is expected to continue and the expectation is that at best the prices will be steady or moderately go down, so the revenue upside is always limited for the companies in this industry unless they can differentiate themselves and become a market leader.

• The rising price of raw materials is a concern for the electronics component industry. This forces electronic companies to put additional pressure on glass manufacturers to reduce prices, which is leading to reduced margins for the glass companies. Also, some components require production of specialty glass, which necessitates high-priced metals and scarce materials, making costs very difficult for the companies.

•The dollar strengthening has made U.S. products less competitive in foreign markets, which has led to reduced margins and the risk of losing market share in cases where foreign imports have become more attractive. This has also led to additional pricing pressure on the companies in this industry.

Investment Opportunity

The South Korean maker of cellphones, tablets, memory chips, and big-screen TVs trades for 10.2 times estimated

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2015 earnings. Lately, Samsung (ticker: 005930 KR) is very much out of favor with investors, due to plunging profit in its largest business, mobile phones. That has led to fears the company could become the next major casualty in a brutal market that already has claimed former heavyweights Nokia and Motorola, and dashed the fortunes of Canada’s BlackBerry (BBRY).Samsung is being squeezed from above by Apple, and from below by Chinese manufacturers. Apple’s adoption of the larger- screen in iPhone 6 has put further pressure on Samsung’s high-end Galaxy and Note phones, which had benefited from a bigger screen than the iPhone 5. Samsung’s smartphones and tablets use Google’s android operating system, which gives phone makers less flexibility than Apple’s iOS.

In the past, Samsung was the world’s largest maker of cellphones, with a 30 percent share. It is still the largest and most profitable maker of memory chips. With a 40 percent market share in DRAMs, it is the leader of a lucrative oligopoly that includes Micron Technology (MU) and Korea’s SK Hynix (000660.Korea). Samsung also is a top producer of NAND, or solid-state memory, which is replacing disk drives in many technology applications.

Samsung is the leading maker globally of displays, which has helped it become No. 1 in TVs, including curved-screen TVs and ultra-size sets with screens of 60 inches or more. Samsung’s next major innovation in cellphones is expected to be foldable screens using its best-in-class OLED display technology, which relies on plastic rather than glass. The OLED screens provide their own light, a big advantage over most existing technology. This could allow the creation of screens that bend or roll, as well as handsets that open into tablets. Expect these Samsung products in 2016.

The Samsung story may require some investor patience. Yet the shares look promising, given the company’s leading brand, strong balance sheet, sizable earnings despite the decline, and a controlling family that sooner or later will align itself with outside shareholders.

REFERENCES

1. Factset Research System 2. Smartphone Display Manufacturers Facing Pressure to

Further Reduce Prices in 2015

http://www.displaysearch.com/cps/rde/xchg/displays

earch/hs.xsl/150202_smartphone_display_manufactu

rers_facing_pressure_to_further_reduce_prices_in_20

15.asp

3. Flat Panel Display Area Demand Growing Rapidly

http://www.displaysearch.com/cps/rde/xchg/displays

earch/hs.xsl/150129_flat_panel_display_area_deman

d_growing_rapidly.asp

4. Emerging regions maintained strong momentum,

while advanced regions fell short of single-digit growth

http://www.displaysearch.com/cps/rde/xchg/displays

earch/hs.xsl/150112_public_display_shipments_growt

h_rate_reaches_record_high_after_six_consecutive_q

uarters.asp

5. LCD TV Shipment Forecast Revised Upward on Strong

Consumer Demand for Larger Sizes

http://www.displaysearch.com/cps/rde/xchg/displays

earch/hs.xsl/141231_lcd_tv_shipment_forecast_revise

d_upward_on_strong_consumer_demand_for_larger_

sizes.asp

6. Flat In-Car Safety Innovations Drive Expanded Use of

Dashboard Screens

http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/141124_in_car_safety_innovations_drive_expanded_use_of_dashboard_screens.asp

7. UHD Resolution Displays Lead Growth in Global Broadcast and Production Display Category http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/140610_uhd_resolution_displays_lead_growth_in_global_broadcast_and_production_display_category.asp

8. Replacement TV Purchase Decisions Driven by Picture and Sound Quality Despite Introduction of New Features http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/140611_replacement_tv_purchase_decisions_driven_by_picture_and_sound_quality.asp

9. Wearable Device Market Growth to be Bumpy as Value Proposition is Established http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/140523_wearable_device_market_growth_to_be_bumpy_as_value_proposition_established.asp

10. 4Kx2K TVs: Will They Stimulate or Slow the Market?-Paul Gray in DisplaySearch

11. Samsung Analyst Day Presentation 12. Panel Makers LCD TV Target Growing by only 3

percent in 2015, as They Shift to Larger Sizes- David Hsieh in DisplaySearch

13. Strategy Analytics Report Highlights Falling Prices, Improved Upscaling Capabilities, and Greater Consumer Awareness as Key Drivers of UHD TV Uptake https://www.strategyanalytics.com/default.aspx?mod=pressreleaseviewer&a0=5513

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14. Record-Breaking Year Ahead: CEA Reports Industry Revenues to Reach All-Time High of $223.2 Billion in 2015- CEA

15. Strong LCD, 4K UHD sales drive bump in global TV shipments- http://www.ooyala.com/videomind/blog/strong-lcd-4k-uhd-sales-drive-bump-global-tv-shipments

16. IBISWorld- Global Consumer Electronics Manufacturing market research

17. CES International 2015, CES 2015 Press 18. World Bank data 19. GfK Digital World, GfK demand projector 20. Fidelity Investment 21. U.S. Bureau of Economic analysis 22. Seeking Alpha 23. Size Matters - LCD TV Shipments See Strong Growth,

Consumers Want Bigger Screens

http://www.misco.co.uk/blog/news/02592/size-

matters-lcd-tv-shipments-see-strong-growth-

consumers-want-bigger-screens

24. 5 Categories Set to Grow Consumer Electronics Biz to Record Levels in 2015- Variety.com

25. Samsung: Why the Stock Could Soar http://online.barrons.com/articles/samsung-why-the-stock-could-jump-50-1413005581

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.