Investment positives

The reshuffle of LCD panel sector accelerated. End-market demand remained weak; panel sector’s earnings facedpressure. Due to worldwide economic downturn, global panel shipments fell 2.54% YoY in 2015. Panel prices fell sharplydue to high supply and low demand; prices of large-size display panels fell ~30%. In 2016, global flat panel displayswould see rising sales volume but falling prices and sales volume growth would see visible slowdown; panel makers’capacity absorption and earnings growth would be mainly driven by: 1) the trend of large-size panels; 2) risingshipments of differentiated products featured by technology upgrading (technologies like OLED, LTPS, and IGZO).

Introduce Sharp’s IGZO technology to expand into high-end displays. The company’s technologies for flatpanel display project mainly came from Sharp, the only company that could realize large-scale production in G8.5 fabwith IGZO technology and a >90% yield rate. Compared with traditional amorphous silicon, IGZO boasts higher electronmobility (higher resolution), lower off current (energy saving) and lower processing temperature (making large-sizepanels production possible). It could be applied to the production of ultra-high-definition panels.

Backed by CEC, high expectations for SOE reform. The company’s actual controller is China ElectronicsCorporation (CEC). As the flagship of China’s electronics sector, CEC now owns more than ten A-share listed companies;in 2014, the group set a “securing growth, deepening reform” strategy. Huadong is positioned as a listed platform fordisplays; benefiting from this round of SOE reforms, Huadong will likely keep making progress driven by reforms.

Financials

The G8.5 fab has been completed and started production; yield rate could reach 80% and monthly production capacitycould be 30,000 pieces. Taking BOE Technology Group’s G8.5 fab (monthly production capacity: 150,000 pieces; 2015revenue: Rmb14bn) for reference, assuming yield rate to stabilize at 85% and monthly production capacity to stay at30,000 pieces in 2016, full-year revenue from G8.5 fab’s panel display and LCD products could reach Rmb2.86bn. Weexpect its 2016/17e revenue to reach Rmb3.9bn/5.6bn, implying EPS of Rmb0.09/0.12.

Valuation and recommendation

China Electronics Panda’s (controlled by Huadong) G8.5 fab just went into production, boasting the unique IGZOtechnology for high-end LCD panels. However, there may be uncertainties in capacity utilization and yield rate; initiatecoverage with HOLD rating and TP of Rmb6.19 (0.75x 2017e P/B).

Risks

Panel prices keep falling; end-market applications lose momentum.