Investment positives

Reshuffle of LCD panel sector accelerated. End-marketdemand remained weak and panel sector earnings saw pressure.

In 2016, we expect the global flat-panel display market to seehigher volumes and lower prices, with capacity utilization andprofitability mainly driven by: 1） an higher portion of large-sizedpanels; and 2） a rise in the shipments of differentiated productswith upgraded technologies （OLED, LTPS, and IGZO）。

Introducing Sharp’s IGZO technology to expand intohigh-end displays. With technologies from Sharp, Huadong isthe only company able to realize large-scale production in G8.5fab with IGZO technology and >90% yield rate. With higherelectron mobility （higher resolution）， lower off current （energysaving） and lower processing temperature （large-size panels），IGZO could be applied to ultra-high-definition panels.

Backed by CEC, high expectations for SOE reform. Amongthe more than 10 A-share listed companies the China ElectronicsCorporation （CEC） owns, Huadong is positioned as a listedplatform for displays. As it should benefit from this round of SOEreforms, Huadong will likely keep making progress.

Financials

Using BOE’s G8.5 fab as a reference and assuming an 85% yieldrate and a 30,000-piece monthly capacity, we expect 2016full-year revenue from the G8.5 fab to reach Rmb2.86bn and2016 and 2017 revenue to reach Rmb3.9bn and Rmb5.6bn,implying EPS of Rmb0.09 and Rmb0.12.

Valuation and recommendation

G8.5 fab went into production in Dec. 2015, boasting the uniqueIGZO technology for high-end LCD panels. There may beuncertainties in capacity utilization and yield rate. Initiatecoverage with HOLD rating and TP of Rmb6.19 （0.75x2017e P/B）。

Risks

Falling panel prices; end-market applications lose momentum.