LPL

LG.Philips LCD Co., Ltd. - 2004 Annual Report (Form 20-F) Summary

Business Context and Reporting Period

Company: LG.Philips LCD Co., Ltd. (LPL)

Reporting Period: Fiscal year ended December 31, 2004.

Business Overview: LPL is the world's largest merchant supplier of large-size Thin Film Transistor Liquid Crystal Display (TFT-LCD) panels. The company manufactures panels primarily for notebook computers, desktop monitors, and televisions. It operates six fabrication facilities (P1-P6) in Gumi, Korea, and assembly facilities in Korea and China. A seventh-generation facility (P7) is under construction in Paju, Korea.

Ownership: As of December 31, 2004, LG Electronics and Philips Electronics each owned approximately 44.57% of the company's common stock.

Key Financial Metrics (Year Ended Dec 31, 2004)

Margins (2004): Gross Margin: 25.0%; Operating Margin: 21.1%; Net Margin: 20.5%.

Cash Flow: Net cash provided by operating activities was Won 2,743 billion ($2,650 million). Net cash used in investing activities was Won 3,893 billion ($3,761 million), primarily due to capital expenditures of Won 3,886 billion ($3,754 million).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 36.5% from 2003 to 2004, driven by significant volume growth in large-size panels for desktop monitors (17-inch and 19-inch) and televisions.
• Profitability: Net income increased 69.3% to Won 1.704 trillion. Gross margin improved from 22.3% to 25.0% due to cost reduction efforts and a shift in product mix toward higher-margin large panels.
• Balance Sheet: Total assets grew 61.5% due to the commencement of depreciation for the new P6 facility and increased inventory levels. Stockholders' equity more than doubled, largely due to the Initial Public Offering (IPO) in July 2004 which raised approximately Won 1.23 trillion.
• Debt: Long-term debt increased to Won 2.206 trillion, reflecting new issuances of floating rate notes and debentures to fund expansion, partially offset by the IPO proceeds.
• Inventory: Inventories increased 139.4% to Won 804 billion, reflecting higher levels of finished goods and raw materials in anticipation of demand growth and the ramp-up of the P6 facility.

Guidance, Outlook, and Risks

Outlook and Strategy: Management anticipates continued capacity expansion in the industry, which may exert downward pressure on prices. The company plans to mitigate this by shifting product mix to larger, high-definition television panels and maintaining cost leadership. Capital expenditures for 2005 are estimated at approximately Won 4.6 trillion, primarily for the P7 facility.

Key Risks:

• Industry Cyclicality: The TFT-LCD industry is highly cyclical with frequent price fluctuations driven by capacity surges and demand shifts.
• Customer Concentration: The top ten end-brand customers accounted for 77.4% of sales in 2004. The top three customers (Dell, LG Electronics, Hewlett-Packard) each contributed over 10% of sales.
• Technology Obsolescence: Rapid technological changes could render current products obsolete. The company is developing alternative technologies like OLED.
• Related Party Transactions: Significant sales and purchases are conducted with affiliates (LG Electronics, Philips Electronics, LG International), creating potential conflicts of interest and credit risks.
• Intellectual Property: The company is involved in ongoing patent litigation with competitors such as Chunghwa Picture Tubes and Tatung.
• Geopolitical Risk: Operations are concentrated in Korea, exposing the company to regional economic and political risks, including tensions with North Korea.

Investor Verification Checklist

• Customer Concentration: Verify the stability of orders from the top three customers (Dell, LG Electronics, HP) which collectively represent a significant portion of revenue.
• Capital Expenditure Execution: Monitor the progress and cost overruns of the P7 facility construction, estimated at Won 5.3 trillion total.
• Inventory Levels: Assess the risk of inventory write-downs given the 139% increase in inventory and the cyclical nature of panel pricing.
• Related Party Pricing: Review the arm's-length nature of transactions with LG Electronics and Philips Electronics, which account for a large share of sales and purchases.
• Patent Litigation: Track the status of ongoing intellectual property disputes, particularly with Chunghwa Picture Tubes, which could result in significant damages or injunctions.
• Debt Covenants: Confirm continued compliance with financial covenants (debt-to-equity, interest coverage) given the increased debt load.