Asia Pacific Equity Research 21 May 2014

Global Display What's in Apple's pipeline? New features and implications for Asian supply chain Based on our supply chain visits, and well expected in the market, there could be a series of new products coming out in 2H14/1H15 from Apple. This includes a bigger iPhone, an iWatch, and a bigger iPad. In this report we analyze the potential design changes from technology aspect and examine pros/cons of each of these technologies. This exercise does not represent a finalized spec of the Apple products but provides some implications to relevant supply chains in Asia. Apple (AAPL.US, OW) is covered by Rod Hall.

Technology - Semiconductors Narci Chang

AC

(886-2) 2725-9899 [email protected] Bloomberg JPMA NCHANG J.P. Morgan Securities (Taiwan) Limited

JJ Park

AC

 “Sapphire laminates” for iWatch and iPhone 6S? – We believe the supply chain has been actively developing a cover substrate that joints the merits of sapphire material and glass. This is supported by a series of events from U.S. based equipment maker GT (GTAT.US, NC) and Apple’s patent filing, along with our supply chain checks in Asia, which indicates selective high-end iPhone models (5.5”) could carry a sapphire-glass hybrid cover. Consumers may see scratch-free sapphire screens for smartphones soon, implying a 100x bigger market than home buttons for the sapphire industry.

(822) 758-5717 [email protected]

 Same technology, bigger screen – We expect next iPhones to carry bigger screens (4.7” and 5.5”), but based on the same in-cell technology, contrary to some market beliefs of other touch panel technologies. We continue to pick up indications that there are two new sizes in the working pipeline, but it is too far off volume production to be sure about the timing. We also expect a 12.9” iPad Pro to come out in 1H15.

J.P. Morgan Securities LLC

 Other spec changes in Apple products – Upcoming iPad Air and iPad mini may carry sapphire home buttons, benefiting STC directly. The high-end iPhone model (5.5") may also carry OIS in the camera module, which would improve image quality. Alps, Largan, LG Innotek, and Sharp would benefit.  Key beneficiaries in Asia – Display component makers, LGD (OW), JDI (OW), Sharp (OW), and Minebea (OW), would be direct beneficiaries of iPhone size upgrades. LGD also would supply iWatch OLED screen. TPK (N), Nissha Printing (N), Nitto Denko (N), and Zeon (OW) would benefit from larger-size iPad. Asian sapphire material makers such as STC (OW) would benefit directly from sapphire home buttons in iPad and indirectly if Apple adopts sapphire material in iWatch and 5.5" iPhone, in our view. Potential Product Roadmap for Apple Potential Product Name iWatch

Size

Resolution

1.3”/1.6

320x320

iPhone 6 iPhone 6S

4.7” 5.5”

iPad Pro

12.9”

PPI 348/278

Display Technology Plastic OLED

Touch Panel On-cell

1334x750 1704x960

326 356

LTPS TFT-LCD LTPS TFT-LCD

In-cell In-cell

2732x2048

265

LTPS/Oxide TFTLCD

DITO film (GF2)

Bloomberg JPMA PARK J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Rod Hall, CFA

AC

(1-415) 315-6713 [email protected] Bloomberg JPMA HALL

Masashi Itaya

AC

(81-3) 6736 8633 [email protected] Bloomberg JPMA ITAYA JPMorgan Securities Japan Co., Ltd.

Yumi Tanaka

AC

(81-3) 6736-8603 [email protected] JPMorgan Securities Japan Co., Ltd.

William Chen

AC

(886-2) 2725-9871 [email protected] Bloomberg JPMA WCHEN J.P. Morgan Securities (Taiwan) Limited

Jay Kwon (82-2) 758-5725 [email protected] J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Remark Sapphire-glass hybrid cover Larger screen Sapphire-glass hybrid cover Convertible

Supplier Candidates LGD (OLED), TPK & GIS (cover lamination), GT (sapphire material) LGD, Sharp, JDI, Minebea (LGP), Zeon LGD, Sharp, JDI, Minebea (LGP), Zeon, TPK & GIS (cover lamination), GT (sapphire material), Zeon LGD, Sharp, TPK, Nitto Denko, Nissha Printing, Zeon, and Radiant

Source: Display Search, J.P. Morgan

See page 18 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Narci Chang (886-2) 2725-9899 [email protected]

Asia Pacific Equity Research 21 May 2014

Table of Contents Display for Upcoming Apple Products ...................................3 Sapphire cover for iWatch .......................................................................................4 “Sapphire Laminates” for iPhone.............................................................................6 Plastic OLED (“P-OLED”) for iWatch ....................................................................9 In-cell for iPhone 6/6S ..........................................................................................11 DITO-film for iPad ...............................................................................................13

Asian Display Stock Implications .........................................14 Appendix: Apple Product Display Spec ...............................17

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Asia Pacific Equity Research 21 May 2014

Narci Chang (886-2) 2725-9899 [email protected]

Display for Upcoming Apple Products Bigger iPhone(s), iWatch, and a convertible iPad are around the corner

Based on our supply chain visits, we think there could be a series of new products coming out in 2H14/1H15 from Apple. This includes a bigger iPhone(s), iWatch, a convertible iPad. In this report, we try to analyze the potential design changes from a technology point of view and examine advantages/disadvantages of each of these technologies. This exercise only provides a view on the potential design but does not represent a finalized spec of the Apple products. Apple (AAPL.US, OW) is covered by Rod Hall.

Table 1: Potential New Product Roadmap for Apple Potential Product Name iWatch

Size

Resolution

PPI

Display Technology

Touch Panel

Remark

1.3”/1.6”

320x320

348/278

Plastic OLED

On-cell

Sapphire-glass hybrid cover

iPhone 6

4.7”

1334x750

326

LTPS TFT-LCD

In-cell

Larger screen

iPhone 6S

5.5”

1704x960

356

LTPS TFT-LCD

In-cell

Sapphire-glass hybrid cover

iPad Pro

12.9”

2732x2048

265

LTPS/Oxide TFT-LCD

DITO film (GF2)

Convertible

Supplier Candidates LGD (OLED), TPK & GIS (cover lamination), GT (sapphire material) LGD, Sharp, JDI, Minebea (LGP), Zeon LGD, Sharp, JDI, Minebea (LGP), Zeon, TPK & GIS (cover lamination), GT (sapphire material) LGD, Sharp, TPK, Nitto Denko, Nissha Printing, Zeon, and Radiant

Source: Display Search, J.P. Morgan

Figure 1: Potential size upgrades on Apple iPhones

Source: J.P. Morgan.

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Narci Chang (886-2) 2725-9899 [email protected]

Asia Pacific Equity Research 21 May 2014

Table 2: Revenue exposure to Apple

LGD Sharp JDI STC TPK Minebea Nitto Denko Nissha Printing Zeon

Apple as % of total sales FY14 FY15 21% 22% 15% 20% 39% 42% 65% 65% 45% 41% 14% 9% 54% 3%

16% 10% 53% 3%

Products iPhone, iPad, Macbook, iWatch iPhone, iPad mini iPhone iPhone and iPad (home buttons and camera lens cover) iPhone and iWatch (only for the cover), iPad, iPad min , iPad Pro. iPhone iPad, iPad mini, iPad Pro iPad, iPad mini, iPad Pro iPad, iPad mini, iPad Pro, iPhone

Source: J.P. Morgan

Sapphire cover for iWatch From our supply chain analysis, we believe there could be a number of new products under development, including a smartwatch (see “Smartwatch Market: Consumers are smarter than smartwatches”). There could be two sizes of iWatches - 1.3" & 1.6”. The resolution could be 320x320 pixels, similar to Samsung Galaxy Gear. Nevertheless, Samsung’s Galaxy Gear 2 features a 1.63” AMOLED screen with sapphire cover, whereas Apple's could be plastic OLED screen with sapphire-glass hybrid cover. This is in comparison to Sony Smartwatch 2’s 1.6” 220x176 pixels LCD screen with a glass cover. If sapphire is being placed on smartphones or wearables, the addressable market could grow exponentially.

We identify the sapphire industry (i.e. STC etc.) as one of the potential winning sectors under the smartwatch theme. Sapphire is a type aluminum oxide, transparent and almost scratch-free. It is so tough that it is the second strongest material (scores 9 on the Mohs scale) on earth after diamond. Roughly speaking, one smartphone screen could be 100x as big as Apple’s home button. A 1.5" square-shaped smartwatch could be 7x as big as Apple's home button. We believe Apple’s home button currently takes away around 10% of the industry sapphire ingot capacity (aside from GT); if sapphire is being placed on smartphones or wearables, the addressable market could expand significantly. Figure 2: Sapphire usage in smartphones/wearables

Source: J.P. Morgan.

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Narci Chang (886-2) 2725-9899 [email protected]

Asia Pacific Equity Research 21 May 2014

Figure 3: Sony Smartwatch 2

Figure 4: Samsung Galaxy Gear

Source: GigaOm

Source: Digital Trends

Why would Apple prepay for sapphire materials?

Apple—GT deal GT Advanced Technologies Inc. (GTAT US, Not Covered), a NASDAQ-listed U.S.based sapphire equipment maker, announced in October 2013 that it had entered into a multi-year supply agreement with Apple to provide sapphire material. According to the announcement, GT will own and operate ASF furnaces and related equipment to produce the material at an Apple facility in Arizona, where GT expects to employ over 700 people. Apple will provide GT with a prepayment of approximately US$578mn. GT will reimburse Apple for the prepayment over five years, starting in 2015. Although the agreement does not guarantee volumes, it does require GT to maintain a minimum level of capacity. GT will be subject to certain exclusivity terms during the duration of the agreement. As we analyzed in our previous report “Sapphire Technology: First proof of margin recovery trajectory…”, published on November 15, 2013, we believe there is a chance that Apple's prepayment to GT could be dedicated for iDevice cover. From our supply chain analysis, Apple could be highly interested in using sapphire material for iWatch cover. The prepayment from Apple to GT (i.e. US$578 million) seems well above needed at the first glance if it is sole dedicated to iWatch cover. On a ballpark estimate using the conventional sapphire furnaces, the amount would be enough to build over 100mn units of 1.5” sapphire screen annually. In this case, the direct opportunity for other sapphire vendors (such as STC) could be limited, but it will likely affect supply/demand to a great deal and boost the size of addressable market for sapphire. For reference, current industry-wide sapphire ingot capacity is around 72mn~96mn 2”-equivalent sapphire ingot per annum. Sapphire vs. Gorilla Glass – Scratch-roof and/or shatter-proof? Sapphire has an almost scratch-free attribute, but it also could be at several disadvantages as compared to Gorilla Glass: 1.

Manufacturing cost: production time for sapphire substrate is 4,000 times that of glass substrate and physical properties (hardness) of sapphire 5

Narci Chang (886-2) 2725-9899 [email protected]

Asia Pacific Equity Research 21 May 2014

substrates to make it difficult to machine/process. The market price of a Gorilla Glass smartphone screen would come under USD5 per unit, whereas the sapphire screen would cost USD20-25 for the same size. However, GT is targeting a price between USD10-15 per unit using their technology. 2.

Transparency: Corning claims sapphire transmits 6% less light and can lead to optical distortion.

3.

Weight: a single sapphire substrate is 67% heavier than a same-sized glass substrate, according to Corning.

4.

Strength: There is little doubt that a sapphire screen is almost scratch-free but there have been constant debates whether sapphire screen is truly "shatter-proof". In our understanding, sapphire screen could be more brittle under certain circumstances. A test directly from Corning simulated durability test on both a piece of Gorilla Glass and an identical-sized 1mm thick piece of sapphire. Taking into consideration the test is performed under a controlled environment and by Corning who likes to promote the resilience of its own Gorilla Glass, the sapphire panel broke under the ringon-ring test at about less than half the force – 161lbs vs. the 436lbs applied to Gorilla Glass, which remained intact.

Although the current sapphire cover price remains 6-8x that of Gorilla Glass, given that 1.3"-1.6" sapphire wafer may cost only