Goldman Sachs - Asahimas Flat Glass (AMFG) - A stock to watchou...

Extracted from Goldman Sach’s report dated 20 October 2009:

Expect 4% of industry capacity to be affected for 2-3 months
Corning announced after the October 19 close (JST) that its glass plant in Taichung, Taiwan was affected by a power outage. The company previously expected volume to rise by about 5% qoq in Oct-Dec, but it announced that because of this incident 4Q volume could remain flat or fall slightly. Corning is working to assess the specific impact, but our channel checks indicate that 5 of the plant’s 14 furnaces were affected, which we estimate is about 4% of the LCD glass industry’s production capacity, and that these furnaces will need repairs that will prevent them being restarted for 2-3 months.

Positive for Asahi Glass/Nippon Electric Glass; neutral for panels
Two industry implications:
(1) Impact for glass makers: We think Samsung Corning Precision, Nippon Electric Glass (5214.T, Neutral; Oct. 19 closing price ¥960), and Asahi Glass (5201.T, Buy, Conviction List; Oct. 19 closing price ¥794) are likely to compensate for shipment shortfalls at Corning’s Taiwan plant, and that near-term volume is likely to be slightly higher at each firm. We think glass supply/demand could be tighter than we previously expected in Oct-Dec and Jan-Mar. If price declines are smaller, we believe consensus estimates for glass maker earnings could rise for FY09 and FY10. We think this is positive news for Nippon Electric Glass and Asahi Glass. We maintain our buy rating for Asahi Glass, and keep the stock on our Conviction List. (2) Impact for panel makers: We think LG Display, Samsung and Innolux are less impacted by this incident. Note that Innolux is sheltered by a guaranteed supply contract with Corning. We expect panel prices will still hold up in the next two months, supported by glass supply constraint, and that risk to our 4Q09 earnings forecast should be on the upside. However, this is not going to change the industry overcapacity downward trend. We believe the effect of a seasonal slowdown in demand will still be greater than the impact of a glass shortage. We retain a Buy on LGD, Neutral on AUO and Innolux and Sell on CMO.