MARKET OUTPERFORMERS CELERITAS INVESTMENTS

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1 MARKET OUTPERFORMERS CELERITAS INVESTMENTS Universal Displays (OLED) Rating: Strong Buy Stock Price: $101/share Price Target: $130/share MOP Idea of the Month: Universal Displays Business Overview: Universal Displays is the largest holder of OLED related patents. The company also manufacture sensitive materials related to OLED displays. Our Outlook: Our base case Price Target, which we consider conservative, of $130 per share (30% upside) is based on a 30 PE multiple applied on our 2020 expected earnings per share and discounted at 8%. Samsung-OLED s win-win relation: OLED is the sole supplier of OLED display materials and designs to Samsung which accounts to 63% of OLED s revenues. Our Assumptions: 100% penetration of OLED in High-end smartphone market. The High-end smartphone market to increase from last years level of 50% of the global smartphone market to 58% by Universal Displays royalty segment assumptions: 0.5% royalty per ASP (low-end of historical rate) of a display. Universal Displays materials segment assumptions: 20 cents Universal Display content per OLED phone screen and $40 content per OLED TV.

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3 BUSINESS OVERVIEW To avoid confusion, Universal Display will be represented by UD instead of OLED (its stock symbol). Universal Display is the sole provider of OLED materials and the world s biggest owner of OLED related patents. The company mainly runs two operating segments; materials, and royalty/licensing. The materials segment contributes to 60% of the company s revenues, however the royalty/licensing segment has much higher gross margins (75% for materials vs estimated 99% for royalty/licensing). Universal Displays to OLED is like ARM to mobile processors, to say the least. The company holds around 3,000 patents and more than 1,000 pending patents, all related to the OLED technology. The OLED market is highly concentrated as Samsung Displays and LG Displays control nearly 100% of the market. However, BOE, a Chinese IoT company that is focusing on flexible displays is expected to be a major player in the coming years. For Universal Display, Samsung is the biggest customer, responsible for 63% of sales. The behemoth not only buys OLED materials from UD for its S9 and S9 Plus phones, it also supplies the iphone X displays and is expected to supply future Apple devices. US and Samsung had an agreement which started back in 2011 and was renewed (albeit under different undisclosed conditions) few months ago to December Under the previous agreement, Samsung would pay UD a fixed licensing fee of $20 million in 2011 which increases $20 million per annum reaching $90 million in Also, Samsung pays around 0.5% to 1% of the average selling price of its display (not phone as in Qualcomm s case for instance) which is currently around $50. The company has a similar agreement with LG Display that expires in December What is OLED and how is it different than LCD? OLED displays are lighter, much cost efficient if produced on a scale, have a higher responding rate, and offers higher screen quality than the LCD displays used in smartphones nowadays. While LCD uses a backlight that passes through a filter to light up the pixels, OLED simplifies this process by making self-emitting materials which remove the need of backlights, filters, and liquid crystals. Total Addressable Market: UD s TAM is huge. It includes smartphones, TVs, tablets, smartwatches, and other IoT devices. The company receives its royalties based on ASP which is based on the area of the display. The bigger the device, the better. That s why LG TVs offer 100x the revenues for UD than smartphones, however, the quantity supplied for each device more than offset the difference. We believe that smartphones, tablets, and laptops are the biggest market opportunities for the OLED industry. However, in our model, we only accounted to TVs and smartphones as our outlook is limited to year 2020 (predicting beyond 2020 is difficult given the rapidly evolving characteristic of the display market) and producing OLED-based tablets and laptops may be beyond that year. In addition, foldable displays would be a huge market opportunity for UD given that foldable displays offer a higher display area than standard OLEDs. Also, the foldable displays are not included in our 2020 outlook, which makes our analysis more conservative.

4 FUNDAMENTAL ANALYSIS Universal Display lost more than half of its market cap in just a few months, without a legit reason. The decline was on a below-average volume which means that was due to a lack of buyers, not heavy selling. We believe a part of that was also due to the fact that the stock was trading above most analysts price targets which discouraged buyers from entering into the stock. That, accompanied with stockholders taking some chips out of the table after an impressive 100% increase in the stock in less than 10 months resulted in a severe decline. We believe that this is an opportunity for long-term investors to invest in a debt-free, high margin, high growth, huge TAM, stock that is trading at 20x!! our 2020 earnings estimate which we discounted back at a 8% WACC. Reasons to be bullish: 1. Focus: There is nothing we like more than a focused company where all employees are working on closely related products. While this brings more risks in a mature industry, it doesn t add any in a young industry with a bright outlook like the OLED. The inclusion of the OLED display in one of the most important episodes of the iphone series proves that the OLED future is bright. The OLED, as many analysts describe, is not a if but a when story. 2. Catalyst Availability: We believe that if what Bloomberg reported turned out to be true regarding the inclusion of OLED in 2 of the 3 expected iphones this year, OLED stock should increase substantially (Bloomberg believes that the new iphone X would have a bigger OLED screen which means also higher revenues for Universal Displays). We also believe that if rumors regarding Samsung s plan to sell OLED TVs again (it discontinued previous releases after problems), that would be a bullish catalyst for the stock. 3. Rapid Adoption in TV Market: While the TV market for UD is relatively small, accounting to 15% to 20% of 2017 revenues by our estimates, we believe that the segment will play a more important role going forward as penetration rate is still very small (2.4% by 2017) and the revenue per device is higher than that of a smartphone. However, it s worth reminding that OLED adoption in the TV market will be much slower than that in the smartphone market. Despite that, we believe the TV segment may be able to move the needle for UD as rapid adoption is still a likely scenario. For instance, a Google search on top 5 TVs in 2017 would include at least 3 OLED TVs. 4. Likely Acquisition Target: We did not put much weight on this scenario given the complexity of the M&A decisions that analysts often underestimate. However, we believe that UD may be an acquisition target for the recently US-domiciled company, Broadcom as the company is thirsty for an acquisition given its failed takeover of Qualcomm. While UD is small to move the needle for Broadcom, we believe that the company s strong patent portfolio makes the acquisition by Broadcom, or any other

5 company like Apple or Samsung, more appealing as the smartphone supply industry is showing signs of consolidation. 5. Healthy Capital Structure and Operations: UD carries no debt, the company s profit margin is as high as 40% (after the new tax law) and it generated a healthy free-cashflow of a $100 million last year and we expect the company to generate around $120 million this year after a ~5% growth in revenues and lower tax rate (assuming capital spending remains the same, however we believe capex should be lower). 6. Customers Increasing Investments in OLED: Samsung, UD s largest customer, spent $12 billion on OLED-related investments. The company fully facilitated its A3 fab to 135,000 plats per month (Samsung had three OLED fabs at the beginning of 2018) and retrofitted an LCD fab to an OLED one. Also, in its latest CC, LG reaffirmed its robust investment plan of $18.5 billion over a 5 year period on OLED, split in half between mobile and TVs. In addition, Sharp (which Apple is considering to be an OLED supplier to reduce dependence on Samsung) is expected to start OLED product in Q3 of this year. Last but not least, BOE s first OLED plant is also expected to start production later this year. We believe that the increase of spending by UD s largest customers is a huge sign that OLED will be the future of display. 7. Samsung Agreement Renew: Last month, Samsung and UD agreed to an undisclosed agreement that runs through December 2022 and can be extended for two years. We believe that this is one of the most important events for the company as we were concerned that some of UD s important patents that will expire in the coming 2-3 years would have an impact on agreement renewal and reduce UD s leverage. If UD had any issues regarding the expiry of some of its key patents, Samsung would have just extended the agreement temporary and without a contract as it did in instead of rushing to make another agreement that runs through 2022 (4 years from now) and can be extended for another two years. This proves UD s solid patent portfolio and should be translated to a higher stock price once the dust of the 50% decline settles. 8. The Success of the Blue Emissive System: The only problem with OLED screens is in their blue pixels. The OLED display has materials that create three colors of pixels; blue, red, and green. The problem is with the blue s short lifespan which affects the color balance of the OLED screen by time as the blue pixel would degrade slower than the red and green (the effect is more noticeable on TVs than on phones). The red and green pixels have a yield around 20% while the blue pixels have a yield of only around 4% to 6% as the blue technology is still based on the one that Kodak developed in the 1970s. UD states that it is near solving this problem and expects commercialization of its new blue materials to take place in the next couple of years. We believe that if UD was able to solve the blue pixels issue, which is highly likely, OLED adoption rate will increase substantially.

6 RISKS 1. The absence of an RGB (red, green, blue) solution for TVs: We believe this is a concerning event since the increased adoption of OLED-based TVs depends on solving the blue pixels issue. If UD or any other 3 rd party was not able to solve this issue, UD s 2020 expected revenue may be affected by 10% to 15% based on our projections. 2. The shift on adoption from OLED to Micro-OLED: Last month, Bloomberg reported that Apple is investing heavily in Micro-OLED and made significant developments. The report resulted in UD s stock being hammered by nearly 20%. Micro-OLED is similar to OLED in function, but is much slimmer and has a higher inertia. Apple was on the verge to discontinue its Micro-OLED efforts last year, but it seems that the company made a breakthrough in the technology that made it more appealing. We believe that such risk is low at least for the next 5 to 7 years as Micro-OLED is in testing mode now and it requires a lot of time for the technology to be cost-efficient. Also, there s still no guarantee that the technology suits TVs and smartphones as Apple is primarily developing the technology for it to be used in its smartwatch and other smaller devices. 3. Lower than expected ASP for displays: In our model, we assumed that the average OLED smartphone panel would decrease in price from $65 to $40 by However, if high supply was not faced by high demand, ASP may go down faster than we expect. While this might lead to quicker adoption rate, we don t believe that s a solid case without solving the blue emitters problem. UD management expected minimal revenue growth for 2018 (8% is minimal given that the stock trades at 40x earnings). This year s revenues are expected to be ~10% lower than the $400 million that analysts expected due to overcapacity in the OLED market. 4. Lower than expected revenues: Management guided for a 50% in installed capacity in 2019 from 2017 levels. That does not mean that revenues would increase 50%, however, we expect a 20% CAGR from 2018 revenues estimates to If actual revenues turns out to be lower than what we expect, our price target may decrease substantially.

7 OUR MODEL In our model, we assumed the lower-end of royalty rates (1% for TVs and 0.5% for smartphones), and that ASP of TV displays and smartphone displays would decline from 2017 levels of $900 and $65 to $400 and $40, respectively, by We also assumed that penetration of OLED for highend smartphones (devices that sell to a customer base that cares about device specs more than price) per device would increase from an expected level of 77% to 100% by At the same time, we are assuming that high-end smartphones as % of the total smartphone market will increase from an estimated level of 50% to 58% by Our assumptions are realistic, and to a little extent conservative, given the worldwide rapid adoption of high-end smartphones in the last few years.

8 FINAL THOUGHTS Universal Displays is a bet on a new highly-expected feature in future phones. We believe that as capacity is increasing in OLED, prices should go down which should increase the rate of adoption which in turn translates to higher high-margin revenues for Universal Displays. We do not believe that an investment in OLED stock is risky as the OLED market is showing huge signs of ticking off. The pace of renewal of the Samsung agreement proved UD s solid position in the OLED market. As such, we are bullish with a $130 per share price target.