AU Optronics et al.
AU Optronics (2409.TT) reported 2Q results as previously noted, down 22.9% q/q and XXX y/y, generating an operating loss. 2Q weaker sales and profits were the result of lockdowns in China and weaker IT product demand from customers who have higher than normal inventory levels, which is predicament that most panel manufacturers faced and AUO was no exception. The company has lowered its utilization rate (area) to ~70% and will ‘dynamically adjust’ that rate in 3Q, which means they have not set goals, other than to look at each product line and decide if they can generate a profit or positive cash flow before deciding to produce that product in 3Q. While this sounds like something that should be done on a regular basis, when utilization and profitability is high there are some products that panel producers will run to satisfy large customers, even if they run negative CF. Given the direr macro circumstances, that perspective has changed.
The company has guided to a decline in shipment for 3Q of between 14% and 16% although they expect ASP (area basis) to be flat based on mix changes, essentially focusing on those products that are in the premium segment of the display market, with automotive and medical singled out. On a general basis management indicated that they are beginning to see raw material prices stabilize or decline and while transportation costs are still high, many of the logistic bottlenecks have abated. While this is a positive for the company (and the industry) and is expected to lead to a 2% to 3% cost reduction in 3Q, the easing of transport bottlenecks also pushed more inventory into the channel in 2Q, which now has to be digested by customers and has forced the utilization reductions that are expected to continue in August.
On a medium-term basis, AUO has decided to reduce it capex for the 2022 year by 20%, from NT$45b ($1.5b US) to NT$36b ($1.2b US) and has delayed plans to build a new Gen 8.6 LCD fab until a better picture of the demand cycle becomes available. The company did indicate that it intends to increase its exposure to the automotive display market, which is seeing improving demand and will continue to grow its ‘non-display’ businesses to offset the cyclicality of the display market. Figure 1 shows the breakdown by product category of AUO’s revenue with TV declining from over 38% in 2Q ’18 to 16% in 2Q ’22 and the combined commercial, automotive, public display and other category moving from 20% in 2Q ’18 to 43% in 2Q ’22. While this has helped AUO through various product category weak cycles, the overall weakness in the TV and IT display space in 2Q was great enough to generate losses.
All in, the quarter was generally as expected for AUO and the call rhetoric seems to indicate that while the company would like to be optimistic (they are hoping that brand discounting will burn through excess inventory quickly), they are unsure as to how long this scenario will last, and the capex cut is indicative of that concern. AUO has responded well relative to competitive challenges from Chinese panel producers over the last two years by focusing away from generic panel production, but with almost all other panel producers now under pressure to find more profitable display products, will likely face increased challenges over product differentiation and capex could shift back to upgrading existing fabs to become more specialized and away from overall capacity expansion given the excess capacity currently existing in the display space. It was a difficult quarter for AUO and the industry, and it looks like 3Q has started off in the same way, although we expect 3Q to end a bit better than it began and 4Q is going to be a reflection of consumer psychology heading into the holidays, which, given the rapidity in which the macro environment changed in 2Q, seems light years away and equally unpredictable.
The company has guided to a decline in shipment for 3Q of between 14% and 16% although they expect ASP (area basis) to be flat based on mix changes, essentially focusing on those products that are in the premium segment of the display market, with automotive and medical singled out. On a general basis management indicated that they are beginning to see raw material prices stabilize or decline and while transportation costs are still high, many of the logistic bottlenecks have abated. While this is a positive for the company (and the industry) and is expected to lead to a 2% to 3% cost reduction in 3Q, the easing of transport bottlenecks also pushed more inventory into the channel in 2Q, which now has to be digested by customers and has forced the utilization reductions that are expected to continue in August.
On a medium-term basis, AUO has decided to reduce it capex for the 2022 year by 20%, from NT$45b ($1.5b US) to NT$36b ($1.2b US) and has delayed plans to build a new Gen 8.6 LCD fab until a better picture of the demand cycle becomes available. The company did indicate that it intends to increase its exposure to the automotive display market, which is seeing improving demand and will continue to grow its ‘non-display’ businesses to offset the cyclicality of the display market. Figure 1 shows the breakdown by product category of AUO’s revenue with TV declining from over 38% in 2Q ’18 to 16% in 2Q ’22 and the combined commercial, automotive, public display and other category moving from 20% in 2Q ’18 to 43% in 2Q ’22. While this has helped AUO through various product category weak cycles, the overall weakness in the TV and IT display space in 2Q was great enough to generate losses.
All in, the quarter was generally as expected for AUO and the call rhetoric seems to indicate that while the company would like to be optimistic (they are hoping that brand discounting will burn through excess inventory quickly), they are unsure as to how long this scenario will last, and the capex cut is indicative of that concern. AUO has responded well relative to competitive challenges from Chinese panel producers over the last two years by focusing away from generic panel production, but with almost all other panel producers now under pressure to find more profitable display products, will likely face increased challenges over product differentiation and capex could shift back to upgrading existing fabs to become more specialized and away from overall capacity expansion given the excess capacity currently existing in the display space. It was a difficult quarter for AUO and the industry, and it looks like 3Q has started off in the same way, although we expect 3Q to end a bit better than it began and 4Q is going to be a reflection of consumer psychology heading into the holidays, which, given the rapidity in which the macro environment changed in 2Q, seems light years away and equally unpredictable.
AU Optronics Product Revenue Breakdown - Source: SCMR LLC, Company Data
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