To say that 1Q was not a typical quarter for the display space is an understatement, and we expect something similar in 2Q as the current US administration seems to change course on trade on a daily basis.  Inventory stocking and pre-tariff buying have altered typical buying patterns as can be seen in the table below, which shows the monthly sales (NT$) for AU Optronics (2409.TT), Taiwan’s largest panel producer.  Our expectations, prior to yesterday’s tariff course adjustment, was that large tariff related price increases would begin to show as previous landed inventory begins to wind down (end of April/early May), with panel producers seeing a more accelerated slowdown as brands hold back or reduced new orders as prices rise.
The fact that there was a date when the new tariffs were to be enacted was at least an anchor point where brands could make decisions about how to deal with new tariffs, but with yesterday’s 90-day hold, that anchor date has moved again and leaves brands in a quandary about how consumers will react to the postponement, in order to plan production and shipments for 2Q and beyond.  This goal-post movement will elongate the ‘tariff cycle’ that has already changed the typical production patterns for the display space, particularly for those producers that feed major brands in the US, so whatever we thought might happen soon is now spread across a wider window.. 

Given the circumstances, we would still expect brands to pause or slow production and shipments, but for a relatively short period of time, while they try to make sense of the administration’s tariff volatility, but the real question is how consumers will react.  There has certainly been signs that some consumers had been buying CE products in anticipation of expected price increases in March, and the table above, albeit specific to a single large panel producer, illustrates that pull-in buying, or at least production that could facilitate that buying, has helped 1Q sales results.  However, the increased Chinese tariffs and the remaining 10% across-the-board tariffs still overhang much of the CE space and the more general anxiety over the potential for a tariff-related economic slowdown still remains.

Display producer AU Optronics (2409.TT) has announced the purchase of Behr-Hella Thermocontrols GmbH for €600m ($632m US), a producer of vehicle climate control panels, Climate sensors, power related hardware for automotive heating and cooling blowers, and associated software.  The company’s customer base is large, with a ~20% share of the market, 2nd only to Denso (6902.T) at ~24% and provides climate controls and other products to BMW (BMW.DE), Daimler (DTG.DE), GM (GM), Ford (F), and others.  AUO has made other acquisitions that have brought it deeper into the automotive display market, with Litemax Electronics (4995.TT) in 2017 that helped AUO with backlighting technology for automotive instrument clusters, and Raystar Technologies (pvt) in 2018 that brought in technology for large automotive displays.  

In 2020 AUO began breaking out their automotive display business share, which has grown from a low of 6% in 2Q ’20 to 17% for the last two quarters of l2022and the first quarter of this year.  It declined to 16% in 2Q as TV panel revenue increased, but we expect automotive to remain between 16% and 18% for the remainder of the year.  AUO, along with a number of other panel producers, have been increasing their exposure to the automotive display market as the industry returned to pre-pandemic demand levels last year.  The automotive display business is a bit different that the typical seasonally driven generic display business in that the development cycles are long relative to the CE space, but the product sustainability is also long, typically 2 to 3 years, so those panel producers looking for a more predictable business cycle have shifted their focus. 
AUO began that process earlier than many other panel producers, but automotive display market share tends to remain stable for the reasons mentioned above and has not changed appreciably over the last few quarters.  That said, the automotive display market is oriented toward hybrid or electric vehicles, although not exclusively, but given China’s large share of the electric vehicle manufacturing market, Chinese panel producers have at least a starting advantage over automotive display producers from other regions, with Chinese display producers BOE (200125.CH) and Tianma (000050.CH) having a combined 21%+ share.  Rather than compete on a capacity basis, AUO’s general philosophy has been to produce high-end, non-generic products, and does the same in the automotive space.  We would expect to see other acquisitions that give them additional expertise in the automotive space, especially as LCD is by far the dominant display type in automotive displays, with Mini-LED backlighting beginning to appear as a way to compete with OLED displays.

Yesterday we mentioned the extremely poor January results from one of the two large panel LCD display producers in Taiwan, Innolux (3481.TT).  The other, AU Optronics (2409.TT) reported January results last night that were also weak, but not quite as weak as those from Innolux.  AUO reported January sales of 15.91b NT$ ($528.7m US), down 11.4% m/m and down 42.7% y/y.  Typically (5 yr. including 2022) January sales are down 20.6% m/m so from that perspective AUO saw better results, but being down 42.7% y/y shoouof as ‘good’.  While AUO does not report large and small panel detail, they do report total area shipped, which in January was 1.25m m2, down 18.8% m/m and down 37.5% y/y, which would imply that AUO continued to maintain or increase low utilization rates in January, an important point in understanding how display producers are reacting to the current demand weakness.  All in, AUO’s January monthly results were as expected to slightly better than expected.

​Innolux (3481.TT), one of Taiwan’s two major LCD large panel producers reported January sales of 12.597b NT$, or $419.2m US, down 21.8% m/m and down 47.5% y/y.  Over the past 5 years Innolux has averaged a 9.2% decline in sales between December and January, putting January ’23 far below the average, although a bit better than the -24.9% m/m decline seen in January 2020 at the beginning of the COVID-19 pandemic.  Excluding 2020, the current results, in absolute terms, are the worst since we began tracking Innolux sales in 2010.  Large panel shipments were 7.75m units, down 20.5% m/m and down 37.5% y/y, the lowest since 2010’s 4.1m units, while small panel shipments were 20.51m units up 8.0% m/m but down 10.9% y/y, the lowest small panel unit volume since 2019.
Our focus on Innolux is due to the fact that listed Taiwanese companies are required to release month results which gives a bit more color into CE display trends than typical quarterly results.  While AU Optronics (2409.TT), the other major Taiwanese large panel supplier, we expect similar results as the display market heading into the Chinese New Year holiday was working toward continuing the reduction of inventory levels heading into 1Q ’23.  As January and February are typically seasonally weak, we expect little change in February, with March usually the first positive m/m sales period. 
As we noted previously, we expect large panel (TV) prices to remain stable or increase slightly over the next month, which could work toward a slight improvement in February results for display producers, but the question remains as to what drives TV set demand going forward, and for how long will panel producers maintain low utilization levels..  We expect little change in TV set or panel demand in 1Q, so the real question is whether display producer managements will cut prices again to stimulate 2Q sales.  We expect that will not be the case, and managements will deal with 2Q results above those in 1Q but still lackluster and rely on 3Q to bail out the 2023 year, under the assumption that the global economy will have recovered enough to support a more positive holiday season.  It is a lot to hope for, and there is much that needs to happen to make it work, but we are still quite early in the year which allows for that hope to remain alive.

​AU Optronics (2409.TT) has said it is considering building a module/assembly plant in the US.  The company, among the top 5 panel producers globally, produces panels in Taiwan and China, is expected to make a decision in 2023 at the earliest, with mass production scheduled for 2025 if approved.  Other than a sales office in Farmington, MI, a bit outside of Detroit, that is a point for AUO’s automotive display business, they have little representation in the US, and while their panels are in a number of TV sets under major brand names, they are not well known in the US.
While a module/assembly plant is a far cry from a display panel fab, it would be unusual for a panel producer to build such a facility in the US given its high cost of labor.  Typically North America is served by assembly plants in Mexico or Brazil, so such plans would be out of the ordinary, but given the incentives the US has put on bringing foreign electronics manufacturing back to the US, the net result could make such a venture a bit more competitive, especially given the high cost of transportation CE producers have faced recently.  While an unusual decision, and one that could also be used to leverage negotiations with potential assembly sites in other countries, it would be nice to see tangible results from the current administration’s efforts to bring CE and semiconductor manufacturing to the US.

​As we have noted in the past, public companies that are listed on the Taiwan exchange are required to report sales on a monthly basis.  This gives investors a view of actual results during the quarter, rather than having to wait for quarterly results, and helps us to spot trends that are company specific or industry wide.  There are three display producers in Taiwan, AU Optronics (2409.TT), Innolux (3481.TT) and Hannstar Display (6116.TT), although Hannstar is primarily a small panel display producer.  We have been tracking such data since 2003 and have built our models using such monthly results, along with a number of other data sources, to gain insight into the display space as a subset of consumer electronics.  It is our wish that other exchanges would implement the same monthly requirements, but realistically the likelihood is infinitesimal so we take what we can get.
AU Optronics reported November sales of NT$17.48b ($571.04m US), up 1/7% m/m and down 43.4% y/y, as a typical (5 yr. avg.) November has been up 1.2%, November m/m results are slightly better than average.  AU Optronics reported area shipments of 1.5m m2, up 17.3% m/m but down 30.2% y/y, which implies an ASP/m2 of NT$11,650, which is down 13.1% m/m and down 18.9% y/y.  Based on the November report, AUO saw improved utilization but lower panel prices, netting out to a slight improvement in overall sales.  December for AUO is typically up 0.4% m/m.
Innolux reported November panel sales of NT$16.182b ($528.63m US), up 3.7% m/m and down 39.1% y/y.  With a typical (5 yr. avg.) November being down 3.8%, Innolux saw a stronger than expected improvement in sales during the month.  Innolux also reported large panel shipments of 9.17m units, up 4.6% m/m but down 22.8% y/y, and 19.75m small panel units, down 9.9% m/m and down 29.3% y/y.  December is typically up 1.5% m/m for Innolux.
November panel sales for both AUO and Innolux were better than we expected given the relatively poor results we have seen from CE retailers, albeit mostly anecdotal, bringing the 4th quarter YTD (2 months) results up 3.6% q/q for AUO and up 2.4% q/q for Innolux, but if we assume a flat December for AUO, 2022 will show the worst yearly performance since 2005 which puts the year in better perspective. Results from other panel producers will likely be less onerous using the same long-term perspective, particularly Chinese LCD panel producers, as they have ben adding capacity over the last few years while Taiwan producers have not, but we expect that on a static capacity basis most panel producers’ full year results would look the same.  We look at 2022 in the LCD panel business as the ‘hangover year’, after the parties in 2020 and 2021, and expect 2023 to be a bit less frenetic but still needing Tylenol™ and electrolytes to make it through the year.

As we previously noted, October LCD panel pricing was mixed with TV panel pricing up 4.5% and combined aggregate IT panel pricing down 1.6%, which implies that panel producer results will be quite dependent on the overall mix of orders.  TV panel revenue for most panel producers has been declining as a percent of the total, given the rapid TV panel price declines that have been evident since July of last year so the TV pricing leverage will be relatively small, although AU Optronics (2409.TT) saw its 3rd consecutive monthly improvement is sales, while competitor Innolux (3481.TT) did not, after a sales jump last month.  Hannstar (6116.TT), primarily a small panel producer, saw a m/m improvement in sales after a weak September, but continuing the downward trend of sales for the year.
While m/m results are looking a bit better for Taiwan LCD panel producers, we expect they will, bounce along the bottom for the remainder of the year, with the objective being to lower inventory levels and attempting to only take orders for lots that are priced above cash costs.  Taiwanese based LCD supply chain participants tend to be focused on making aggressive inventory adjustments before year-end to enhance year-end financials, and weakness coming from Chinese COVID lockdowns will all likely contribute to a lackluster 4Q.  That said, there is some hope that the inventory reductions underway will keep the seasonally slow 1st quarter from being a disaster, but without a demand driven recovery, it would be hard to make the case for anything but a relatively flat 1Q.  

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.

AU Optronics (2409.TT) reported June Sales of NT$20.69b ($69453m US), ↓5.8% m/m and ↓39.0% y/y, putting the 2nd quarter sales at NT$62.881b ($2.111b US), ↓22.9% q/q and ↓34.3% y/y and 1st half results are ↓19.1% y/y.  Typically (5 year average) June is up 0.4% m/m and 2Q is up 7.0% q/q, so from any perspective June and 2Q were weak for AUO, although no surprising given the weakness seen across the CE space and the display space in particular, as overall display panel prices declined 12.0% during the 2nd quarter and panel orders from brands were reduced.  Area shipped was 1.59m m2, ↓9.7% m/m and we do note (see Figure 2) that AUO has been able to maintain fab efficiency (not utilization), meaning the sales value of each m2 of display produced, at a reasonable level since the beginning of the year, which points to the company’s focus on high value display products rather than generic displays.
While we wait for Innolux (3481.TT) and Hannstar (6116.TT) to report June sales and shipments to complete the Taiwan panel producer data, we expect July results for most panel producers will see further declines, more weighted toward order reductions than price declines, giving a messy start to 3Q.  With Samsung Electronics (005930.KS) reducing or eliminating TV panel orders from suppliers to reduce inventory, as we have previously noted,  it will be difficult for panel producers to maintain production at earlier levels, unless they are willing to offer larger discounts than in previous months, which will amplify panel price declines.  Our hope is that the order cuts will be enough to reduce inventory to more normal levels by mid-August, and that the panel price declines that have been evident for part of last year and the 1st half of 2022 will slow to more ‘normal’ levels as we enter September.  Brand targets have been reduced but consumers have yet to jump at discounts thus far, and the macro environment leaves a bit to be desired, so again we look at such prospects as possible but less probable than an extension of the current CE malaise into 4Q.  As of yet there are few signs pointing toward a better than expected outcome, but we keep looking.
 

​As we have mentioned a number of times in previous notes, Apple has a strong interest in micro- displays, and has been researching the use of same for a potential AR/VR product.  There is considerable competition in the micro-display space, not only between manufacturers, but between types of micro-displays that are vying for the attention of Apple and others, with LCD, OLED, quantum dot, and LED factions all pushing development to garner favor in the AR/VR world.  Of the AR headsets in our database that have been released or announced, for which we have specific display information, 12 of 23 are based on micro-OLED displays, 5 on micro-LCD displays, 3 on micro-LED displays, with 3 (older) based on LCoS or DLP.
Given the ability for OLED displays to be both self-emissive and patterned, they offer a practical solution for micro-displays than less mature and therefore more expensive micro-LED solutions and nascent quantum dot micro-displays, and the weaker characteristics of micro-LCD.  Currently Sony (SNE) is the leader in the micro-OLED display space, having been involved in the development of such products since 2009, originally for the replacement of optical viewfinders.  Currently Sony displays use a WOLED structure with a color filter, similar to what LG Display (LPL) uses for it OLED monitor and TV displays, as patterning micro-OLED pixels, which are an order of magnitude smaller than those in a typical OLED TV display, is quite difficult.
Given the expertise needed to develop micro-OLED displays, there are only a few producers competing with Sony, including AUO (2409.TT) and EverDisplay (688538.CH), but the leader in large OLED displays, LG Display, is said to be at the cusp of ordering deposition equipment from Korea’s Sunic Systems (171090.KS) in order to develop a competitive micro-OLED display line that will compete with Sony for Apple’s potential AR/VR business.  Sunic supplies both cluster and in-line OLED deposition systems designed for both large and small panel production, which include loaders and various chambers for organic and metal deposition, and are sold to many display manufacturers and research organizations and OLED lighting manufacturers. 
While we do not know the exact tools being ordered by LG Display, which would give some indication as to what stage of development the company has reached, we would expect it will take some time for LGD to get qualified as a volume producer and would likely not be in the running for the first Apple AR/VR release, which is rumored for early in 2023, but given LGD’s expertise in the OLED space, we expect they will eventually become a viable competitor, especially given their OLED supply relationship with Apple, for whom they supply a substantial percentage of iPhone displays.  China’s BOE (200725.CH) has also been developing micro-OLED displays using Sunic deposition tools but oriented toward military applications.