​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.

In our 05-11-22 note we reviewed the results for the three Taiwanese LCD panel producers which were quite weak and while May sales results were up on a m/m basis for two of the three, y/y comparisons were quite poor.  Of the three AU Optronics (2409.TT) fared the best, with sales of NT$21.97b ($744.0m US), up 8.7% m/m but down 31.6% y/y, while Innolux (3481.TT) saw sales of NT$18.01b ($610.02m US), down 12.6% m/m and down 42.6% y/y, and Hannstar (6116.TT) generated NT$1.60b ($54.32m US), up 15.6% m/m/ but down 43.1% y/y. 

AU Optronics typically sees a m/m sales increase of 8.1% (5 yr. avg.), so this month’s performance seems in-line on that basis, although sales for the month are now only slightly above 2020 pandemic levels, which were the lowest since 2005,  While AUO does not report large and small panel shipments, they do show shipment area (m2) for each month, which we convert into sales/m2, as seen in Figure 4, which peaked in July of last year, and has continued that m/m decline this year as panel prices declined.
Innolux fared the most poorly of the three, despite a continuing rebound in small panel shipments, although we expect the continued weakness seen in large panel pricing offsets the shipment gains in the small panel segment.  Hannstar, which specializes in small panel production, saw a large jump in large panel units, but we note that these are small volumes relative to other producers and vary considerably based on orders, especially after the weakness seen earlier this year.  After a poor April Hannstar is now seeing relatively steady small panel shipments, although pricing remains under pressure, and with the return of large panel shipments (IT panels most likely) was able to generate positive m/m performance in May.
Looking at the two large panel Taiwanese producers combined, sales saw a 2.07% decline, and while we cannot directly compare large panel shipment data for bot (AUO does not provide), we assume that the combined large panel shipments were roughly flat, leaving price as the basis for the sales decline.  As we expect June will see additional panel price declines, we expect flat to weaker results for Taiwan panel producers this month.  We do expect to see Chinese panel producers lower utilization rates again, although the increments have been small thus far, which could help to slow panel price declines, but we would not expect to see panel price stability until August when panel production for the holidays begins again.  Much will depend on how much inventory Chinese panel producers were able to bring down by lowering utilization and how aggressive brands will be on maintaining inventory levels into the holidays, but we are still quite concerned that the lingering effects of COVID-19 lockdowns and the war in Ukraine, along with the rapidly increasing price of energy will temper production demand in 3Q.

​Over the last few days various sites have speculated that Taiwanese panel producers AU Optronics (2409.TT) and Innolux (3481.TT) would merge to create an LCD powerhouse that could compete with Chinese panel producers, such as BOE (200725.CH) and Chinastar (pvt).   Given the poor performance seen by LCD panel producers in April and a continuation of same for the 2nd quarter, we expect drawing such conclusions would be a way for some to refocus the declining profitability of the display space toward such combinations that would give promise to a new order, but it seems that neither company was interested in the idea and Innolux went as far as to appeal to the media not to publish false reports that would mislead the public.  AUO indicated that the transformation it has made over the last few years, moving from commodity panel  production to more specialized displays, and branching out into Mini-LED and Micro-LED technology, have performed well and are creating value, so a merger would only be viable if it were synergistic to that goal.
The problem with such a merger is the capacity that both parties already have and how that plays into today’s market.  Both AUO and Innolux have significant Gen 5 and Gen 6 capacity, which is ideal for IT panel production, but combined lave less Gen 8 capacity than China’s leading TV panel producer BOE, which is essential for efficient TV panel production.  Both also have a number of Gen 4 and Gen 5 fabs, which are relatively old and therefore inefficient by current standards.  We note that AUO has recently indicated that it is planning to build a new Gen 8.5 LCD fab and has expanded capacity at its fab in Kunshan, the first capacity expansion project that the company has made in many years, and Innolux has stated it will not build any new LCD capacity but will upgrade existing LCD lines.  With the continuing downturn in LCD panel pricing, we expect such plans are less prone to be rushed and the result of combining existing assets would likely also be less crucial.

April was not a good month for panel producers in Taiwan, and likely similar results would be found for other panel producers.  AU Optronics (2409.TT) reported April sales of NT$20.22b ($682.37m US), down 27.9% m/m and down 31.7% y/y.  Area shipments were also down 73.9% m/m and down 23.7% y/y.  To put this data in perspective, the drop in sales seen by AUO was the largest m/m decline seen since November 2008, the y/y decline was the largest seen since January 2009, and the panel area shipments were the lowest since AUO began reporting those numbers in February 2020.  Typically these monthly numbers are reported without any commentary however this month AUO added the following to the report, which we feel sums up the month quite succinctly:
“Revenues dropped sharply in April, largely due to weaker demand amid macroeconomic uncertainties caused by war and inflation, together with higher channel inventory resulted from previous port congestions and container shortage. In addition, eastern China has introduced strict Covid-19 related lockdowns since April. Given the challenges of lack of workers, combined with supply chain disruptions under these lockdown measures, the Company has lowered utilization rates at its production sites in Kunshan and Suzhou. Meanwhile, shipments to customers were also impacted by these lockdown restrictions. Currently, lockdown measures were lifted in certain areas while the pandemic gradually eased. However, it may still take some time for market to return to normal.”
​

Innolux (3481.TT) did not fare much better in April reporting sales of NT$20.6b ($695.2m US), down 13.9% m/m and down 32.1% y/y.  Innolux shipped 10.7m large panels in April, down 10.9% m/m and down 10.6% y/y and shipped 26.55m small panels during the month, which was up 14.5% m/m but down 5.0% y/y.  Innolux made no comments about the results for the month

Hannstar Display (6116.TT), who is primarily a small panel display producer, saw  sales of NT$1.39b ($46.91m US), down 20.3% m/m and down 49.6% y/y, while large panel shipments declined to 38,000, down 39.7% m/m and down 78.3% y/y, while small panel shipments declined to 17.32m, down 41.4% m/m and down 52.6% y/y.

​Characterizing April as a bad month for Taiwanese panel producers is a bit of an understatement, although some fared better than others.  As panel producers face lower sales and bring down utilization rates to compensate for weaker demand, we expect to see margins turn negative and if the recovery from China’s COVID lockdowns and the war in Ukraine take much of May, the 2nd quarter will be quite poor, even with a bit of a snap back in June.  While each panel producer will see different results in May and June, we expect Chinese panel producers will still try to maintain shipment levels by continuing to discount panel prices into June, but will soon see those prices fall below cash costs, at which point they have no choice but to lower utilization rates.  While those lower utilization rates will lead to more stable panel prices in 3Q demand does not seem to be strong enough to warrant increasing utilization to previous levels, which means 3Q panel results will be negative on a y/y basis.  We expect the only hope for results better than this scenario would be if China gets COVID under control and there is a bit of a recovery in the Chinese economy, but that is an optimistic scenario.

​AU Optronics (2409.TT) reported 1Q sales of NT$81.5b (~$2.77b US), down 12.4% q/q and down 1.7% y/y, Gross margins declined from 18.9% in 4Q (28.7% at peak in 2Q ’21) as did net margin, which was 6.3%, down from 12.7% in the December quarter and down from 14.3% in 1Q ’21.  None of this is surprising given the state of the display space, as we have noted previously.  2nd quarter guidance for AU Optronics  reflects some of the impact of the Russian invasion of Ukraine and Chinese COVID-19 lockdowns, but the company cautioned that the impact may not be fully reflected in the forecasts, which are for area shipments to be down by low single digits q/q after a 7% decline in 1Q.  Blended ASP (m2 basis) is expected to be down by mid to high single digits, after declining 6.3% ((m2 basis) in 1Q.
AUO management indicated that aside from the continuing shortages that most panel producers have been facing, transportation issues for both raw materials and finished product continue to make predicting 2Q more difficult than usual.  Chinese COVID-19 lockdowns have also affected the company’s production fabs in Suzhou and Kunshan, where some operations have been limited or suspended due to the lockdowns, although overall inventory levels have been increasing to higher than normal levels as demand weakened during the quarter and brands lowered panel purchase targets.
We believe while AUO’s quarter is indicative of the difficulties facing panel producers currently, they have been able to mitigate some of the impact by having shifted production goals to more premium products and away from generic panel production, where competition from Chinese panel producers is fierce.  These niche products have helped stabilize AUO’s results for the last quarters but as with all panel producers overall demand will drive both pricing and profitability, so AUO’s results this year and next will be slightly less driven by the global macro environment than some, but will need an improving environment to achieve y/y sales and income growth.

​Taiwan based AU Optronics (2409.TT) has announced the purchase of Rise Vision (pvt) based in Wichita, Kansas for $29.25m US.  The company provides software that helps users design cloud based content for digital signage for schools and commercial applications.  The software is based on the number of displays used (10 displays cost $1155/year, while schools get unlimited displays for $1,000/year).  The software is hardware and OS agnostic so it will run on almost any OS and media player, and is used by a number of large organizations including Marriot (MAR), The Philadelphia Eagles (pvt), and the Chicago Public School System.
AU Optronics has a public display division that provides a broad lineup of displays that include small touch based displays to large video walls.  This software will help to provide a simple and popular solution for content creation as part of a PID sale and goes toward AUO’s push toward providing non-generic displays that carry higher margins and are less subject to competition from Chinese panel producers.   For those not familiar with the public display market here are a few examples:

As we have noted in the past, while Taiwan represents ~27.4% (Fe. ‘22) of large panel display industry revenue, the three Taiwanese panel producers are required to report monthly sales figures while panel producers in other regions and countries typically report those figures quarterly.  This gives a bit of granularity to shorter-term trends in the display space and justifies tracking those results.  As February is an unusual month for the display space given that it is a short month and also contains the Chinese New Year holiday, March tends to even the quarter out, making it a bit more comparable to other years.  Such is the case this year, although the total quarterly result is a bit less positive than last year.
AU Optronics (2409.TT) reported March sales of NT$28043 ($829m US), up 9.3% m/m but down 8.7% y/y, while Innolux (3481.TT) posted sales of NT$23.92b ($825.74m US), up 9.0% m/m but down 22.8% y/y, while Hannstar (61116.TT) generated sales of  NT$1.74b ($59.57m US), up17.4% m/m but down 42.6% y/y.  While the m/m performance looks strong, as we noted, March tends to be a recovery month for panel producers after a slow January and February, however, in the table below, we also show the 5 year averages for March m/m and y/y, which indicate that the gains seen this March are below the averages, particularly when comparing y/y metrics.
Preliminary quarterly sales results, as shown in Table 2, paint a similar picture, although not quite as negative, with the 1Q results being a bit closer to 5 year q/q averages, while 1Q y/y results are a bit further from the averages.  The charts below show that 2022 is starting out more similar to 2018 – 2019, which makes sense given 2020 was certainly not a typical year, nor was 2021, but based on the sales data thus far for the three Taiwan based panel producers, it looks like 2022 will be a more typical year than the last two, but at a higher sales level than 2018 – 2019.  This would be a good indicator of full year panel producer results, however we expect TV panel pricing to remain relatively flat for 2Q and IT panel prices to decline further, which would pull down full year sales and make the 2022 full year chart look a bit less typical than it does thus far.
All in, the best case in our view would be a typically seasonal 2022 for panel sales, at a higher level than 2018 – 2019, but a lower one than the ‘COVID-19 years’ of 2020 and 2021.  The worst case would be a rapid decline in IT panel prices with no increase in TV (large) panel prices, which would set up potential q/q declines during what should be sequentially better quarters.  Y/y results will likely be down in 2Q and possibly 3Q as last year’s large panel price decline began late in the year.  While not a disastrous year for panel producers 2022 is shaping up to be far more difficult than last year and we expect valuations to continue to remain constrained for most generic panel producers.

​Following moves by a number of Taiwanese companies, AU Optronics (2409.TT) indicated that it will be reducing capital by NT$28.82b ($1.001b US) through a cash dividend of NT$1 ($0.03 US) and the cancellation of ~20% of the company’s 9.6b shares this year.  The company also indicated that it expected to return to shareholders a total of NT$55.77b (~$1.937b US) over the years 2022 through 2024, of which NT$26.95b (~$936.28m US) would remain in 2023 & 2024.  AUO reported its best year in 14 years in 2021 and has already announced plans to build a new Gen 8.5 LCD fab in Taichung which is expected to begin production in 2025, (we expect it might be a bit earlier) and which will see its 2022 capex increase from NT$17b (~$590.6m US) last year to NT$45b (~$1.56b US) this year, with a total cost (including other fab upgrades) of between NT$100b (~$3.47b US) and NT$150b (~$5.21b US).  The capital reduction will be voted on at the June shareholder meeting.
AUO’s Taiwan shares declined by 1.96% last night with investors seemingly disappointed at the dividend value, although the total payout represents 46.5% of the 2021 full year EPS.  It has been a tough 12 months for AUO’s stock price, peaking at NT$33.35[1] on April 28, 2021 and falling to a low of NT$16.80 on October 4, 2021, despite strong results, as investors have remained concerned about the volatility seen in LCD panel prices.  AUO has and continues to push a transition away from generic LCD panel production toward premium and specialty panels, which represented ~ 50% of revenue in 4Q ’21 and should lower the company’s sensitivity to typical display industry cyclicality.


[1] Closing Price

As we have noted in the past, while Taiwan represents ~27.6% (4Q ’21) of large panel display industry revenue, the three Taiwanese panel producers are required to report monthly sales figures while panel producers in other regions and countries typically report those figures quarterly.  This gives a bit of granularity to shorter-term trends in the display space and justifies tracking those results.  We note however that February is an odd month for panel producers generally, as the month is short and contains the Chinese New Year holiday, which is a time when factories run at low levels as workers travel home for the holiday.  As a result February seasonality sales and shipment data varies considerably between producers, as AU Optronics’ (2409.TT) 5 year average m/m February sales are down 0.9% while Innolux’s (3481.TT) February average is down 13.5%.  We believe looking at the chart trends is a better way to see how Taiwan panel producers are performing during the early months of the year as seen below.  We note that AU Optronics reports only total sales while Innolux and Hannstar (6116.TT) report sales and shipments.
In the case of AU Optronics and Innolux, sales have fallen to levels at or below February 2021.  Both panel producers generate considerable revenue from TV panel sales (generally between 30% and 35%) with the remainder from IT products (notebooks, monitors, tablets) and small panel (smartphone, watches) sales.  As large panel prices have declined steadily since last July, the effect has been obvious on sales, but only within the last 2 – 3 months have panel prices for IT products begun to decline.  Those panel products had helped to offset the decline in TV panel prices until recently and now have begun to pressure overall sales as those panel prices weaken.  As this trend has continued through February, first quarter results are likely to be under pressure, although the declines in TV panel prices have slowed somewhat as IT panel price decreases increased.  As panel producers spent much of last year shifting production away from TV panels and toward IT panel production, this makes the industry more sensitive to IT panel price declines.  Hannstar is primarily involved in producing small panels so the effect of TV and IT panel price declines is less obvious however component shortages and weak demand for smartphones has also affected Hannstar’s monthly sales trends this year.

​AU Optronics (2409.TT), is the 4th largest LCD panel producer globally and has taken a different path than many of its competitors over the company’s more than 25 year history.  While in the early years AUO built capacity in Taiwan, purchased capacity in Singapore, and eventually expanded into China, the company has done relatively little in terms of expanding production capacity over the last 5 or 6 years, a period when Chinese panel producers have expanded LCD capacity rapidly while South Korean panel producers have gone in another direction, reducing LCD capacity and focusing on OLED production. 
We have noted recently that AUO has decided to expand capacity at their Kunshan, China Gen 6 fab by 28.6% this year, but has remained more focused on upgrading its older fabs than constructing new ones.  That is going to change over the next few years as the company has announced it will be acquiring land and developing power and engineering capabilities for a new fab in Taiwan.  The capex budget for this project will be NT$5b ($180.3m US) this year, and will increase to NT$28b ($1.01b US) as the project develops, with the equipment purchases likely to begin in 2023, pushing the overall project cost to between $3.6b and $5.4b.  Based on those expectations, we expect the new fab will be built in at least three phases, with the first completed in 2025, and the additional phases being built out over an additional 2 – 3 years.
AUO did not give additional details about the fab other than it is expected to be a Gen 8.5 or Gen 8.6 fab and that it will be focused on IT panel production, but owing to AUO’s conservative nature as to capacity expansion, we would expect the full build out might take many years and potentially change a bit over time.  The land and infrastructure construction is just a start for what will become another major fab for AUO, and will eventually add to their automotive and premium IT panel production capabilities.  AUO however has shied away from OLED panel production and has become more focused on LEDs as an advanced display source, so there is the possibility that phase 2 or 3 of the new fab might have a different production orientation when it is built out, although for now, the orientation would still be LCD..