All three Taiwan based panel producers saw revenue decline on a m/m basis, with both Innolux (3481.TT) and Hannstar (6116.TT) seeing y/y declines, while AU Optronics (2409.TT) saw a 4.5% increase.  For reference, AUO’s typical[1] January sales decline is 10.8% m/m.  That said, AUO saw both a m/m and y/y decline in area shipped, likely a reflection of the lower utilization rates seen by many LCD panel producers as demand slows and panel prices decline.  Innolux saw sales declines on both a m/m and y/y basis and while large panel shipments were up 2.4% m/m, they were down 1.1% y/y along with a steeper m/m and y/y decline in small panel shipments.  While increased large panel shipments might have offset some of the impact of declines in large panel prices, Innolux also saw a substantial drop in small panel shipments, both on a m/m and y/y basis.  Small panel production is less meaningful in terms of fab usage (m2), however small panels are usually more profitable on an m2 basis, so we expect the lower small panel shipment volume will be a contributor to lower margins for 1Q if such declines continue.  Hannstar is primarily a small panel producer, so we put less weight on the large drop seen in their large panel business, which is primarily IT products, but it does give some indication as to the demand level for such products, which has been weakening as COVID-19 restrictions have been reduced.
All in January results for Taiwan based panel producers seem to be in line with our expectations, which are based on our outlook that panel prices for both TV and IT panels will continue to decline in 1Q.  While 1Q guidance from panel producers is a bit more optimistic than we might expect, with the concept that panel pricing will stabilize during 1Q, that has not been the case thus far, and we would expect that if February results continue to be weak, which we expect will be the case, the hope that panel prices will stabilize will likely be pushed out to 2Q and panel producers will likely have to lower utilization rates again in order to slow the decline in panel prices. 


[1] 5 year average (2017 – 2021)
 

​AU Optronics (2409.TT) held a ceremony to officially begin its capacity expansion project at its Kunshan, China Gen 6 LCD fab.  While the expansion itself is relatively small, adding an estimated 9,000 to 10,000 sheets/month to the fab’s current 27,000 sheet/month capacity, we expect AUO has a further plan to add an additional line of the same capacity at a later date, for a total of 45,000 sheets/month.  We expect there will be other upgrades to the fab, which began production in 3Q 2016.  Based on equipment timelines, we expect the initial expansion to be completed in September of this year. 
AU Optronics has been relatively conservative toward capacity expansion over the last few years, looking more toward developing leading edge products than garnering market share, the opposite tract of Chinese LCD panel producers who have been expanding capacity despite the risk of cyclical overcapacity that has plagued the display industry over much of the industry’s recent history.  While AUO has spent ~$367m for equipment purchases to upgrade LCD production facilities in Taiwan since the end of August last year, much is going toward upgrades rather than capacity (other than Kunshan), which has allowed AUO to maintain a key position in a number of premium panel markets.  While this philosophy might not have looked good during the rapid panel price increases seen in late 2020 and early 2021, the true test comes when the effects of weaker panel pricing drives down profitability for those in the commodity panel space, while premium product pricing is affected to a lesser degree, which we believe is the case currently.
.
 

​Taiwan based AU Optronics (2409.TT) saw two of its senior level managers and a partner indicted for a scam that cost the company $86.6m over a period of seven years.  The manager permitted the third party to buy LCD panels from the company at a price lower than normal, which he resold in China for a profit and then laundered a portion of the profit back to the manager through accounts of relatives, eventually using the illegal profits to buy real estate. The partner generated $3.4m in profits while the manager admitted to and returned ~$360,000, with the second manager, who joined the scheme later, taking in ~$220,000 in kickbacks and other income.  The initial manager was detained, with the court fearing he might destroy evidence, while the other two were released on ~$72,000 bail each.
While price fixing was the more typical issue for panel companies in the early 2000’s, with AUO and a number of other panel producers being indicted and fined for collaborating to keep panel prices from declining over a period of four years, such lesser infractions seem to plague many panel producers who have trouble maintaining a watchful eye over managers, and plead to the courts how shameful these crimes are but take little responsibility for the lack of oversight.  We would expect a company panel to be formed to examine ways in which these crimes could be prevented in the future, and a few new programs to make sure it does not occur again in the near future, as always. 

While Hannstar (6116.TT) has yet to release its November sales report, AU Optronics (2409.TT) and Innolux (3481.TT) reported mixed results for November.  AU Optronics reported sales of NT$ 30..88b ($26.14m US), up 1.6% m/m and up 19.0% y/y.  AUO no longer reports large or small panel shipments on a monthly basis.   Typically November is flat to up slightly m/m, so AUO performed well relative to its 5 year averages.  Innolux reported sales of NT$ 26.59b ($22.51M US), down 0.8% m/m and up 1.9% y/y. Large Panel shipments were 11.88m units, down 1.4% m/m and down 1.8% y/y, while small panel shipments were 27.93m units, up 13.6% m/m and up 2.5% y/y.  To characterize November for these two panel producers, we would say the month was a bit above the norm, but by a small amount. 
With declining sales across the panel space each month since August, some bounce could be expected but we presume that the general trend of declining large panel prices and weakening IT panel prices continues, although year-end orders might obscure that trend a bit.  December tends to be a volatile month for panel producers, with the 5 year average being down 2.5%, but 2020 saw a 3.3% industry sales gain in December after many years of December monthly declines, so our faith in the averages is a bit diminished. 
That said, assuming a flat December, AUO’s full year sales will be up 36.5%, with 48.3% of sales in 1H and 51.7% of sales in 2H, not far from the 5 year average split of 47.9% and 52.1%.  As TV panel prices have fallen faster than IT panel prices, AUO’s shift away from TV panel production and more toward IT panel production has helped to stave off the effects of the rapid TV panel price declines.  While we certainly give management the credit for such foresight, we expect some of that transition was also a result of the increasing pressure on AUO’s TV panel business from Chinese suppliers, who have continued to add capacity and dominate the space in terms of unit volume.
Innolux has been a bit more oriented toward large panel production, which has affected 2H sales a bit more than AUO.   2H share of the full year sales total was 49.4% vs. Innolux’s 5 year average of 53.1%, showing the effects of the more pronounced drop in TV panel prices in 2H.  The full year for Innolux was still up 29.71% (assuming a flat December) but monthly y/y comparisons are getting more difficult, just barely keeping pace with last year, while Innolux faces the same competitive issues from Chinese panel producers as does AUO.

AUO (2409.TT) has participated in a private placement for shares in PlayNitride (pvt), a Taiwan based company that has been working toward the commercialization of Micro-LED technology since 2014.  The private placement raised $20m (Shares priced at $7.73), bringing the total raised by the company over the last few years to over $61m.  Previous funding rounds for PlayNitride have seen investments by Samsung Ventures (005930.KS), Lite-On Technology (2301.TT), a Taiwan-based company that produces LEDs, and two VCs.  PlayNitride has been developing Micro-LED displays under the names PixeLED®, µ-PixeLED™, and PixeLED Matrix™, and has been showing prototypes, particularly those used for AR/VR applications and automotive HUD displays., although they have shown a number of iterations of ultra-large Micro-LED TVs based on their modules. 
AU Optronics and PlayNitride have been working on Micro-LED display projects together for a number of years and have worked on Micro-LED development projects for Apple (AAPL) at the well-known ‘secret’ Apple LED R&D center in Taiwan.   AUO also made a recent investment in Ennostar (3714.TT), a holding company formed from the merger of LED producer Epistar and LED packager Lextar, both of whom have also been associated with the ‘secret’ Apple facility in Taiwan.  Under the heading of ‘where there’s smoke there’s fire’, it would seem that Apple continues to get more involved in the application of Micro-LEDs for future products although the timeline for same still remains a mystery.

October results were down for all three panel producers in Taiwan, which gives some indication of results for those panel producers that are not seeing an offsetting increase in capacity.  While AU Optronics (AUOTY) no longer provides large/small monthly panel data, we expect they saw a reduction in both large and small panel sales in October.  AUO still has room to garner positive y/y sales in November, but a strong December last year will make that month a hard comparison, although we expect early 2022 monthly comparisons will return to the positive as sales in January/February of this year were weak.  Starting in March however we expect a more difficult time showing positive y/y sales results.
Innolux  (3481.TT) has less wiggle room on a y/y sales basis, but relatively consistent large panel shipments have helped to maintain positive y/y monthly sales, however small panel shipments dropped to a yearly low in October, which will impact profitability as small panels are the most profitable on a m2 basis.  Hannstar (6116.TT), which is focused on small panel production, saw a continuation of sales declines that began after a peak in small panel production back in March as smartphone demand continues to wane.  We would not expect much change until production for the next smartphone cycle resumes in March 2022.
 

​Back in April we noted that Taiwan based AU Optronics (AUOTY) was planning to both buy out its joint venture partners and add capacity to its Gen 6 LCD fab in Kunshan, China.  The deal had been waiting for approval from the Taiwan Investment Commission, which has been reviewing the transaction.  According to local press, the Commission has approved the deal, allowing AU Optronics to purchase the 49% stake held by the Jiangsu Kunshan Development Zone Construction Group for $617m, making the fab a wholly owned subsidiary.  This will allow AUO to add what we believe will be ~9,000 sheets/month of capacity to the existing 36,000 sheet/month layout, with a planned timeline of 3Q 2022 as the opening of the new line. 
AU Optronics has been quite conservative toward expanding capacity over the last few years and has spent more time and capital upgrading its LCD production processes and shifting production toward higher margin products, so this transaction, and the capacity expansion, albeit small by industry standards, are a change for AUO and are indicative of the more optimistic view panel producers have of the current panel cycle.  That said, we expect AUO is looking past current prospects and is looking to broaden it capabilities on a more general basis, with emphasis on the IT and automotive display spaces.  Given AUO’s conservative nature, we see relatively little risk in the expansion regardless of the prospects for the next few quarters.

Large panel shipments (Fig. 4) were up 0.1% in August while large panel sales (Fig. 5) were down 3.8%, a result of the large drop in TV panel prices (-10.1%).  With July being the peak for TV panel prices and IT product panel pricing remaining stable in August (looks the same in September), but the effects of the steep TV panel price drop in August had a negative effect on LCD panel industry sales, with the price per unit of TV panels considerably greater than that of IT panels.   We show both Shipments & Share in Fig. 6. To illustrate how shipments have remained flat but large panel price increases have kept sales momentum intact.  Given the Significant drop in TV panel prices in August and again in September, we expect the September large panel sales results to see another drop.
TV panel share is a monthly variable that does not get reported by many panel producers (some do quarterly) but based on our data, we believe the shipment level for LCD TV panels declined by 4.3% in August, following a 1.5% increase in July, offset by a 2.8% increase in monitor shipments, flat notebook shipments, and a 4.8% increase in tablet shipments.  The shipment trends are noted in Fig. 7.  Panel producers have been decreasing their share of TV panel production in lieu of IT panel products, less in anticipation of the price drop seen in August but more due to the continued demand for notebooks and monitors.  While there is much talk over how this will lessen the effect on panel producer sales as TV panel prices decline, we have only seen one month of excessive TV panel price declines and therefore little cumulative negative momentum.  Given that September saw an even larger decline in LCD TV panel prices and little price offset from IT panel pricing, we expect that September industry large panel sales will be down in excess of 5%.

Translating those metrics to companies, we first look at the sales share of the top 5 large panel producers to gain insight into who might be affected most by declining large panel prices.  As noted, the concentration is quite high with 83.1% of the industry’s large panel LCD sales coming from the top 5 producers.  That said, given that August was the first month where TV panel prices dropped substantially, we look at the sequential change in sales for large panel producers between July and August to see who was affected most by the TV panel price drop.  We note that ideally we would like to see at least one additional month of data that included substantial panel price drops, but we take what we can get until next month’s data becomes available.  We note that we have added share in the second table to gain better understanding as to how much each panel producer influenced the total.

​We note that Samsung Display has sold or closed much of its large panel LCD capacity, so monthly results could reflect that limited capacity (hence the 1.4% share) and the impact of large panel price declines.  LG Display, to a lesser degree, has done the same.
All in, August looks to be the tip of the iceberg for large panel LCD producers in terms of the impact of decreasing TV panel prices.  If September and October are any indication of the severity of such panel price drops, the effects will be felt by almost all large panel producers, especially if there is little positive offset from IT panel pricing or shipments.  Given that it took only a short period for TV panel prices to trace back almost half of the gains made in the last year, it sets the stage for a weak 4th quarter for large panel producers.  As noted above, we expect IT panel pricing to remain reasonably stable for the remainder of the year, and would find it difficult to assume that TV panel prices continue to fall at such a precipitous rate for the rest of the year, but we did not expect to see an almost 20% drop in TV panel prices in September.  “Surprise, Surprise” – Gomer Pyle USMC (1964).