Panel sales out of Taiwan for September were strong as expected, but that only tells a part of the story as it was well-known that on a general basis brands were filling inventory levels in anticipation of the upcoming holiday season.  That said, October demand for CE product in general has been weak and we already mentioned that a number of major panel producers have scheduled utilization cutbacks for this month in order to tighten supply/demand balance.  This lessens the value of the September and 3Q data as we expect a change for October.   Here’s the September and 3Q sales data for the three Taiwanese panel producers:

Based on 5-year averages, October is typically a down month (m/m) for the two large panel producers and an up month for Hannstar, as they are primarily a small panel producer and September is typically (5-year average) the month with the highest number of smartphone releases.  Here’s what October panel sales typically look like for the three Taiwanese panel producers, so we are not expecting October to be better than the averages based on the utilization rate cuts and weak demand.

Taiwan’s three major panel producers saw an unusual variance in performance for August.  The largest of the three, AU Optronics (2409.TT) saw a 17.3% m/m increase in sales ($809.68m US), although down 9.2% y/y and almost right on target against the 5-year sales average for August.  On a cumulative y/y basis, AUO is up 0.6%, essentially flat with last year.  Innolux (3481.TT), saw sales decline 3.0% m/m but up 1.0% y/y, although down substantially against its 5-yr. average for the month.  On a cumulative y/y basis Innolux is up 4.6%.  Hannstar (6116.TT) is a different entity as it is primarily a small panel producer.  Hannstar saw a m/m decline in sales of 3.9% but a 38.4% increase in sales on a y/y basis, indicating how poor last year was for the small panel market.  That said, Hannstar’s results were still significantly below its 5-year average, but again, on a cumulative y/y basis, Hannstar was up 25.4%.
All in, AUO continues to keep a close handle on balancing its panel production and maintaining a steady revenue flow and will likely see easy comparisons for the next two months based on the weakness seen in 3Q and early 4Q last year.  Full year results will depend on the build into the holiday period and so far brands have remained mildly optimistic, pointing to a flat to slightly up year for AUO.  Innolux seems to have found a groove this year, with monthly results slightly above last year, but again, the full year for Innolux will depend on the next two months, particularly September, as last year September was the strongest month in the back half, which must be duplicated for Innolux to stay ahead of last year.  While Hannstar is certainly ahead of last year’s results, the back half of this year does not look particularly strong from a demand perspective unless you are a producer for Apple (AAPL), which we do not believe Hannstar is.  It will certainly be a better year than last but still a poor showing against the company’s 5-year averages.

Not surprisingly May was another uneventful month for Taiwanese panel producers as the ever volatile trade situation leaves both producers and consumers with little understanding of what to expect.   CE product status quo seems to be to keep inventory levels in the US relatively high, despite weak demand, anticipating a potential change in the current tariff situation.  As we get closer to July, when the most recent tariff postponement is  set to expire, we expect shipments to increase to get them over the US border by July 9, although some are beginning to doubt whether the ‘reciprocal’ tariffs will ever be implemented, at least for our more significant trading partners.
Panel sales in Taiwan, which are reported monthly, indicated that May m/m sales for the two large panel producers (AU Optronics (2409.TT) and Innolux (3481.TT)) were between -1.4% and +4.5%, relatively minor changes,  and with little or no change in May panel pricing, shipments also look to be flat, leading to another month of watching and waiting.   Given that inventory levels remain on the high side in the US, we expect brands will maintain current or slightly lower production levels until the 9th of July, before planning the seasonal holiday build.  Much will depend on the ongoing tariff situation, but we expect there will be less of a rush to build holiday inventories this year than last, and given the recent reductions in CE product forecasts for the year, we expect brands to remain cautious, regardless of the tariff situation .  

The three panel producers in Taiwan, given the fact that they are required to report monthly sales, tend to be a precursor to general display industry trends, and as such we track sales data for all three.  On a general basis AU Optronics (2409.TT) and Innolux (3481.TT) are oriented toward large panel production while Hannstar (6116.TT) is oriented toward small panel production, although all three do both.  In April the general trend was for relatively flat sales m/m, although AUO saw m/m sales decline by 10.5% after a strong March.
While each of the three producers have their own sales patterns, the general trend last year was for a weak 1Q and progressive improvement through September.  This will make y/y comparisons more difficult going forward this year, which have already turned negative for both large panel producers.  As we have noted, there has been some non-linearity this year as CE brands pull in orders to move product into the US to avoid potential tariffs, which we expect will continue until the next ‘tariff deadline’ in early July.  Inventory levels in many CE products remain high for the same reason, which could affect production later in the year if there is no incremental demand as the holiday season unfolds in September.

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.  

Of the three major panel producers in Taiwan, Hannstar Display (6116.TT) is the exception, as the company’s focal point is small panel production rather than large panel, as is the case with both AU Optronics (2409.TT) and Innolux (3481.TT), the other major producers in Taiwan.  As seen in Figure 1 Hannstar’s monthly sales have historically tracked reasonably close to industry small panel pricing up until this year when small panel pricing continued the decline it began in 3Q 2021 while Hannstar’s sales increased and have maintained a similar high level with only April as the anomaly. 
What makes this unusual is that a Hannstar VP noted late last week that given the steady order pull-ins that the company had been seeing, Hannstar expected to see higher utilization rates in the 2nd half than in the 1st, essentially the opposite of the rest of the industry.  The VP went on to say that the company has been less affected by the slowdown in overall panel demand as the company has diversified its product portfolio and its customers.  He cited a company utilization rate of ~80% for the first half of the year and set expectations for a 90% to 95% utilization rate for the 2nd half of this year. 
While sales for the 1st half of 2022 for Hannstar are down 40.78% y/y, the implication is that the 2nd half (assuming small panel prices remain roughly flat), would be up 11.7%, the 5 year average, a far cry from the expectations for large panel producers in the 2nd half, especially with lower utilization rates now being assumed to remain for much, if not all of the 2nd half.  If Hannstar is able to do as the higher utilization rate implies, it would put them in a category by themselves for the remainder of the year, and while there are still many factors that could influence Hannstar’s full year and 2H results, we would certainly give credit to management for the improvement in product and customer base.  Hopefully the customer list has broadened, making the company less reliant on a particular customer, but it is a bit too early to see if the data proves out. 
All in, Hannstar presented one of the most optimistic views of the next two quarters among panel producers, but at the same time we note that the additional capacity that Hannstar announced last July (see our note 7/9/21), the first time the company has added capacity since it began production in 2005, has been ‘paused’, which seems to contradict the outlook above, but we expect Hannstar will not be the only one to slow or stall capacity increases, especially if the utilization rate reductions being seen currently remain in effect for the remainder of the year.  While we have to assume that at the first sign of either stable small panel display pricing or any improvement in consumer demand for mobile devices, those construction projects will be resumed under the thought that there will be a return to the insatiable demand for smartphones and other mobile products that existed in 2020 and early 2021.  Any optimism we might have for the small or large panel LCD display business would be predicated on at least some of those capacity projects being permanently cancelled.