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.

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.

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.

​While Chinese panel producers continue to add Gen 8 and Gen 10 LCD capacity, Taiwan’s two large panel producers have differing opinions as to how to meet that competition.  Both are relatively conservative, with both AU Optronics (2409.TT) and Innolux (3481.TT) not having added new or additional fab capacity since 2018.  They differ however in their forward plans as AUO is adding capacity to its L6 line in Kunshan, and has announced plans to build a new Gen 8 LCD fab at a later date, which we expect will be in 2025, while Innolux has taken another path and decided not to build any new LCD fabs, but to modify its older fabs to produce higher margin products such as fingerprint sensors and mini-LED backlights.
Innolux has been using its F1 – TPO (2002) Gen 3.5 fab to produce capacitive fingerprint sensors and is expecting to expand that production to biometric identification sensors for credit cards and has announced a collaboration with Super-C Touch (pvt) and Starttek Engineering (pvt) to develop Innolux sensors for the Indian market in 2023.  India has plans to have 80% of its 1.2b inhabitants register their fingerprints over the next five years in order to boost the mobile payment industry.  Innolux says it has also converted another Gen 3.5 LCD line toward the production of Mini-LED backlights and plans to release its first 75” LCD panels using its own Mini-LED backlights next quarter.

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)
 

​Rather than go through innumerable press releases extolling the virtues of new products that have been pre-announced before the CES 2022 show, we thought it better to wait until the reality that many of the items announced are not currently available (demos, prototypes, etc.) or look a bit less exciting when OLED details are given or the product is actually viewed.  One such announcement from Taiwan based panel producer Innolux (3481.TT), who is ushering back in the world of 3D displays, although this time without the glasses that were an integral part of the 3D viewing experience and a great hindrance to its development in the past.  These “N3D” (Naked 3D) panels are shown in the promotional video as providing images that are inches or feet from the screen and in some cases hovering overhead, a difficult achievement without special optics or projectors.
https://youtu.be/0BgZvgoE8XI
But the biggest problem for many of the new items released (actually ‘announced’ would be more accurate) is both the lack of delivery dates and more so, the lack of price.  CES is a place where companies can show the glitz and glamor of their products without much of the recourse that follows and actual product release and consumer feedback, so we take most announcements with a grain of salt and wait until there is an actual product to look at before making any judgements as to the validity of the product or the technology.  We expect key buzzwords at the show this year to be “Metaverse”, “Mini-LED”, “VR”, “NFT”,and more quietly “Supply Chain”.  Based on Google (GOOG) search requests on a global basis for the period between December 26, 2021 and January 1, 2022, “Metaverse” had a search interest of 100 (the maximum) as did “VR”, with “NFT” down slightly to 94, while “Supply Chain” has dwindled to 49 and “Mini-LED” to 0, although the latter peaked at 100 as recently as late November 2021.

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.

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.
 

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).

​Taiwan based LCD panel producer Innolux (3481.TT) indicated that while the ongoing chip shortage and a tightening of substrate glass supply would cause the industry to see reduced panel production, they remain cautiously optimistic about the 2nd half.  Innolux management indicated that a glass substrate supplier would be cutting its utilization by 15% to 20% in order to do annual maintenance, tightening what has already been a tight glass market, and would lead to the reduction in panels being produced during the 3rd quarter.  Their take on the 3Q panel squeeze was that the reduction in panel production would reduce supply and avoid a glut, although the company had not mentioned that an oversupply situation was a possibility in the past.  Singling out IT products as the area where there was an imbalance between supply and demand, they indicated that the reduction should ease those concerns.
As we have noted a number of times in the past, LCD panel producers have been shifting production away from large panels (TV), where demand has weakened, and moved to IT products, meaning monitors, notebooks, and tablets.  While logic holds that panel producers would follow those areas with the highest profit potential, capacity has increased relatively quickly while demand has stayed relatively flat, especially if one accounts for the potential component shortages that have limited deliveries or pushed out dates.  This has caused buyers to ‘enhance’ ordering a bit by increasing numbers to encourage allocations and meet quotas despite possible shortages.  As brand inventories get closer to real quotas, those orders become more realistic and panel producers are left with excess capacity, a situation they have not faced in over a year. 
The TV panel space is already seeing some panel price weakness, however the IT space, where the capacity shift has been the greatest, has seen only less aggressive panel price increases and has yet to see real panel price declines.  While the annual maintenance period during August is not unusual for glass producers, given the tight market and the high level of production at all of the glass producers that maintenance cannot be avoided and some shortages above the recent norm might be seen, but we have a hard time seeing this scenario as a glass half full one, rather than one indicating the potential for change., But then we are not sitting on billions of dollars’ worth of capital equipment that needs to be running at or near full capacity to produce profits.  Just a difference in perspective.