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.

​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.  

​Innolux (3481.TT) is one of almost all large panel LCD producers that have lowered utilization rates as the display industry finds itself with high inventory levels and decreasing demand.  Given that panel producers do not want to fire workers that have been trained only to hire and train new workers when utilization rates move up, the company has announced a new ‘Unified Vacation Plan’ for employees that designates September 12th and 13th as ‘vacation days’, along with October 5th, 6th, and 7th, with the payroll system deducting said ‘vacation days’ from worker’s pay, which has caused workers to complain to the media and the Taiwan Ministry of Labor.
The Ministry of Labor seems to believe that the Innolux leave announcements ‘clearly violate Labor Standards Law’ and put the company in position to receive a maximum fine of NT$1,000,000, which is the equivalent of ~$33,000 US$.  The average engineer in Taiwan earns $85,300/year, which comes to $234/day and assuming all 52,600 Innolux employees are forced to take the 5 additional unpaid vacation days, the savings to the company would be ~$62.5m, which makes a $33k fine seem a bit insignificant.  Of course it does little for company/employee relations but with the outlook cloudy for the next few months we expect management would not be distressed if a few employees left for greener pastures.

Innolux (3481.TT), a subsidiary of Foxconn (2354.TT) is the 4th largest global large panel LCD producer by revenue, having been producing display panels since 2003, and as one of two remaining large panel producers in Taiwan is a supplier to a wide variety of CE brands.   Last month the company predicted that it would see shipments for 3Q remain flat, despite panel price weakness and high inventory levels, but it seems they have changed their outlook since then and are now expecting shipments in 3Q to drop by 12% and expect to lower their utilization rate from 90% last quarter to between 50% and 70%.
The company’s chairman stated “It is meaningless to manufacture that many panels when selling prices have dipped below the cost level and inventory digestion is slower than expected”, which seems to be stating the obvious when looking at Figure 7 & Figure 8,  and is directing the company to allocate more capacity toward high-value added products in order to ‘optimize’ the product portfolio, something other panel producers have been doing since the middle of last year.  The company is now looking for only modest sales gains in 4th quarter, despite the holiday season after the company slipped into a loss position for the first time in almost two years.
Other than the closing of the barn door after the horse has gone, what gives us concern is that the company is pinning its hopes on the weather in China, with it’s best case scenario being one where the power cuts in China cut panel production between 3.5% and 5%, or 2m to 3m 32” panel equivalents, and stated that the ~70% reduction in power to factories in Sichuan would not be enough to keep production lines running.  Under such a scenario Innolux management sees a bottom for the industry by year-end and a good start to 2023.  The company also believes that global notebook shipments will be maintained at the higher levels reached as the COVID-19 pandemic forced people to remain sheltered, with the idea that remote learning and a hybrid lifestyle will maintain notebook demand for the next few years, although based on Figure 9 we expect notebook shipments will fall back to pre-pandemic levels, as they seem to already have. 
Unfortunately, this ‘head-in-the-sand’ approach does little but exacerbate the negative display market situation that has been developing since the middle of last year, but we keep our expectations low.  While Samsung Display (pvt) and LG Display LPL) made the decision to step out of the large panel display business a few years back, others seem to be willing to look at the world through rose colored glasses, which only works well when prices are rising.  The glasses should have come off last July.

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.
 

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.

​Yesterday we noted the weakness at Taiwanese display producers in April, which caused all three to see declines in shipments and sales.  Innolux (3481.TT) has now given some guidance as to what it expects for 2Q, which is an increase of 7% to 9% for large panel shipments and an increase of 17% to 19% for small panel shipments.  While this sounds like a positive for the company, Innolux is also expecting a a 10% to 13% decrease in ASP, which will likely generate an operating loss.  The company also announced a 50m share buyback, which is equivalent to 0.47% of the outstanding shares and declared a dividend of 18.99% of 2021 EPS, or NT$1.05 ($0.04 US).  1Q operating p[profit was NT$2.243b ($75.186m US).