​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).

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.”
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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.