Innolux – Horses and Barn Doors
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.
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.
Innolux - Monthly Sales - 2018 - 2022 YTD - Source: SCMR LLC, Company Data
Innolux - Large Panel Shipments - 2018 - 2022 YTD - Source: SCMR LLC, Company Data
Notebook Panel Shipments - 2019 - 2022 YTD - Source: SCMR LLC, IHS, Witsview, Company Data
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