友達 / 奇美 / 華映 / 彩晶 / 群創 / TFT LCD

shockly

ML : 2H08 hot season duration shorter, magnitude smaller lower CMO/AUO （友達與奇美）ratings one notch
we are downgrading CMO to Underperform and AUO to Neutral given anticipated greater PC ASP drops in 3Q08 leading to a more muted 2H08 where hot season magnitude is lessened and duration is shorter, while 1H09 oversupply risk still exists.

 

Key points are: PC panel ASPs seeing greater downside risk in 3Q08 End demand is not the issue, undisciplined supply is Downgrade CMO from Neutral to Underperform Disciplined player, but AUO down to Neutral on industry concern

 

 

zakk

citi：友達

Buy: It Will Not Be A Repeat Of DRAM
 It's not DRAM — Among all the concerns on TFT, the market’s main fear is the potential oversupply in 09E. However, we list five reasons why TFT will not be a repeat of DRAM, and an oversupply, if any, will not be as bad as feared. We see current weakness an enhanced opportunity to position for the L-T re-rating.
 Lower fixed costs — Fixed costs as a % COGS are the lowest among upstream tech, implying less incentive to constantly operate at 100% utilization. They are better off lowering utilization than letting prices free fall in a downturn.
 Fixed costs diminish moving to G8/10 — "Capex per area" falls when moving from smaller to larger fabs, implying % of variable costs will increase over time, forcing panel makers to proceed with caution when ramping up new Gens.
 Market less fragmented — Top-5 firms control 97% of TV panel market, with a fairly similar share by each. With strong B/S and FCF, they are likely to behave more rationally, as it is too difficult to drive others out of business.
 Cost structure more in par — Another reason why prisoner’s dilemma might not necessarily apply in TFT is the similarity in cost structures and technology roadmaps. Given there is no clear cost leadership, there is less incentive for anyone to consider undercutting prices aggressively in order to gain share.
 Higher ASP with less uniformity — Lastly, given wide range of panel spec and high ASP nature, supply chain has become less inclined to carry excess inventories at any time, forcing panel makers to cut utilization when necessary.

shockly

BNP:

• TV panel price will decline in 2008 on more supply and a muted pace of LCD TV panel size upgrade. Monitor panel price hike since end-1Q has proven modest/short-lived on concerns of inventory overbuild/end-demand softness. UMPC is thelone bright spot, but cannot ease panel oversupply. Stay cautious on TFT-LCD names, despite their trough P/BV.
  

Yuanta :

CMO (3009 TT); BUY (Jeff Pu).

• Concerns overdone, valuation looking attractive: CMO is trading atonly 1.0x 2008F BVPS and most market fears (i.e. demand uncertainty,2009 oversupply) appear to be priced-in
  

AU Optronics (2409 TT); BUY (Jeff Pu).

• True value camouflaged: AUO is trading at only 1.0x 2008F P/B, itslowest point since 2006 when the industry suffered a severe supplyglut and most panel makers saw earnings disappear.
  

shockly

AU Optronics 2409 TT 友達
Nomura:

Unexpected panel price declines amid weak sales by second-tier TV vendors and
of monitors in China prompt us to revisit our panel price assumptions; we pare
FY08F EPS for AUO by 34.8% and downgrade to BUY. Attractive valuations and a
new 2009F industry outlook support our still-positive view. Fair value is now NT$56.

LB: AU Optronics (2409.TW 友達 - TWD 46.95) 2-Equal weight

Chi Mei Optoelectronic Corp (3009.TW 奇美 - TWD 34.90) 2-Equal weight

Display Industry:

The LCD industry is currently in a state of oversupply, owing mainly to weaker-than-expected demand attributable to the global
economic slowdown. In our view, earlier-than-expected oversupply in the TV panel market has trickled down to the IT market. IT
panel prices began to fall in June, earlier than our previous assumption of October. This oversupply-induced panel price fall should
persist through 1H09, in our view. We expect IT panel prices to drop 40% from now until the next bottoming out in 2Q09. We have
lowered our target prices on pure LCD names – LG Display (LGD), AU Optronics (AUO), and Chi Mei Optoelectronic Corp (CMO).

shockly

Add TFT-LCD related report

shockly

ML : 2Q08 earnings likely in line but weakening 2H08 outlook

shockly

MS: Taiwan TFT LCD Stock Upside on Bear Market Assumptions

Investment conclusion: TFT stocks have declined 46% (avg) since the 4Q07 TFT LCD super-cycle peak, discounting 09 bottom. We expect the crystal downcycle to continue through 2Q09. Learning from 2H04-1Q07, AUO/CMO should act early in a downturn to rationally cut production, slow capacity ramp, and cut 09 capex. MS EM Strategist Jonathan Garner recently upgraded Taiwan to Overweight at 13.7% vs MSCI EM benchmark weighting of 11% on valuation. TFT stocks should rebound in seasonally strong Aug-Nov from low June/July. Our top picks: Innolux, AUO, CMO, Himax.

 

austin

Taiwan TFT LCD
A decreasing role in the face of industry's maturity :  We downgrade AUO and CMO to UW

 

We downgrade AUO/CMO to UW:

At current valuations, the market appears to have priced in a downturn with a loss-making scenario. We believe the next drivers will be recovery speed and long-term value drivers. We expect a prolonged down-cycle into 2009 and a contracting trading band. Risks remain on the downside over a 12 month-horizon, in our view.

 

Reminiscent of the 2001 down-cycle, but with fewer future drivers:

We expect 2008 to be the first year that panel makers and OEMs will suffer a demand drop since 2001. A lower 2008 base would make the 2009 growth target challenging. But, unlike in 2001, there appear to be few emerging opportunities for market expansion.

Panel makers likely to be de-leveraged:

TV consumption growth in China and US markets has been embedded in TFT makers’ 2009 capacity expansion plans. A consumption freeze and decreasing competition from white-box mean that there is less incentive for TV brands to tie up with panel makers and be aggressive at the retail level.

What could turn us positive? 1) Meaningful capex cuts :

but first movers could benefit competitors, and thus result in market consolidation; 2) Alliances: TFT producers could increase bargaining power, and regain their position in the TV value chain. 

 

We cut our earnings estimates and PTs: We downgrade AUO/CMO to UW, and lower our Dec-08 PTs to NT$33/22 from NT$41/NT$33. We lower our PTs for Innolux and Qisda to NT$40/NT$11 from NT$45/NT$21. Key upside risks to our PTs are better TV price elasticity and white-box recovery.

 

zakk

Citi：AU Optronics (2409.TW)
Buy: It's a Different Cycle, Says Management
Why still bullish? — We are not ignorant of the macro risks (granted, many say we are already in a recession), but our bull case that panel makers can better manage a TFT cycle within an economic cycle still holds. Utilization cut, lower peak inventory (both at panel makers and customers), and delayed capacity ramp, are all mechanisms that are being implemented. Once an improved "trough cycle ROE" is proven, we see no reason to see a "lower-low" on P/B. Valuation at a 5-yr low of 0.95x P/B, making it an attractive long-term entry point. Maintain Buy, adjust target slightly on share count, and cash div.

Stock catalysts — There is something for both bulls and bears. Bears will focus on price decline in 3Q, ss-dd imbalance in 1H09E, while we reiterate that industry dynamics have changed. In the near term, it's key to watch price stabilization as well as end-demand (many ODM/OEMs are still guiding normal seasonal growth in 3Q). For the long term, many have already anticipated consecutive losses in coming quarters, and AUO will have to prove them wrong.

Results/outlook — 2Q margin slightly better than feared, but partially offset by higher tax rate (~14%). 3Q guidance is largely in line with expectations. EPS was NT$2.5, compared to NT$3.4 in 1Q.

A different cycle — Management stressed differences between this downtick and past downcycles: fewer players, better product diversification, lower peak inventory, faster response to end-demand fluctuation, etc. Overall, it remains cautiously optimistic on outlook. We note that in the past, it could normally take 2-3 quarters to digest excess inventory, which will definitely not repeat
this year.

Other highlights — 1) As expected, no immediate cut on this year's capex, as plenty of time exists to make adjustments before the scheduled ramp up by 2H09E; 2) Channel inventory is fairly ok, with an exception of 1-2 wk higher for monitor; 3) Will lower utilization by 10% in 3Q; 4) Management commented that demand could start to recover from August and it does not rule out the
possibility of seeing rush orders going into the later part of this quarter.

austin

AU Optronics 友達 2409
Rational players
AUO has announced that it will cut its 3Q08 utilisation rate by 10ppt to 90% to speed the inventory correction in the monitor panel market. In addition, management said its 2009 7.5G and 8.5G ramp-up schedules were flexible, depending on the market conditions. These actions illustrate the company's commitment to maintaining profitability. In addition, management believes that IT panel prices should stablise in September, in line with our view. With valuations already at what we see as very attractive levels, we believe that utilisation rate cuts and stabilising prices will act as near-term positive catalysts for the stock. With 2Q08 results and 3Q08 guidance in line
with our expectations, we maintain our Buy recommendation and NT$51 target price.

 

2Q08 earnings and 3Q08 guidance in line
AUO reported 2Q08 results after market today. Net profits of NT$20.4bn were slightly ahead of our NT$19.5bn and the NT$20bn Bloomberg consensus. 3Q08 guidance was generally in line, with large panel shipments rising by around 5% qoq and panel prices under pressure. Details of the results and guidance can be in Table 1 on page 2.

Monitor inventories remain high
Management said monitor panel inventories remained 1-2 weeks above a normal industry level and estimated they would not normalise until August or September. This is in line with our view that panel prices will remain under pressure in August before stabilising in
September. The company believes that notebook, TV and small and medium-sized panel inventories are within a normal range.

AUO has cut its utilisation rate to speed the inventory adjustment Inventory rose to 40 days from 33 days at the end of 1Q08 due to a sharp slowdown in June monitor panel shipments as customers began to reduce inventories. To speed the inventory adjustment, the company announced that it would cut its 3Q08 utilisation rate by 10ppt qoq to 90%. Management also emphasised that active capacity management is a key part of its strategy, and noted that panel makers in general had reacted much faster to the current inventory problems than previous ones. The cut in utilisation rates is in line with our view.

 

 

AU Optronics Underweight 友達 2409
Bullish tone is the major surprise

 

2Q08 result a mixed bag: AUO reported 2Q08 profit of NT$20.2 billion or EPS of NT$2.6, down 25% Q/Q and up 230% Y/Y, and
7% ahead of our estimates but largely in line with recent market expectations. However, with the better margin, shipments are below guidance. As such, inventory days rose by 9 days (COGSbased).

• Management stays positive in the face of macro uncertainty: For 3Q, management is guiding for a better ASP, but inferior
shipment growth compared to our expectations, likely due to a 10% cut in loading rate and selected product mix. The guidance
also implies a strong September demand recovery. The company tone seems to remain bullish with no change in capex.

• Our view: The key differences between our view and the bulls lies in: 1) demand outlook – we are more bearish after pull-in demand ends in Sep/Oct; and 2) structural: the complementary role to TV brands’ capacity in a maturing industry should result in de-rating due to a decreasing value position. LCD component names provide the best example following TFT makers’ vertical integration.

• Maintain UW and PT of NT$33: Due to the better 2Q margin, we have slightly adjusted our earnings estimates upwards. But we
note that in down cycles, the company’s actual results are normally below guidance. As such, we do not expect meaningful upside in the coming quarters. We maintain our UW rating on AUO and a Dec-08 PT of NT$ 33 based on 0.8x FY08E book.

Key upside risks are better white-box demand, and industry consolidation.

 

 

M O R G A N  S T A N L E Y  R E S E A R C H

AU Optronics 友達 2409
Quick Action on Addressing Inventory Correction

 

Quick Comment: Cyclically, 4Q07 was the last peak, 2Q09 should be the next bottom. AUO should not lose money this downturn by addressing the downturn early in 3Q08. Seasonally, August-October should improve M/M from the lower June/July base. 3Q08 shipment growth should be lower than historical levels due to quick action to address the inventory correction with loading cuts, setting 4Q08 up for an easier comparison and closely tracking end market demand. The 8-month stock correction of 40% has seen US$5 bn QFII funding outflow (30% of market cap), and at 1x P/B, the lowest in five years, AUO stock has priced in 2H08 demand uncertainties and 2009 over-supply risks. We believe AUO will rebound on realization of a less severe bottom.

 

What’s New? AUO reported 2Q08 EPS of NT$2.56 (net profits of NT$20.1bn), ahead of our estimate. 2Q08 large size shipments declined 1% Q/Q, below low single digit growth guidance; S/M size shipments growth of 11% Q/Q was below guidance of 15-20%. 2Q08 Key Data: 2% Q/Q area ASP decline and 4% Q/Q area shipments decline. 2Q08 EBITDA margin declined 100 bp to 36% with 4% NT/dollar appreciation a negative impact. Inventory increased by 7 to 40 days on customer adjustments in late June. AUO lowered net
Debt/Equity to 14.3%. 3Q08 Guidance: 1. Large size shipments growth 5% for IT (excluding mini-NB) and TV panels. 2. S/M shipments growth 15% Q/Q. 3. IT ASP declined 15%. TV ASP declined 5% Q/Q on mix shift – 32”+ mix increased by 4% and 40”+ by 2-3% to total of 78-79%. 4. Loading rate declined by 8-9% to ~90% with capacity increase. AUO aims to control inventory based on customer demand. 6. 3Q08 cost reduction will be minimal 1-2% on 3-5% components cost reduction (60% of costs) offsetting by manufacturing related cost increase on lower utilization (40% of costs including depreciation, labors, utilities, etc).

 

AU Optronics Corp.  (Merrill Lynch) 友達 2409
3Q guidance in line, cautiously optimistic on hot season

 

3Q guidance is in line, still “cautiously optimistic” on 2H08
3Q guidance of ~5% volume growth and low teen IT ASP fall/~5% TV ASP drop are roughly in line with expectations. AUO will lower 3Q utilization by ~10% to control inventory (2-3% OPM impact), but it does not rule out an upturn/hot season occurring in 3Q/4Q, as it believes just as quickly as things went down in June/July, it can turn up again in Aug/Sept (volume pickup and stable ASP). AUO believes it is too early to judge 09E supply/demand, and therefore it doesn’t plan to adjust 09E ramp or capex plans yet (although if conditions in 09E are bad, AUO will be flexible, but right now it’s too early to make that call, according to mgmt).

2Q results in line, but inventory days rose to 40 days
AUO 2Q OPM of 19.5% and EPS of NT$2.57 were in line with market expectations (ML 18.6%/NT$2.57). On the plus side, net debt/equity ratio dropped to 14% from 20% in 1Q. On the negative side, inventory days rose from 33 days in 1Q to 40 at the end of 2Q as customers suddenly cancelled orders in the last 10 days of June. Mgmt cited macro, oil and inflation as the causes impacting consumer sentiment.

 

Focus on Neutral-rated AUO over CMO (Underperform)

AUO is better positioned than Underperform-rated CMO or LGD in terms of cost down, TV customer base and product mix, and current valuations are not demanding. But with limited upside catalysts for the LCD sector in the next 3-6 mths given weakening fundamentals (low visibility, falling ASP, uncertain 2H demand and 1H09E supply risk), we retain our Neutral (NT$47 PO on 1.1x 08E PBV).

zakk

HSBC：AU Optronics (2409 友達) 

Downgrade to N(V): Only midway to bottom
AU Optronics (2409)  Downgrade to N(V): Only midway to bottom
。We think ASP drop is just beginning; no near-term catalysts visible
。5% q-o-q panel shipment growth likely in 3Q08, below normal seasonal growth of 10-15%
。Cut 2008/2009 earnings forecasts by 41%/58%, and target to TWD43.25 (1x 2008e/2009e average P/B, trough valuation) from TWD74.50. Downgrade to N(V) from OW(V)

  AUO’s 2Q08 earnings TWD20.2bn, down 25% q-o-q and 15% below our forecast. Large-size panel shipments declined 0.8% q-o-q, lower than AUO’s guidance of 3-5% growth. Inventory days rose to 40 from 33 in the last quarter. Net debt to equity ratio dropped to 14.3% from 77.3% a year ago. We wonder why AUO is paying back debt at this time, given the impending downturn and increased cost of borrowing.

  Despite conservative on 3Q08 outlook, we believe the downside risk has increased significantly. AUO expects to see 5% unit shipment growth with 15% blended average selling price (ASP) decline in 3Q08. The company has reduced its utilisation rate to 90% from 100%. However, we believe it is difficult to see an industry-wide utilisation control when other panel makers are still optimistic about demand outlook.

  ASP drop is just at the beginning; sensitivity analysis shows breakeven in 1Q09. We cut AUO’s 2008e/2009e earnings forecasts by 41%/58% respectively, to reflect the panel price downward trend and weak demand situation. Without utilisation control, we expect panel ASP to drop 24% in 2H08. We will not see panel price rebound until 2H09.

  No short-term catalysts; downgrade to Neutral (V) rating from Overweight (V). We cut our target price to TWD43.25, based on 1x 2008e/2009e average book, a trough-cycle P/B multiple) from the previous mid-cycle P/B of 1.6x. We see no clear catalysts in the near term despite the seemingly cheap valuations. Historically, AUO share prices only rebounded when its earnings hit breakeven or loss, which we believe will be in 1Q09.

 

AUO 友達 (Macquarie Research)

2Q08 net income of NT$20.2bn

Event
2Q08 EPS was NT$2.57 (bonus adjusted, -25% QoQ, +4.6x YoY, net income of NT$20.2bn). The results were in line with market expectations and our net income estimate of NT$20.8bn. The outlook for 3Q08 was in line, although the company was upbeat that the downturn may bottom as early as late-3Q08.

Impact
2Q08 operating profit was NT$24.1bn (bonus adjusted, -21% QoQ, +4.9x YoY). Operating margin was 19.5%, down from 22.2% in 1Q08. Sales were NT$123bn (-10% QoQ, +16% YoY). Large-panel unit shipments rose to 22m (-1% QoQ, +12% YoY), while large-blended ASP was US$168 (-6% QoQ, +11% YoY). Taxes were high at NT$3.2bn, or 14% of pretax earnings, due to higher undistributed earnings that are subject to more tax.

For 3Q08, overall large-panel blended ASPs should be down by 7–13% QoQ. For TV-panel ASPs, AUO expects a decline of around 5% QoQ. For IT-panel ASPs, AUO expects a sharper decline of 10–15% QoQ. For total large-panel shipments, AUO guides for an increase of about 5% QoQ, with TV and IT panels expected to each grow by 5% QoQ.

 

AUO said the current downturn could bottom as early as end-3Q08.

AUO believes that the current fall in pricing is mainly due to inventory adjustments. AUO expects that inventories will be digested by August, after which panel prices may begin to stabilise and rebound. AUO said that demand is still healthy and that panel buyers are waiting for inventories to be de-stocked. AUO said monitor inventories are now down to only 1–2 weeks higher than normal. 

 

Capacity is being reduced, but not as much as we would like to see.

AUO will reduce its utilisation rate in 3Q08 to 90% to limit output during this downturn. Further adjustments will be made if demand and pricing falters further. Capex for 2008 will remain unchanged at NT$130-140bn as AUO said that it is too late to make changes this year. For 2009, AUO said that it is considering delaying the ramp up of its 7.5G and 8.5G fabs. However, there is no formal announcement or plan for 2009 yet as it is too early to comment.

 

Earnings revision
We lower 2008–10 EPS forecasts by 2–4% to reflect higher taxes.

 

Price catalyst
12-month price target: NT$65.00 based on a Price to Book methodology.

Catalyst: Stabilising panel prices followed by an upswing in the TFT-LCD cycle should be positive for the share price.

Action and recommendation
We maintain Outperform and keep our target price at NT$65 based on a 2008E P/BV of 1.6x. We believe the downturn will bottom in 3Q08 at the earliest or 1Q09 at the latest. AUO’s comments suggest that there is a good chance of an early bottom in 3Q08. 

austin

Chi Mei Optoelectronics 3009 TT 奇美 BNP

 

Amid weak end-demand, 2Q volume strength drives monitor panel inventory glut/price freefall. LGD’s 6G fab increase for wide-format IT panel is a risk to CMO. The rise of vertically-integrated TV strongholds will reduce LT panel outsourcing to pure plays, whose bargaining power is falling. High gearing hurts CMO in downturn, with 1H09 loss more real.

 

High monitor exposure now a liability
Strong 2Q volume growth + weak end-demand = Ugly 3Q
Chi Mei Optoelectronics (CMO) posted higher-than-expected 2Q profit, due to better reduction in manufacturing cost. Yet, our earlier fear of 2Q08 strong volume shipment merely a mover of channel inventory stuffing materializes. CMO guided that 3Q08 IT panel shipment will fall 10% q-q (blended ASP drop of 15-20%), while TV panel shipment is expected to rise by 5-10% (5-10% drop in blended ASP). This pace of business deterioration reinforces our view of 1H09 loss.

LGD’s expanded footprint in IT space a clear risk to CMO
LGD’s 6G fab increase in mid-2009 probably shows its increasing focus on the wide-format (16:9) IT panel space, which is a negative to CMO as it relies heavily on this market. A 6G fab also offers LGD the flexibility for 32”/37” TV panel production, whose volume demand remains healthy in the price-sensitive backdrop. LGD’s weakening TV clientele probably drives its increased focus on IT panels. Also, amid KRW depreciation versus USD, LGD may enjoy cost advantage over its Taiwan peers, given similar cost structures (after adjusting FX effect) for major players.

Pricing power of pure panel makers at risk
SEC/Sharp and Sony are not likely to slow down their panel capacity expansion because of their mission to support in-house LCD-TV divisions’ share gain (even at the cost of compromising short-term profits). With market-share gains, vertically-integrated TV brand names hope to regain selling-price control, while their panel capacity build-up in the downturn will marginalize pure-play outsourced panel vendors, and give them an upper hand in future panel purchases. So their profitability should improve in the long term. Taiwan pure-play panel makers will see pricing power tilting toward these vertically-integrated TV powerhouses.

 

HOLD; valuing CMO on trough P/BV
We reiterate our guarded view on CMO and expect short-term selling pressure. Our end-2008 target price is TWD23.00, based on 0.7-0.8x 2008E P/BV, with reference to its historical trough P/BV seen during the SARS outbreak, when consumer/corporate spending dipped. CMO deserves to trade at a valuation discount to AUO, given its higher exposure to non tier-1 TV brands, inventory-laden monitor segment and a weaker financial status (high gearing + possible 1H09 loss).

 

 

Chi Mei (3009) 奇美 HSBC
Downgrade to N(V): Only midway to bottom

ASP decline is just beginning; no near-term catalysts
Panel shipments likely to be flat to down 5% q-o-q in 3Q08, below normal seasonal growth of 10-15%
Cut 2008e/2009e earnings forecast by 56%/49%, reduce target from TWD54 to TWD28 (0.8x 2008e/2009e average P/B, trough valuation). Downgrade to N(V) from OW(V)

 

CMO 2Q08 earnings TWD13.7bn, down 10% q-o-q and 30% below our forecast.
Large-sized panel shipments grew 19% q-o-q. But blended average selling price (ASP) dropped 7.3%, worse than CMO’s flat guidance. Inventory days went up to 42 from 38 in the last quarter. Net debt to equity ratio dropped to 55.6% from 56.7%. CMO’s 3Q08 guidance is more conservative than others. CMO expects to see flat to 5% unit shipment decline with 10-15% fall in blended ASP in 3Q08. The average utilisation rate in 3Q08 will be around 85%, down from 100% in 2Q08. Compared to growth expectations of 20% from LGD and 5% from AUO, CMO is conservative on the 3Q08 outlook. But it still expects China demand to rebound during the Oct. long vacation.

We cut our CMO 2008e/2009e earnings forecasts by 56%/49% respectively, to reflect the panel price downward trend and weak demand situation. Without industrywide utilisation control, we expect panel ASP to drop 25-30% in 2H08. We see CMO’s earnings reaching close to breakeven point in 4Q08. No short-term catalysts; downgrade to Neutral (V) from Overweight (V). We cut our target price to TWD28, based on 0.8x 2008e/2009e average book, a trough-cycle P/B multiple, from the previous mid-cycle P/B of 1.3x. There are no clear catalysts in the near term despite the seemingly cheap valuations. Historically, CMO’s share price only rebounds when its earnings hit breakeven or losses, which we believe will be in 1Q09.

 

austin

HannStar

2Q08 net income of NT$2.4
Event
2Q08 EPS was NT$0.47 (bonus adjusted, +2% QoQ, +81% YoY, net income of NT$2.4bn).

The results were surprisingly good and beat expectations and our net income estimate of NT$2.1bn. HannStar is the only TFT-LCD panel maker globally in 2Q08 to see a QoQ rise in operating margin and net income and lower inventory. The outlook was in line with expectations.

Impact
2Q08 operating profit was NT$3.6n (bonus adjusted, +21% QoQ, +153% YoY). Operating margin of 17.5% was up from 15.4% in 1Q08 due to a hike in monitor panel prices and product mix changes. HannStar started in 2Q08 to produce medium panels, which generate higher margins than monitors. Sales were NT$20bn (+6% QoQ, -3% YoY). Large panel unit shipments rose to 4.9m units (+6% QoQ, -4% YoY), while the blended ASP was firm at US$130 (-1% QoQ, +6% YoY).

Inventory days fell to 20 from 21 in 1Q08 due to tight control. Employee bonus expense stayed low at less than 10% of net income. Net income would have been considerably higher if not for a tax expense of NT$885m, or 27% of pretax earnings, due to undistributed retained earnings. 

 

For 3Q08, HannStar guides for blended ASPs to decline by 10–15% QoQ. Shipments for large panels will drop by 29% to 3.5m units from 4.9m in 1Q08 as HannStar will allocate more capacity to medium panel production. Medium panel shipment target is 5m units, up 2.5x from 2m a quarter ago.

 

HannStar will not reduce utilisation rates. Rather, the company will shift production away to medium panels and away from monitor panels where pricing is under the most pressure. Moreover, LGD (034220 KS, Won30,400, Neutral, TP: Won34,000) is committed to taking shipments of 25-30k panels per month as per their agreement related to their investment in HannStar. 

Capex for 2008 will remain unchanged at NT$2.5bn.

Earnings revision
No change.

Price catalyst
12-month price target: NT$13.30 based on a Price to Book methodology.

Catalyst: Stabilising panel prices followed by an upswing in the TFT-LCD cycle should be positive for the share price.

Action and recommendation
We maintain Outperform with a target price of NT$13.3 based on a 2008E P/BV of 1.0x. We believe the downturn will bottom in 3Q08 at the earliest or 1Q09 at the latest.

austin

TFT-LCDs

Panel prices in August
Event

We think TFT-LCD panel prices in August will likely see another sharp drop, albeit at a lower pace of decline following a major fall in July. However, the share-price downside should be limited as we believe the market is already pricing in substantial price falls and losses for panel manufacturers.

Impact
Monitor-panel prices in August will likely be down by 5–10% MoM, depending on size, in our view. This follows a drop of 10–15% MoM in July, when prices had another fall late in the month. Like in July, panel prices in August will not be finalised until the end of the month, as is usually the case during cyclical downturns.

TV-panel price declines continue to be milder than for monitors. We estimate TV-panel prices will fall by 3–7% MoM depending on product. TV demand and inventory are still faring relatively better than for monitors. 

 

The sharp fall in panel prices is mainly caused by an inventory correction as well as weak demand. Panel buyers prefer to de-stock their inventory for fear of more price drops, which could result in inventory-revaluation losses.

 

Panel shipments are gradually beginning to pick up in July and August after orders were cancelled in June. Even so, we think revenues of panel makers in July will likely be down MoM due to ASP declines. 

 

So far in 3Q08, July and August panel prices for monitors and TVs have fallen by 18–22% and 9–13%, respectively. Depending on pricing in September, 3Q08 pricing should be in line or slightly miss guidance from companies. Most panel makers guided for their blended ASPs to fall by 10–15% QoQ, with individual sizes falling by 15–20% for IT panels and around 10% for TV panels.

In the worst case, we see about another 10% downside for monitor-panel prices. This would take pricing down to cash costs for tier-one producers, which could halt production and act as a floor for pricing. 

 

Panel makers may see losses on their monitor products. We estimate that smaller panel producers like CPT are already seeing losses in August on their monitor products, with larger producers like AUO and CMO likely to have losses by September or 4Q08 if pricing continues down. We forecast losses for CPT starting in 3Q08, with operating margins at all other panel makers like AUO and CMO falling to a mid-single-digit percentage in 3Q08 from 15–20% in 2Q08 followed by -1% to -5% and losses in 4Q08.

Outlook
We maintain Outperform ratings on panel makers. We believe pricing and earnings of panel makers could bottom in 3Q08 at the earliest or 1Q09 at the latest. Although sharp price drops in July and August could lead to losses soon, it also means that pricing and earnings could bottom earlier as producers shut down capacity and demand responds to cheaper prices. Our top pick remains AUO due to what we see as superior management and exemplary capex discipline.

shockly

TFT-LCDs

The combined sales of the four dedicated TFT-LCD large panel makers in Taiwan fell by 16% MoM (-23% YoY) in July. Blended large-panel ASPs for the group were down 12% MoM (-17% YoY) and aggregate large-panel shipments dropped by 12% MoM (-9% YoY). The weakness is mainly with monitors. Orders were reduced as panel buyers wanted to de-stock rapidly amid excess supply.

 

These results were broadly in line with our expectations as panel prices dropped sharply in July and companies reduced utilisation rates. Sales for CPT and HannStar were lower than expectations.

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Taiwan LCD Sector

We expect lower utilisation rates to help digest inventory and stabilise panel prices for September and October. After November, however, we think that the sector will experience a negative impact from seasonally slow demand and the new capacity rampup going into 1Q09. Although we think that downside risk for AU Optronics (AUO 友達) (2409 TT, NT$37.55, 3) and Chi Mei Optoelectronics (CMO) (3009 TT 奇美 , NT$25.95, 3) is limited at the current PBR level of less than 1x, we do not see any share-price catalysts going forward, given a gloomy 2009 outlook. We maintain our Neutral view on the LCD sector.

austin

Innolux Display Corp. (3481.TW 群創)
Buy
Adjusting target price on dividend issuance and better 2Q08 results

What's changed
Innolux’s 2Q08 net income came in at NT$3.46bn, up 4.7% qoq, on sales of NT$44.4bn, up 7.4% qoq. EPS was NT$1.25, ahead of our forecast of NT$1.09 due to better non-op income. 1H08 net income totaled NT$6.77bn, or NT$2.45 per share, better than our forecast of NT$2.29.

Implications
Although 2Q08 net income appears to be lower than Bloomberg IBES of NT$3.74bn, we think it is in fact better than Street  expectations as we see IBES, with only 3 estimates from local brokers, as unrepresentative. We believe Street expectations for Innolux’s 2Q08 figures will have been for sequential decline after AUO and CMO posted earnings drops of 24%/10% qoq 2-3 weeks ago.

Valuation
Innolux currently trades at 13.9x/13.6x of 2008E/2009E earnings on ROEs of 11%/11%, respectively. We have adjusted per share estimates for Innolux post its $1.5 cash and $1.0 stock dividends on August 14. Our new EPS forecasts are NT$3.7, NT$3.8 and NT$5.6 for 2008E, 2009E and 2010E, respectively. We accordingly revise down our 12-month DCF target price from NT$66.1 to NT$ 58.7 to factor in dividend issuance and better 2Q08 results. It translates into 15.6x 2009E P/E. We maintain Innolux on the Conviction Buy list.

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Innolux Display Corporation 群創 3481
INLX’s share price has corrected ~50% YTD, and given weakening 2H08/1H09 LCD outlook, we cut 08/09E earnings by 44%/48% to low end of street and expect shortterm volatility. However, we view this as a longer-term buying opportunity as its unique hybrid business model should allow it (unlike pure play panel makers) to avoid losses during this downturn, while LCD TV assembly is intact as a key driver of 09/10E growth. We lower our ex-div adj PO from NT$101 (NT$111 pre-div) to NT$62 on 14x 09E PE, which is at the lower end of historical 8-30x PE range.

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The "Shortest" Inventory Correction Coming to an End 面板產業存貨修正即將結束
The shortest correction — With an improved inventory and utilization control, we expect panel prices to stabilize by end-Aug, marking the two-month decline a "shortest" inventory correction in the history of TFT. While the macro risks persist, we still argue for a  igher-low valuation for the panel makers, given the improved trough cycle ROE & cash flows, and, therefore, maintain our positive
stance on leading panel makers.

austin

TFT-LCDs
Busy in August

Outlook
While seasonality is part of the reason for the brisk sales in 3Q08, each company is seeing product-specific catalysts which should help growth beyond 3Q08 and into 2009. Demand for touch panels are based on new smartphone product launches and a greater use of touch screen functionality in handsets. The China handset market is still growing despite a bumpy year in 2008 due to extraordinary factors such as the Sichuan earthquake, an inventory correction and a temporary clampdown on white and black label handset sales ahead of the Olympics.

We maintain Outperform ratings on Wintek and Giantplus, but remain cautious on PVI. In the TFT-LCD small panel sector, we continue to prefer Wintek due to cheap valuations and upside risks to earnings with touch panels acting as a major catalyst for a re-rating.