AU Optronics may face losses next year

AU Optronics Corp (友達光電), the world's third-largest maker of flat-panel displays, along with its rivals in Taiwan may post losses because they are building more plants than can be justified by demand, investors said.

AU Optronics, HannStar Display Corp (瀚宇彩晶), Chi Mei Optoelectronics Corp (奇美光電) and Quanta Display Inc (廣輝電子) are all building factories that will help cut production costs. They are playing catch up with South Korean rivals, who opened the same types of plants this year.

Panel prices declined by about a fifth since June this year, forcing HannStar to post a third-quarter loss and AU Optronics to forecast a loss in the fourth quarter. The slide in prices may worsen next year after the Taiwan-based "fifth-generation" plants start production, investors said.

"Price pressure will increase once the fifth-generation lines start up in the second half," said Vincent Lai, a fund manager with HSBC Asset Management Taiwan who counts shares in Taiwan flat-panel makers among the US$150 million in equities he manages. "The Taiwan companies may make profits again in 2004."

Worldwide investment in new production capacity by flat screen makers next year will more than double to about US$8 billion, according to industry organization Semiconductor Equipment and Materials International. Fifth-generation factories will help cut costs by increasing the number of screens that can be cut from one sheet of glass material.

Tim Li (李杜榮), Chief Financial Officer at Quanta Computer Inc (廣達電腦), Taiwan's biggest notebook computer maker, said the market may not have room for all of the companies, prompting mergers.

"We may start to see industry consolidation in the next six months, because recent falling panel prices are hastening the process," he said in an interview. Quanta owns 30 percent of Quanta Display.

Third-quarter results for Taiwan's flat panel industry highlighted a change in fortunes after a first-half recovery.

HannStar, Taiwan's fourth-largest supplier of the screens, turned to a loss of NT$201 million (US$6 million) in the third quarter after being profitable in the first half.

AU Optronics, which cut its profit forecast for the full year to NT$6 billion from the NT$14.3 billion predicted in April, said it expects to post a loss in the fourth quarter.

Chi Mei Optoelectronics, which posted a profit of NT$1.1 billion in the third quarter, slashed its pretax profit forecast for the year by more than half to NT$4.8 billion. Third-quarter profit at Quanta Display, a venture between Quanta Computer

and Japan's Sharp Corp, fell to NT$439 million from NT$713 million in the previous three months.

The price of flat screens declined since June and reached Y24,000 (US$196) for 15-inch panels, close to last year's lowest level, as of the end of September, according to Hiroshi Saji, the chief financial officer at Sharp. Japan's No. 1 flat-panel maker expects prices to drop to as low as ?21,000 by the end of next month and continue to slide in the new year.

South Korean and Taiwanese companies, which lead the market for flat screens used in notebook computers and desktop monitors, are trying to enter the television business, dominated by Japan's Sharp. Demand for flat-screen TVs is not growing quickly enough to absorb the increased production, analysts said.

"The expectation was that there would be new applications for flat panels," said Aaron Hsieh, an analyst with First Taiwan Securities Investment Advisory Inc (菁英投顧). "It's not happening as fast as expected."