AU Optronics Corp (友達光電), the world's third-largest flat-screen maker, announced yesterday that its quarterly profits jumped nearly fivefold on better cost efficiency, but investors worried that lower panel prices would slow the growth.
During the quarter that ended last month, profits climbed to NT$14.39 billion (US$425 million), up from NT$2.9 billion a year ago, which propped up the company's first half earnings to NT$26.05 billion, or NT$5.59 per share.
The second-quarter results slightly exceed the NT$13.43 billion forecast by Merrill Lynch, which downgraded its recommendation for AU by two notches to "Sell," saying that steeper price fall could throw the industry into a reverse.
"We did see some signs pointing to slow demand since late June as channel distributors became inactive on inventory buildup," Lee Kuan-yao (李焜耀), chairman of AU Optronics, told investors during a conference yesterday.
"But we feel this should be a result of seasonal factors, rather than [an indication that] the industry's tilting toward unhealthy development," he added.
"After one-and-a-half-years of price hikes, it should be time to lower prices of computer monitors in order to level off inventories," Lee said.
In addition, AU will cut back production to help ease its inventory pressure, Lee said. AU's invenotries swelled to some NT$17.78 billion in the second quarter, up 44 percent from NT$12.36 billion in the first quarter.
Sales of liquid-crystal-display (LCD) panels for computer monitors made up 65 percent of the Hsinchu-based company's total revenue of NT$48.53 billion in the second quarter.
AU expects a 10-percent price decline for large-sized panels during the July-September quarter on a quarterly basis.
But, industry analysts expected panel prices to fall significantly.
"The price drop will be much deeper. Say, 17-inch LCD screens are likely to fall by 23 percent to US$225 a unit," said Frank Su, an analyst with BNP Paribas Peregrine in Taipei.
Despite the falling panel prices, AU chief financial officer Max Cheng (鄭煒順) said "We'll take on the challenge to control the gross margin to dropping less than 10 percent."
In the last quarter, AU's gross margin inched up 1.3 percent to 35.3 percent from 34 percent from the previous quarter.
With gross margin sliding, the firm is expected to post a quarter-on-quarter 30 percent decline in earnings to NT$9.39 billion in the quarter to September, according to Merrill Lynch.
South Korean rival LG.Philips LCD, a 50-50 joint venture between LG Electronics Inc and Philips Electronics NV, said second-quarter profits more than tripled to 701 billion won (US$20.75 billion) from 183 billion won a year ago.
Looking ahead, Lee said the strength of the demand for flat-screen televisions, which heavily consume LCD makers' capacities, will be a determining factor to divert a supply glut next year.
"We believe 2005 will be the year for LCD TVs to take off as the pricey sets will become more acquisitive when the retail price for a 32-inch set fall to acceptable US$1500," Lee said.
AU expects sales from TV panels to make up to 20 percent of its revenue next year, from the current 7 percents.
"But, Lee's remarks do not sound convincing to me. The concern over a supply glut hurting panel prices and eroding profits has not been alleviated at all," Su said.