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LCD recovery is a long way off

Manufacturers of liquid-crystal-display (LCD) panels for computers and televisions will see earnings hit bottom next quarter, but no strong V-shape recovery awaits them this time, Merrill Lynch analysts warned yesterday.

But Merrill Lynch's comments were upbeat compared with those of the president of market researcher DisplaySearch, Ross Young, who warned that constant, rapid capacity expansion would postpone turnaround for panel makers to as late as the second half of next year.

Offering some good news amid the gloom, Merrill Lynch analyst Daniel Kim said "the worst would be the second quarter of this year in terms of earnings."

But the recovery will not come as strongly as last time -- in 2003 -- as constant capacity expansion was exacerbating the overcapacity-driven downturn.

The capacity growth rate is exceeding the demand growth rate, he added. Five new fabs from South Korea, Taiwan and newcomers from China such as SVA (上海廣電) are entering the market this year, he added.

Samsung Electronics Co is ramping up an advanced seventh-generation fab, and AU Optronics Corp (友達光電) started mass production on its sixth-generation factory this month.

"This is very different from the last downcycle in 2001, which did not feature such an aggressive capacity increase with new players in the industry," said Jeffrey Su (蘇志凱), another Merrill Lynch analyst based in Taipei.

As a result, Kim said, "it's unlikely to see a V-shape rebound this time."

In other words, "for 2005, you will see the same kind of volume rebound in 2003, but you are not going to see a 30 or 40 percent price rebound," Su said.

But with better cost structures and rich product portfolios, "industry leaders including Korean companies and AU Optronics should be able to make profits this year," Kim said.

Last quarter, AU Optronics, Taiwan's top LCD panel supplier, posted a bigger-than-expected loss of NT$2.23 billion, or NT$0.46 a share, while South Korean Samsung Electronics Co and LG Philips LCD Inc still managed to make profits.

Merrill Lynch, which has been pessimistic about the sector since last June, issued a "sell" investment rating on AU Optronics, but issued a "buy" on the world's biggest LCD maker, Samsung Electronics Co.

Now is the time for investors to reduce holdings in smaller players as the price gap between industry leaders and the "contenders" widens, Kim said, adding that industry leaders usually have better market share and higher returns.

When asked when the rating on the Taiwanese company would be raised to "buy," Kim said most Taiwanese TFT-LCD companies were trading too high now.

It would be an appropriate time to buy AU Optronics shares when the stock trades at around 1.3 to 1.5 times the price of its book value, he said.
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