Smaller Taiwanese liquid crystal display (LCD) makers such as Chunghwa Picture Tubes Inc (中華映管) are facing mounting pressure to merge with bigger players as competition intensifies, industry watchers say.
Speculation about possible consolidations has heated up recently as smaller players face growing difficulty raising funds needed to finance expanding capacity, which they need to do in order to survive.
"Merging for growth seems to be an easy solution for present difficulties," said Naiwen Kerr, an analyst with Lehman Brothers in a report released last Friday.
"We think the most likely M&A [merger and acquisition] deal will occur in the smaller companies," Kerr said.
It would make the best sense for the No.3 player, Chunghwa Picture Tubes, to merge with Quanta Display Inc (廣輝), or for the No.2 LCD panel maker Chi Mei Optoelectronics Corp (奇美電子) to acquire Quanta Display, he said.
Quanta Display and Chunghwa Pictures said last month they were just in the initial stage of merger talks, and no substantial progress had been made. They made the comment after reports appeared in the Chinese-language newspapers about a possible link-up.
Quanta Display, a LCD panel manufacturing unit of the world's biggest contract laptop computer maker, Quanta Computer Inc (廣達電腦), has the best pricing power in M&A talks given its focus on notebook panels, Kerr said.
Most of Quanta Display's production goes to Quanta Computer, which supplies notebook computers for some of the world's biggest computer vendors, including Hew-lett Packard Corp.
Pressure from the increasing competition posed by Chinese LCD panelmakers will accelerate consolidation among local players, said Frank Su (蘇穀祥), who tracks the LCD industry for BNP Paribas Securities.
"Taiwanese second-tier panel makers, particularly Chunghwa Picture Tubes and HannStar Display Corp (瀚宇彩晶), will face competitive pressure from new Chinese entrants, who will catch up soon," Su said at a forum on the LCD industry in Taipei last Friday.
All Chinese newcomers, including SVA-NEC LCD Co (上海廣電) and BOE-Hydis (京東方), will focus on fifth-generation factories over the next three years, which implies that their business should concentrate on monitor panels, or possibly notebook computer panels, he said.
Both HannStar and Chunghwa have been focusing on panels for computer monitors and have been slow to expand to bigger screens for TVs.
Su said he expects to see a merger in the industry within a year.
Kerr has upgraded his ratings on Quanta Display to 2-Equal weight as the stock has been traded down close to book value.
He also upgraded Chunghwa Picture Tubes to 2-Equal weight saying cheap valuation and meaningfully large capacity provide a good incentive for M&A, which could be a short-term catalyst for the stock to perform.
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