Challenges loom for panel makers

The financial status of the world's major flat-panel makers will deteriorate over the next two years because of massive capital spending and weakening profitability, Taiwan Ratings Corp (中華信評) said in a report released yesterday.

Industry laggards such as Taiwan's Chunghwa Picture Tubes Ltd (中華映管) and Hannstar Display Corp (瀚宇彩晶) will face escalating pressure to obtain capital to pay back debts, said Raymond Hsu (許智清), an analyst who tracks the flat-panel industry for Taiwan Ratings, a local arm of Standards and Poor's Rating Services.

"Taiwan Ratings expects the financial flexibility of smaller Taiwan-based operators to be affected by the banking sector's reluctance to increase exposure to the TFT-LCD industry," Hsu said in the report.

The two companies, which have combined debt of more than NT$10 billion (US$304 million) maturing by the year-end, do not have enough capital yet, according to Taiwan Ratings.

"Demand for capital is expected to remain high over the medium term to fund new-generation plants; Taiwan Ratings expects the companies to continue to generate negative free operating cash flow over the medium term," Hsu said.

Hsu made the conclusion after reviewing the world's six major thin-film-transistor-liquid-crystal-display (TFT-LCD) manufacturers, including LG.Philips LCD Co and five local companies led by AU Optronics Corp (友達光電).

The capital expenditures of the six companies more than doubled to US$12.9 billion last year, compared with US$5.1 billion in 2003, according to Taiwan Ratings.

In the medium term, LG.Philips is expected to maintain a better credit profile because of stronger profitability and its technological leadership in the boom-and-bust TFT-LCD industry, Hsu said.

AU Optronics and Chi Mei Optoelectronics Corp (奇美電子), Taiwan's two largest flat-panel makers, should be able to manage changes in the industry and capital needs, helped by good profitability and strong support from banks, he added.

The credit profile of AU Optronics would weaken in the wake of its acquisition of smaller rival Quanta Display Inc (廣輝), which has weaker operating efficiency and more bank loans, according to Taiwan Ratings.

But, the merger with Quanta Display will boost AU Optronics' market share to around 21 percent this year, outpacing LG.Philips and Samsung Electronics Co, Hsu said.