Mon, Sep 25, 2006 - Page 12 News List

Macquarie report upbeat on Taiwanese LCD firms


Macquarie Research Ltd suggested that investors switch to Taiwanese liquid-crystal-display (LCD) panel makers from South Korean industry leader LG.Philips LCD Co, as local companies will benefit from a nascent industry recovery.

The Australian investment research house recently changed its tune, lowering its investment rating on LG.Philips to "neutral" from "outperform," because it expects the world's biggest thin-film transistor (TFT)-LCD panel makers' losses to extend into the first half of the next year.

But overall, Macquarie has left its upbeat outlook on the TFT-LCD industry unchanged, Macquarie analyst Michael Bang wrote in a report issued last week.

All indicators, such as year-on-year sales growth and earnings upgrades, show "the cycle has bottomed and we are at an early stage of an upswing," Bang wrote.

Riding on this uptrend, "all Taiwanese companies including smaller players like Hannstar Display Corp (瀚宇彩晶) and Chunghwa Picture Tubes Ltd (中華映管) should have operating profits in September and also into the fourth quarter of 2006," the report said.

Chi Mei Optoelectronics Corp (奇美電子), Taiwan's second-biggest LCD panel maker, is the top pick because of a cheaper valuation and industry-leading profit margin, Bang said.

"Valuations are noticeably cheaper for Taiwan panel makers, while profitability is better," he said.

According to Bang. Chi Mei's profit margin reached 23.3 percent for the second quarter before tax and amortization, compared to LG.Philips' 10 percent. Chi Mei would record a price to book value multiple of 1.3 for this year, compared with LG.Philips' 1.7.

In the report, Bang retained an "outperform" rating on the nation's major LCD manufacturers including the smallest firm, HannStar.

Among TFT-LCD component makers, Macquarie preferred local chipmaker Novatek Microelectronics Corp (聯詠).

Despite rebounding demand, LG.Philips would be dragged down by potential price declines for 40-inch and bigger-sized TV panels on seasonal factors, Bang said.

Taiwanese firms should be immune to the price erosion because they don't operate any seventh-generation (7G) plants, Bang said.

Panel makers usually cut 40-inch, or 42-inch TV panels from glass substrates made on 7G plants.

In Taiwan, only AU Optronics Co (友達光電), the world's No.3 maker of LCD panels, planned to start making big-sized TV panels, including 40-inch panels, on its first 7G plant by the year-end, according to Bang.

That does add some risk to AU Optronics' profitability, he said.

Looking ahead, Macquarie projected prices for computer panels would climb further for the rest of the year and into next year, while prices for TV panels would hold steady, or even drop slightly.

Last week, market researcher iSuppli also predicted panel prices would rise through the second half of the year because of supply constraints. Demand for panels is likely to surge as TV makers cut product prices and notebook computer companies make models with bigger screens, iSuppli said last Tuesday.

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