Despite expectations that worldwide demand for smartphones and tablet devices will remain robust, the rapid increase in capacity by Taiwanese touch panel makers is likely to result in oversupply and therefore hurt pricing and margins, Citigroup Global Markets said in its latest report.
“We are bearish on the touch panel supply chain given our expectations that a surge in aggregate capex [capital expenditures] -spending will result in a 17 percent capacity oversupply in 2011,” Citigroup analyst Arthur Lai (賴昱璋) said in the report issued on Friday.
Lai said an oversupply would represent “an unprecedented event” in the fast-growing touch panel industry’s short history.
Citigroup’s oversupply worries came after Goldman Sachs first warned late last month that touch panel makers’ plans to increase capital spending for producing next-generation thinner products raised concerns over the sustainability of their return on equity.
TPK Holding Co (宸鴻), a supplier of touch panels for Apple Inc’s iPhone and iPad, said in February it planned to more than double its capital spending to NT$20.34 billion (US$706.8 million) this year from NT$9.4 billion last year. The company kept the capex plan unchanged at an investor conference on Wednesday.
Wintek Corp (勝華), which supplies touch panels to Apple, Nokia Oyj and HTC Corp (宏達電), was reportedly targeting a capital -spending of up to NT$15 billion this year, compared with NT$10 billion last year, the Chinese--language Economic Daily News said on April 14.
Citigroup expects the Taichung-based company to raise its capex to NT$14 billion this year. However, Jay Huang (黃忠傑), a spokesman for Wintek, declined to comment on the reports, saying the company has never made public its capex plans.
Citigroup said the touch-panel supply chain is shifting to “oversupply” this year from “undersupply” last year, when the iPad was launched. This has thus far attracted an aggregate NT$90 -billion in capital spending from existing touch panel makers and many new entrants, which Citigroup said would lead to a supply surge beginning in the fourth quarter.
“We believe the market is unaware of potential price pressures facing touch panel suppliers and over-estimated sector profitability,” Lai said.
Citigroup also based its bearish view on other factors, including a limited upside growth for the demand of tablet and smartphone for the next two years as well as Apple’s overwhelming bargaining power against its suppliers and the US company’s routinely asking its suppliers to invest heavily in -technology upgrades.
Like Goldman Sachs, Citigroup recommended a “sell” rating on TPK shares with a target price of NT$780, implying a downside risk of 18.4 percent from the stock’s record closing price of NT$956 on Friday.
Citigroup also gave a “hold” recommendation on Wintek shares with a target price of NT$47, indicating a 14.1 percent upside from Friday’s closing price of NT$41.2.
The brokerage said Wintek would have a limited downside in the near term, as share prices have recently already fallen because of the loss of market share on yield issues.
Meanwhile, Citigroup offered a "sell" rating for Young Fast Optoelectronics Co (洋華), with a target price of NT$150. That represents a 21.5 percent downside from the stock's closing price of NT$191 on Friday. Young Fast supplies touchscreen modules and touch sensors to companies like HTC, LG Electronics Co and Samsung Electronics Co.