Citigroup Global Markets Inc downgraded its rating for Taiwanese flat-panel maker Chimei Innolux Corp (CMI, 奇美電子), citing market erosion in China and loss of the company’s competitive edge.
In a research note dated April 11, Citigroup revised its recommendation rating on Chimei Innolux from “buy” to “sell” and cut its target price from NT$15 to NT$10, citing two structural issues that will hurt the manufacturer.
“As CMI has been highly exposed to the China market [30 to 40 percent of sales], we expect it will be hurt most by Chinese panel makers’ aggressive -expansion,” Citigroup Global Markets analyst Arthur Lai (賴昱璋) said in the note. “In addition, due to technology barriers, we foresee CMI losing share in the new iPad [iPad 3], potential iPad Mini, and next-generation iPhone.”
Chimei incurred a NT$64.76 billion (US$2.2 billion) net loss last year, with a loss per share of NT$8.81, because of a global downturn in the flat-panel industry.
In the first quarter of this year, Chimei reported consolidated revenues of NT$109.3 billion, a decrease of 16.2 percent from the fourth quarter of last year.
Lai said the Chinese government had increased import tariffs on flat panels from 3 percent to 5 percent starting on April 1 to support the development of Chinese panel makers, and would likely raise tariffs further to support Chinese manufacturers of LCD TVs.
To avoid the rising tariffs, Samsung Electronics Co, LG Display Co and FullVision Optoelectronics — a strategic partner of Taiwan’s AU Optronics Corp (友達光電) — plan to invest in seventh and eighth generation fabs in China next year.
“Without a timely G7/G8 fab arrangement, we expect CMI’s 2013 market position to be threatened by this long-term trend,” Lai said.
Furthermore, Lai said the capital tie-up announced last month between Japan’s Sharp Corp and a major Chimei stakeholder, Hon Hai Precision Industry Co (鴻海精密), would undermine Chimei’s product launch.
Under the alliance, Hon Hai, which assembles iPhones and iPads for Apple Inc, will buy up to 50 percent of the panels made by one of Sharp’s subsidiaries, Sharp Display Products, starting in October.
Chimei used to benefit from orders of iPhone 4S and iPad 2 display and touch panels, but it has failed to break into the display supply chain for the iPad 3, while Sharp has become a potential supplier, Lai said.
Given Chimei’s reduced market accessibility and shrinking technological competitiveness, Hon Hai is likely to reduce its reliance on the company, he said.