Citigroup downgrades its flat-panel ratings

By Kevin Chen  /  Staff reporter

Fri, Jul 19, 2013 - Page 14

Citigroup Global Markets Inc yesterday downgraded its ratings for Taiwanese flat-panel makers Innolux Corp (群創) and AU Optronics Corp (友達), citing weakening demand in China.

The downgrade caused shares in the two companies to plunge in Taipei trading with investors’ concerns that pricing and margin pressures on the firms are likely to grow in the second half of the year.

Shares of Innolux, the nation’s largest flat-panel maker, dropped by the maximum daily limit to NT$13.95, their lowest level since Jan. 23, while those of AUO declined 4.95 percent to close at NT$10.40, Taiwan Stock Exchange data showed.

In its latest research note, Citigroup revised its equity recommendations for Innolux and AUO to “sell” from “buy” and cut its target prices to NT$11 and NT$8.5 respectively, from NT$22 and NT$17.

Innolux returned to profit in the first quarter after five years in the red, while AUO is forecast to follow suit in the second quarter.

However, the two companies’ earnings prospects are likely to deteriorate in the second half of the year, Citigroup said.

“We expect China’s TV sell-through in the second half to decline year-on-year for the first time in history,” Citigroup analyst Arthur Lai (賴昱璋) said in a note. “Weak demand is likely to offset contributions from [the Taiwanese panel makers’] premium [product] offerings, and cause AUO’s and Innolux’s earnings to miss market expectations.”

Lai attributed the weakness in demand to no further extension of a subsidy program by the Chinese government and a credit crunch that will likely upset the Chinese housing market and make TV brands reluctant to replenish panel inventories.

Citigroup’s move came after UBS Securities Asia Ltd’s recent supply-chain checks, which also suggested potential downward revision of TV panel demand in the third quarter as TV vendors plan to lower inventory built up in the first half of the year, a note written by UBS analyst Samson Hung (洪希民) said on Monday.

Both Citigroup and UBS said Chinese TV makers may become more aggressive in offering discounts to customers following the termination of the subsidy program and they would likely to ask for more price concessions from panel makers.

Therefore, both Innolux and AUO may find it hard to sustain their profitability in the fourth quarter as they face further panel price declines amid inventory corrections, they said.

“Innolux has the most complete lineup in ultra-high-definition TV, yet the positive impact on blended selling prices from an increasing share of such TVs in its product mix could be nullified by lower panel pricing,” Lai said.

Meanwhile, AUO is expected to lose some orders for the new iPad mini models equipped with “Retina” high-resolution displays to LG Display Co, Samsung Electronics Co and Sharp Corp, he said.

Citigroup cut its earnings forecast for Innolux to NT$0.96 per share this year and NT$0.98 next year, compared with a previous forecast of NT$1.38 this year and NT$1.59 next year, Lai said.

Citigroup said it forecasts that AUO will report a net loss per share of NT$0.02 this year and earnings per share of NT$0.18 next year, down from its previous forecast of NT$0.41 and NT$0.54 respectively.