Rising share prices are usually an indication that companies are performing well, but it does not necessarily follow that firms can maintain that momentum and go on to build profitable businesses in the future.
That is the reason UBS Securities Pte Ltd has become cautious on the outlook for Taiwan’s LCD sector in the second half of the year, after a strong showing in the first half.
In a research note issued yesterday, the brokerage said it was downgrading its investment recommendation on LCD panel maker AU Optronics Corp (AUO, 友達) to “sell” from “neutral” and retained its “sell” rating on another panel maker, Innolux Corp (群創).
“We see scope for the recent upward trend in TFT-LCD panels slowing down, likely after September,” UBS analyst Samson Hung (洪希民) said in the research note, citing potential declines in TV and tablet panel shipments, a seasonal slowdown in notebook and smartphone panels, as well as possible price declines amid increasing industry capacity.
As a result, the outlook for Taiwanese panel makers’ revenue and earnings growth momentum is forecast to be moderate this quarter and start trending down next quarter, Hung said, adding that there is also an increasing risk of share prices declining heading into the second half of the year.
UBS said that following the end of the FIFA World Cup, overall TV panel shipments for this quarter could decline by a single-digit percentage from last quarter, when AUO and Innolux reported about 20 percent sequential increases in shipments from the first quarter.
The brokerage’s warning comes ahead of upcoming investors’ conferences hosted by AUO and Innolux next week, during which the two firms are expected to provide their sales guidance for the second half of the year.
However, recent forecasts by other market researchers have signaled potential headwinds to come for the sector.
Last week, WitsView said shipments of all categories of panels are expected to drop this month from last month, with an 8 to 9 percent decline for LCD monitor panels and a 10 percent fall for notebook computer panels.
Panel shipments for TVs and tablets should decline by 4 percent and 7 percent respectively, according to WitsView.
Meanwhile, growing shipments of ultra-high definition 4K panels by South Korean companies are also set to challenge Taiwanese suppliers of this type of panel in the second half, according to NPD DisplaySearch.
UBS forecasts both AUO and Innolux are set to post just 4 percent revenue growth for this quarter from last quarter, when AUO reported a sequential increase of 9 percent to NT$102 billion (US$3.4 billion) and Innolux saw a 24 percent increase to NT$111.1 billion.
For next quarter, UBS predicted AUO’s revenue would fall by 10 percent, with up to a 25 percent decline for Innolux from this quarter.
Share prices of AUO and Innolux moved lower yesterday by 2.16 percent and 0.66 percent respectively to NT$13.6 and NT$14.95 in Taipei trading.
Since the beginning of the year, AUO shares have risen by 42.9 percent and Innolux shares have moved up 31.7 percent, compared with the broader market’s 9.63 percent increase over the same period.
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