Flat-panel makers are expected to be heavily oversupplied and face pricing pressure next year, thanks to Chinese manufacturers’ continued addition of new capacities, despite a gloomy outlook for TV demand, Morgan Stanley said last week.
Due to ongoing capacity expansion plans at BOE Technology Group Co (京東方), China Star Optoelectronics Technology (華星), CEC-IRICO (中電彩虹) and CEC-Panda (中電熊貓), the industry is likely to see supply outpace demand by 4.4 percent next year, compared with 2 percent this year, the US investment bank said in a report on Thursday last week.
Specifically, the oversupply of large TFT-LCD panels is expected to increase to 6 percent during the low seasons in the first half of next year, from 2.5 percent in the second half of this year, the report said.
“We cut 2018-2020 earnings estimates meaningfully for most [firms] across the display supply chain to reflect increased oversupply pressure,” the Morgan Stanley technology hardware research team led by Sharon Shih (施曉娟) wrote in the report.
However, Taiwan’s AU Optronics Corp (AUO, 友達) and Innolux Corp (群創) are exceptions, the report said.
“We raise our 2018-[20]20 earnings forecasts by 82 percent, 296 percent and 129 percent, based on AUO’s strong execution of business diversification amid the increased oversupply glut,” the analysts said.
While AUO’s profitability would still be affected by the industry’s supply-demand dynamics from this quarter to next quarter, the company has made efforts to upgrade its products and technology, while market tastes are developing in AUO’s favor, including for 4K2K, thin-bezel and ultra-large products, they said.
The bank retained its “equal-weight” rating on AUO, but raised its target price from NT$11.3 to NT$12.
“We view AUO as a defensive name in the Greater China display supply chain, thanks to its capacity expansion discipline, operational flexibility and sound financial performance,” the analysts said.
Morgan Stanley increased its earnings forecasts for Innolux by 9 percent, 2 percent and 4 percent from this year to 2020 respectively, despite the potential effect of falling panel prices in upcoming quarters.
The bank maintained its “underweight” rating on Innolux, but slashed its target price on the stock by 17 percent to NT$8.8.
“Innolux could be vulnerable to a TFT-LCD panel downcycle, especially given lack of product diversification for business upgrade,” the bank said. “The unclear business split among different panel subsidiaries within the Foxconn [富士康] group could continue to cap its share price upside.”
Shares in AUO rose 0.81 percent to close at NT$12.5 in Friday trading in Taipei, while Innolux fell 0.9 percent to NT$9.96.
The Morgan Stanley’s report said the industry’s oversupply pressure could moderate from June to the third quarter next year, as leading TV brands are to increase stocking momentum ahead of the year-end holidays.
The increase of active-matrix organic light-emitting diode (AMOLED) panels used in mid to high-end smartphones is the only positive factor to support the industry from next year onward, it said, adding that their panel adoption in smartphones is forecast to increase to 24 percent next year and 29 percent in 2020 from 20 percent this year at the expense of amorphous-silicon LCD panels.
“This reflects the advantages that flexible AMOLED panels can offer compared to LCD panels, including reduced thickness, enhanced picture quality and improved power efficiency,” Morgan Stanley said.
However, this trend would pressure legacy makers of small LCD panels like Tianma Microelectronics (天馬微電子) and Innolux, it said.
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