Why LCD Inventories Really Do Matter (AUO, GLW)

Includes: AUO, GLW
by: William Trent, CFA

When we have written about the LCD panel inventory glut in the past, we often get a comment similar to this one:

LCD demand will have its ups and downs. The general trend though is up. There was this glass oversupply “Glut” last year and it did not stop the panel makers from expansion. Also China has not be tapped yet. Near term demand might be flat to slightly higher but as long as they keep finding ways to cut cost, lower ASP wont impact them as much.

The problem is, when there is too much inventory there tends to be too much inventory everywhere. PC makers have more than they need and cut back orders. Besides, during the shortage they were probably double-ordering to make sure they would get something and now they don’t need all the extra orders.

Then, the wholesalers have too much. All of these inventories have to be cleared before the manufacturer gets new orders. And in the meantime, the manufacturer has to cover fixed costs on little or no revenue. The margin impact can be significant, and depending on the severity of the glut can last several quarters.

DigiTimes has two stories today that show the process is progressing:

AUO Cuts Shipment Goal as May Revenues Slide

AU Optronics (NYSE:AUO) yesterday made downward adjustments to its shipment goal for the second quarter, as it reported that its consolidated revenues in May declined 10.3% sequentially to NT$20.13 billion (US$628 million).

Hsiung Hui, executive vice president of AU Optronics (AUO), said that May revenues were down because average selling prices [ASP] fell faster and deeper than expected.

With its utilization rate dropping to 90% amid high inventories in the market, AUO expects its TV panel shipments will grow only 6-8% sequentially for the second quarter, compared to its previous forecast of 20% made on April 20 during an investors conference.

The panel maker also adjusted its shipment goal for PC panels to 6-8% growth from the original 10%, while shipments in the small-to-mid-size segment will grow only 15%, compared to the 30% it had originally expected.

AUO had previously indicated that the average selling prices (ASPs) for its TV and PC panels would decrease 5-9% and 10% respectively for the second quarter compared to the first quarter. But according to the revised forecasts, the ASPs for TV and PC panels will fall deeper, at 10% and 15-18% respectively.

Sources remarked that the revision to AUO’s shipment goals indicated weaker-than-expected demand in the overall display market during the second quarter, and the downturn may continue into the third quarter.

Note that AUO lowered demand estimates as well as its own goals. This is likely because previous demand estimates were based on double-ordering.

Note also that May revenues declined. They didn’t grow at a slower rate, they fell. That’s because the orders going to customers were coming from distributors who had enough inventory and didn’t need to replenish it from the manufacturer. And average selling prices will decrease, which is likely to impact margins.

And it does carry down the line. The other DigiTimes article, LCD Component Suppliers Feel Price Pressure Growing Amid Weaker AUO Outlook, has this to say:

The LCD components sector is bracing for mounting price pressure after AUO revised its shipment goals downward and reported a decline in May revenues on fast-dropping average selling prices (ASPs) and high inventories in the panel market.

While the revision to AUO’s shipment goals is an indication of a downturn hitting the panel industry, some components suppliers said their top priority now is to seek ways to quickly cut production costs to meet expected demand for price cuts from panel makers.

Polarizer maker Optimax Technology said inventory issues facing panel makers affected its shipments in May. Expecting more pressure for price cuts, Optimax said the market in the third quarter will depend on how fast panel inventories can be cleared during June.

So yes, they will try to continue to cut costs. But it is unlikely they will do so as quickly as their own prices fall.

We still expect a rough patch for Corning (NYSE:GLW).

AUO 1-yr chart:

AUO 1-yr chart