Mixed News (Mainly Bad) on the LCD Panel Front (AUO)

Includes: AUO, GLW, LPL
by: William Trent, CFA

Readers who wish I would quit being so bearish on LCD panel makers already, or more to the point, investors who own LCD panel makers and wish the bleeding would stop, will just have to continue to wait. The good news is, signs are forming that the industry recognizes the problem and is taking steps to solve it. Only when it stops getting worse can it start getting better.

According to DigiTimes, Taiwan-based panel makers are cutting production amid inventory issues and a dim industry outlook, with AU Optronics (NYSE:AUO) and Chi Mei Optoelectronics using the slow period to train employees at their LCD module plants in China while Chunghwa Picture Tubes and HannStar Display are both encouraging their employees to take holidays. DigiTimes quoted the Chinese-language Commercial Times as their source.

However, there are also signs that the process will be tortuous. Innolux Display stated it shipped more than five million LCD monitors through the first five months of this year, and it is confident that total shipments for this year will reach 16-18 million units. Eying the booming LCD TV market, Tuan said, the company is looking to enter the market starting from next quarter. In addition, Although the global LCD monitor market was slow in the first half of this year, BenQ is still positive about the outlook for this year and is confident it will achieve its goal of 15 million units for the whole year, up 55% from 9.7 million in 2005, according to Hermit Huang vice president and general manager of BenQ Digital Media Business Group. BenQ shipped about 3.4 million units in the first quarter of this year, according to the company. Despite seasonal effects, the monthly shipments from BenQ in April and May remained at more than one million units, Huang pointed out.

Adding to the problem is that continued overproduction is speeding price declines. Manufacturers and retailers are no longer willing to hold inventory that is losing value so quickly. As yesterday's Digitimes reported

Taiwan-based home appliance makers including Kolin, Sampo, Sanyo Taiwan, Teco Electric & Machinery and Tatung are striving to lower their LCD TV inventory to 10-15 days, according to the Chinese-language Commercial Times.

Due to fast-falling TV panel prices, most LCD TV makers are reluctant to accept orders of more than a month away. Several TV makers in Taiwan indicated LCD TV quotes for the US market will drop at least 20% between now and the fourth quarter, the paper said.

For the appliance makers to cut inventory means they will have to reduce the number of units they order from their suppliers. With some suppliers still aggressively ramping up production, the inventory will swell on their own books. Then we’ll see the real capacity reductions begin.

AUO 1-yr chart:

AUO 1-yr