The Skinny on Flat Panels: Reduced Capacity Could Mean a Strong '08

It has been a while since we took a look at the flat panel space, and we thought a good way to get back up to speed would be to review the recent conference call transcripts for Corning (GLW) and AU Optronics (AUO). Some highlights are excerpted below.

To start with, the pricing pressures we were forecasting last year definitely have come to pass.

We are seeing some positive signs of pricing stabilization as well as improvement in the supply demand environment in the market. In Q1 2007, demand for notebook monitor panel shipments improved and exceeded our expectation. Our TV panel segment was in line to our guidance. However, pricing decline in this quarter was more than our expectation. AUO’s audit consolidated revenue declined 14.7% sequentially, reported at NT$18.7 billion, equivalent to US$2.4 billion for the quarter, mainly due to a 4.1% decline on large size panel shipments as well as a 10.8% decline on ASP per square meter, combining the impact of seasonal weakness and the qualification of the acquired QDI capacity that is still in progress. Our Q1 2007 fab loading rate was at about the 80% level.

In addition to that, panel pricing also experienced a significant drop. As a result we reported our gross margin as 0.4%, operating margin at negative 5.3%, net margin at negative 6.3% and EBITDA margin at 18.5% and an operating loss of NT$4.2 billion; net loss of NT$5.1 billion.

(Excerpt from full AUO conference call transcript)

However, it looks like the worst may be over.

Display sales were $524 million in the first quarter, a 15% decline compared to the fourth quarter sales of $619 million. First quarter glass volume declined 12% sequentially, as expected.

Regarding glass pricing, our new strategy appears to be working as we hoped. Sequential pricing is lower by just 1% to 2% in the base business. Equally important, there appears to be no material change in our market share in the first quarter. It comes as no surprise that we will continue this pricing strategy heading into the second quarter.

(Excerpt from full GLW conference call transcript)

The main difference between this year and last year is the inventory. If we look at the inventory at the end of our first quarter, last year we still had a pretty large inventory across the pipeline. This year, in almost every part of the value chain we found the inventory is healthy.

(Excerpt from full AUO conference call transcript)

The growing preference for wide monitors, however, means that more panels can be squeezed out of each plant due to the way the large pane of glass gets cut.

We are now seeing panelization improvements as our customers move towards widescreen monitors. For example, the GEN 5 panel maker can make 6, 20 inch panels in the standard 4:3 format on the GEN 5 piece of glass, which leads panelization efficiency of about 60%. However, on that same piece of glass they are able to make 8, 20 inch wide monitors resulting in panelization efficiency of 70%.

(Excerpt from full GLW conference call transcript)

This means capacity additions should still grow at a slower rate than panel sales, or the overcapacity will come right back. But if the capacity additions are slow in coming, both companies are expecting tighter supplies by year-end. The long lead times for adding capacity could make for a very profitable 2008.

Comments

[Long-Short Guy:]

Related:
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They're also enriching investors. Shares of manufacturers Citizen Holdings Co., Toyoda Gosei Co. and Stanley Electric Co. of Japan, and Epistar Corp. and Everlight Electronics Co. in Taiwan have beaten global electronics stocks and their national stock indexes this year.

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Source:
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2007 Jul 22 09:50 AM

[Long-Short Guy:]

Related:
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<b>Price drops for LCD glass substrates cease</b>

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Source:
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2007 Jul 22 05:13 PM