Taiwan TFT LCD Sector: Panel inventory remains healthy, awaiting new product launches to drive panel demand

Taiwan TFT LCD Sector: Panel inventory remains healthy, awaiting new product launches to drive panel demand

● AVC released that 2012 first 4 weeks (2–29 Jan, New Year and
Chinese New Year period) of LCD TV sell through in China was
down 8% YoY, below its original expectation of flat to up 5% on
consumer’s early purchasing demand in the last week of Dec
2011, prior to the end of “Old for New” subsidy.
● We believe this is neutral for Taiwan TFT supply chain given 2012
Chinese New Year was in Jan, versus 2011’s in Feb, and should
be less relevant to gauge New Year and Chinese New Year
demand in China.
● Based on our checks, panel inventory post CNY holidays has
returned to normal level with some TV brands planning to place
order in Feb and Mar for inventory build in preparation of new
product launches in May.
● We prefer AUO to CMI. CMI stock has surged 38% YTD vs 25%
for AUO and 12% for the TAIEX. We believe positive news on the
potential loan extension and Hon Hai group or Mr Terry Guo
becoming CMI’s new Chairman have already been priced in. We
remain NEUTRAL on CMI.

China 2012 W1 to W4 LCD TV sell through down ~8% YoY
Today, AVC released that 2012 first four weeks (2–29 Jan, New Year
and Chinese New Year period) of LCD TV sell-through in China
reached 4.5 mn units, down 8% YoY, below its original expectation of
flat to up 5% YoY. AVC attributed this to consumer’s early purchasing
demand in the last week of December 2011 (~400,000 units), prior to
the end of “Old for New” subsidy. According to AVC, China urban LCD
TV sell through declined 16% YoY to 2.26 mn units during the first
four weeks of 2012, while rural LCD sell through was up 1% YoY to
2.19 mn units.

We read this as neutral for Taiwan TFT supply chain given: (1) 2012
Chinese New Year was in January but in 2011 it was in February. We
believe YoY comparison of week 1 to week 4 in 2012 should be less
relevant to gauge New Year and Chinese New Year demand in China.
(2) Based our checks, panel inventory post Chinese New Year holiday
has returned to a normal level; some TV brands are planning to place
orders in February or March for inventory build in preparation of new
product launches in May.

AUO should play catch up in China market
We estimate AUO’s market share among Chinese TV brands of ~20%
in 2011, behind CMI’s ~30%, LGD’s ~25%, and Samsung’s ~20%.
AUO should play catch up in 2012 after the new management team is
in place and on new product launches (3D TV panel, 39”/50” panels).
CMI’s and AUO’s effort on 39”/50” panels for higher cutting efficiency
on Gen 6 and Gen 7.5 fabs should help generate higher revenue and
better profitability per substrate. As rural market now plays a more
important role in China, both CMI and AUO should benefit given better
relationships with Chinese local brands, as well as existing JV
relationships (AUO had JVs with TCL, Haier, and Chang Hong).

Still prefer AUO over CMI
We continue to prefer AUO over CMI despite CMI being viewed as a
higher beta play amid TFT LCD’s directional improvement. CMI stock
has surged 38% YTD vs 25% for AUO and 12% for the TAIEX. We
believe the positive news on potential loan extension and Hon Hai
group or Mr Terry Guo becoming the new Chairman of CMI have
already been priced into the stock. We remain NEUTRAL on CMI.