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Musing-Weekly Newsletter

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AUO Reports 2017 Results Relatively Flat Y/Y; January is Down
February 12, 2018

AU Optronics and Innolux are the anti OLED panel producers and while AUO has a low volume Gen 4.5 producing OLED watch displays and Innolux has been dabbling in OLEDs, neither is committed. So, we view these suppliers as virtually pure play LCD vendors and their financials can be a proxy for measuring the strength and vigor of the LCD industry.
 
AUO reported January revenue  of 26.21b NT$, up 1.4% M/M but down 7.6% Y/Y.  Large panel shipments were 9.53m units, up 1.2% M/M and up 12.4% Y/Y, while small panel shipments were 16.65m, up 2.5% M/M and up 39.49% Y/Y.  On the surface these look like good numbers as January is typically a down month sequentially for AUO (5 year avg - ↓7.0%), but on a Y/Y basis, AUO’s January is typically up 7.3% and this year was down 7.6%.  With both large and small shipments up substantially Y/Y and M/M, and sales up modestly M/M, but down Y/Y the ASP impact was substantial.  Based on January panel pricing data (TV average ↓0.7% - Phone average ↓6.3%), AUO’s efforts to meet the Chine LTPS pricing, while resulting in new sales is driving the gross margins down.
 
AU Optronics (AUO) also reported 4Q and full year results last week. 
 
4Q17
  • Large panel shipments
    • Q/Q (22.2m) Down ~5%– but better than 1Q 5 year average of -8%
    • Y/Y Flat a bit worse than the 5 year average of +0.3% -
  • Small panel shipments
    • Q/Q (43.45m) – worse than the 5 year q/q average of +1% - up 19.3% q/q decline reflects strong 4Q rather than weak 1Q – new 18:9 demand is driving small panel unit volume
    • Y/Y Down 7% - 8% better than 5 year average of 1.2%  
  • ASP -- Q/Q Blended ASP down 2% - 3% in US$
  •  Utilization –High at ~94% - 96%  
 
  1. Outlook
  • Increasing TV resolution and panel size - Expect 1”+ size gain for year
  • Additional Capacity – Gen 8 phase 3 to come on line for TV
  • Gen 6 LTPS ramping up  19:9 small panel format – company says makes panels 20% larger
  • Improving digital signage market – Industrial 4.0 –
  • Negatives
    • Increasing Chinese capacity – Biggest impact in 2019/2020.
    • General Oversupply – AUO says “The new norm”
    • OLED – Little investment until proof that it generates additional sales, at which time it will likely be too late. 
    •  Micro-LED – Doing research, but focused on hi-end as more LEDs mean more drivers, means more cost 
 
2018 Supply/Demand

  • Demand
    • Expect Large panel area demand up 6% to 8% driven by replacement cycle, increasing size and Sporting events  TV panel demand is forecast to be flat to slightly up by most sources
    • 4Q saw China and N. America demand down – Europe up – Cited strong 11/11 and 12/12 Chinese promotions as positives but overall sell-thru decline less than 3Q – Expect 2018 to be similar
    • India market demand down due to higher consumption tax               
  • Supply
    • Up in 2018 as noted but next gen fabs take longer to improve yield –2H will be worse than 1H
    • Inventories
    • TV – 1 to 2 weeks higher than normal – Stocking for New Year holiday
    • Monitors – Normal – 3 to 5 wks.
    • NB – Normal – 5 to 6 wks
    • Phones – 9:16 inventory declining – 9:19 inventory increasing but normal
    • Currency – 4Q negligible impact on GM
 
Expectations – 2018
  • Expect 4K TV market to be 40% of overall market – Was 30% in 2017
  •  Expect AUO 4K penetration to be greater than market
  • Expect 80% of Smartphone market to be ‘full screen’ for AUO – Market ~60%
  • Expect 8K to be 10% of something in 2018 
  • Expect 65” market to be up 40% (share)
  • Expect 70” market to be up 50% (share)
  • Expect 75” shipments to double in 2018
  • Noted that 85” 4K/8K HDR quantum dots TV demos at CES 2018 used AUO panels  
  • Capex
    • NT$ 43.9b in 2017
    • NT$ 45.0b in 2018 
 
AUO has done a good job of differentiating themselves from ‘generic’ panel producers by developing specialized products, which they say represented ~50% of 2017 sales.  This has helped them keep utilization and gross margins high, but it also means they have to move quickly to stay on the forefront of new products, which all seem to have compressed development cycles.  However, both AUO and Innolux are essentially treading water.  They are not investing in capacity so their market shares have been flat and will soon drop significantly as the new China ( Gen 8+ and Gen 10+) fabs reach MP.  They have ignored OLEDs and also Micro LEDs, are dropping behind technologically. They have benefited from the reduction in large area capacity over the last two years, but the industry is moving to an overcapacity situation and the average price/sq. m is dropping along with ASPs. The question is how long they can survive and will the Taiwanese government support them in the troubling future?

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