Update on AU Optronics

I have 4 new articles I found regarding the LCD Panel industry and AUO specifically. They are all from DIGITIMES.

By date, the first one says that the strong demand for small to medium size panels will ease. This was actually from a report out of the Topology Research Institute. This says demand may ease by the third quarter as the major buyers have wrapped up their orders. Of course this is a concern if other articles are saying demand remains above supply and prices continue to increase, but I like to show both sides of the argument, when there is another side. No need to fool yourself into thinking something is a great investment when there are issues.

The quote dealing with AUO is:

Panel makers such as AU Optronics and Wintek that ship mainly to international brands will be less affected by the situation...

So if there is a slowdown in this segment it most likely won't hurt the main catalyst with AUO, that being a return to profitability.


Next article is from DIGITIMES and is titled "Major China TV makers may visit Taiwan panel makers, paper says."

Amid a tight supply of panels, presidents at major China-based TV makers...may visit Taiwan-based panel makers, hoping to sign contracts for securing panel supply, according to the Chinese language website sina.com.

"Sign Contracts" is always a good thing after prices have risen. It will lock in a nice margin for AUO. Game on.


"PC Panel prices to rise in July" is the title of the 3rd article. Basically we're looking for a $2-$5 rise in July, probably closer to $2-$3. Unless China comes to town with even more demand and contracts.


Last article is also from DIGITIMES and is titled "Shortages of small-to medium-size panels persist despite slower demand in June and July." It should be noted that all these articles have an aspect of AUO in them, they all deal with different products and sizes. The quote here on AUO is:

AU Optronics has a monthly capacity of more than 10 million units of small-to-medium panels, and currently it is running close to full capacity, industry sources said.

So although demand has slowed and prices are now "only" rising by $2-$3, shortages persist and China may be coming to town.

AUO Confirmation

Here are three more articles that support not only a return to profitability, but also an increased stock price for AUO.

Digitimes says

Amid rising panel quotes and shipment increases, AU Optronics (AUO) and Chi Mei
Optoelectronics (CMO) will likely report sequential sales growth of more than 5%
and set records again in June, according to the Chinese-language Commercial
Times.

Shipments of the two panel makers are to grow 5-7% sequentially during
the period, the paper noted.

With shipments growing on increased sales prices and increased margins...what's not to like?

The next article is titled "Strong Demand from LCD TVs and Mobile Applications Drives Asia Pacific Flat Panel Display Market". This article details how the industry had revenues of $67 billion in 2006 and predicts growth to $122.8 billion by 2013.

Finally, the last article shows that export orders for Taiwan rose on strong demand for notebooks, PCs, and outsourcing. They might as well said LCD Panels, LCD Panels, & LCD Panels.

The Digitimes article will not last for free for too long. Their site sends it to a subscriber only archive site after only a couple days.

Supply cannot meet the demand for LCD Panels and what it means for AUO

I submitted the following to http://www.valueinvestorsclub.com/ today. More information detailing the supply/demand conundrum in various media outlets. One I like is http://www.digitimes.com/


AU Optronics is the third largest thin film transistor LCD Panel manufacturer in the world. Market share for panels > 10" increased for all three market sectors: Notebook PC, LCD TV, and LCD Monitors. In panels < class="blsp-spelling-error" id="SPELLING_ERROR_0">th for mobile phones, 2nd for Digital Video Cameras, 3rd for Digital Still Cameras, and 2nd for General electronics (video game players, etc).

AUO is currently priced at 1.5x book, 1.56x sales, and 7.6x cash flow. Compared to the industry at 3.67, 3.15, and 18.9. The main factor in being valued less than their industry is their profits have not been optimal. That is what's changing. Currently, as profiled by a number of media outlets, demand for LCD panels is outstripping supply, which is leading to higher sales prices and higher margins.

Their May revenue was a record at 76.4% higher than last May. Year to date revenue (through May) is up 35.8%. This is what is leading them to publicly announce at their annual meeting that they are returning to profitability.

In terms of value, they are obviously undervalued compared to their industry. Once quarterly figures come out showing they indeed are returning to profitability, shares should increase. As revenue, margins, profit, and cash flow increase, I feel they will come closer to parity with their industry, but not become fully valued without a demonstrated consistency of earnings. In a cyclical business that is always the challenge and skepticism will remain the key obstacle in coming to full value.

The current price per ADR share (10 Taiwan shares to 1 ADR), could double without becoming overvalued fundamentally or compared to the industry based on their YTD revenues.

The catalyst is three-fold:
1) Demand for their products is higher than supply, creating higher margins and revenues.
2) YTD revenue growth is 35.8%
3) Higher revenues and margins are returning AUO to profitability

The Catalyst Investor

We have found a number of key items that can give a particular stock an increase in market value. As we find these, we will list what stocks we think will experience an increase due to increasing margins or volume, or a decrease in costs.

A list of books will be posted in the future, showing where we have gained the most education. Overall, we are influenced by Jim Rogers, Warren Buffett, Seth Klarman, and Mohnish Pabrai.

More posts will follow