AU Optronics Upgraded To Outperform At Credit Suisse

Credit Suisse’s Jerry Su believes “the better supply/demand environment from 2H16 will lead to strong pricing recovery, which should help the panel makers to return to profit in 2H16.”

Su upgraded the rating on AU Optronics Corp (ADR) AUO from Neutral to Outperform, while raising the price target from NT$10.20 to NT$13.00.

Beneficial Panel Cycle

The analyst believes the panel cycle was entering a recovery phase, rather than a seasonal uptick, and that this phase would extend into 2017.

In addition, a slowdown in capacity growth in 2017 was likely to support panel pricing, which in turn would allow panel markets to further reduce their debt levels and invest in new technologies.

“AUO has mentioned earlier that it is evaluating its OLED investment plans, and we believe it will need to make a decision in the next 12-18 months to participate in the flexible OLED take-off,” Su stated.

AU Optronics has guided to large-sized panel shipment growth in the mid-single digit percent quarter on quarter for 2Q16, with small and medium sized panel shipments remain flat to marginally up.

The company also guided to large size ASP growth by the mid-single digits quarter on quarter, driven by a mix shift and improved utilization.

Outlook

Stating that the quarter-to-date data and checks suggest AU Optronics was tracking ahead of the shipment guidance, Su said, “the recent upward pricing recovery trend could help the company generate a positive profit in June, despite 2Q16 still being loss making.”

Longer term, the analyst expects the company’s strategy of increasing its value-add through a ramp in premium TVs, integrated touch for mobile devices and higher resolution panel for smartphones and NB to help differentiate AU Optronics from Chinese panel makers through better profitability.

The EPS estimates for 2016 and 2017 have been raised to reflect the better panel pricing environment and improving end market demand.