Chi Mei Optoelectronics (CMO) Optimistic about Second Half: Caveat Emptor

Chi Mei Optoelectronics (CMO) posted second quarter results that were better-than-expected. Better-than-expected, but the expectations were quite low: CMO posted a net loss of NT$8.84 billion (about US$269 million). Expectations were a net loss of NT$11.67 billion. CMO also shared an upbeat outlook further supporting a future recovery for LCD manufacturers.

Optimistic But a future recovery means that LCD manufacturers become optimistic. Optimistic LCD manufacturers in turn begin to boost existing capacity and increase capital spending toward building more capacity. If too many LCD manufacturers move too aggressively there is the risk of oversupply. Samsung, LG Display, AU Optronics (AUO) have all announced plans to boost capital expenditure. An oversupply will certainly lead to another round of LCD panel price erosion causing profits at LCD manufacturers to decline.

Shortage What is making LCD manufacturers optimistic about the future? A shortage of certain LCD panels that have led to increased prices is one answer. The shortage has given LCD manufacturers reason to increase utilization rates from sub-50-percent to normal levels at around high-80-percent. The shortage mainly comes from a government-backed program in China that has boosted LCD TV purchases. However, overall consumer spending in the US and in Western Europe have been depressed. The US and Western Europe compose roughly 60-percent of the overall LCD TV market. Surprisingly, retail sales of LCD TVs in the US have been strong according to market research company NPD despite weak reporting from CostCo and Wal-mart, two major retailers that I think have taken market share of LCD TV sales away from traditional retailers like Best Buy.

Supply Chain Because of a long supply chain for LCD TVs the best quarter for LCD manufacturers are in the third quarter. Most LCD panels have to be shipped in that time period to make it to integrators in China and elsewhere for import into the US, distributed and put on shelves. The LCD panels shipped in the fourth quarter for integration into LCD TVs are geared for sale in the first quarter of the next year; panel sales are usually not very good in the last quarter.

Fourth Quarter With utilization rates and capital expenditures increasing, it is likely that LCD panel prices will start declining rapidly in the fourth quarter when demand is relatively low. Most analysts as well as CMO expects LCD panel prices to continue increasing in the third quarter. What that means to the end consumer that purchases LCD TVs is that those LCD TVs won’t be much cheaper than what you see on the shelves today.

Demand Most US consumers are cash-strapped. The best way to pry money out of them is with a fantastic bargain but if that doesn’t materialize this Christmas season I think retailers will be stuck with a large inventory that will be shipped back to the brands. The brands will therefore curtail LCD panel purchases that will have a major impact on LCD manufacturers that have built up a collosus amount of additional capacity. Speaking again of capacity, CMO plans to increase its sixth-generation monthly capacity from a current 90,000 glass substrates to 120,000. LG Display and Samsung will increase capacity too.

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