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May 29, 2017

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AUO, Innolux shares up on China demand hopes

TAIPEI -- Shares of AUO Optronics Corp. (AUO, 友達光電) and Innolux Corp. (群創), Taiwan's top two flat panel makers, moved higher Thursday morning, outperforming the broader market, as investors have high hopes that the two companies will benefit from solid demand over China's May 1 Labor Day holiday, dealers said.

Buying in AUO appeared more visible as investors took cues from recent strong buying from institutional investors, who have become more upbeat about the earnings outlook for flat screens, the dealers said.

As of 11:14 a.m., shares of AUO had added 6.25 percent to NT$11.90 (US$0.39) with 215.89 million shares changing hands, while shares of Innolux had gained 3.77 percent to NT$11.00 on trading volume of 114.67 million shares.

The weighted index on the Taiwan Stock Exchange was down 0.15 percent at 8,890.70 points.

"With a buying spree ahead of and during China's Labor Day holiday approaching, it seems that Chinese panel buyers are preparing to build up their inventories," Asia Securities Investment Consultant analyst Chang Chih-cheng said.

"I expect that the production capacity utilization rate of AUO and Innolux will rise due to rising demand from China," Chang said. Some market analysts have estimated that the two companies' capacity utilization rate has risen to about 90 percent, compared with about 80 percent in the January-February period.

In reflection of a recovery in demand in the huge China market, TV panel prices have shown signs of stabilizing in the second half of March, reversing a decline in the first half, research reports indicate. TV screens serve as the major sales source for both AUO and Innolux, accounting for more than 40 percent of their total revenues.

"Market sentiment toward the flat panel business has improved a lot. Judging from foreign institutional buying, AUO has become one of their favorites," Chang said.

According to the TWSE, foreign institutional investors served as net buyers of more than 56 million AUO shares in the past two sessions, while foreign investors bought about 6 million Innolux shares in the same period.

In a research note, Barclays Capital said that following inventory adjustments in recent months, flat panel inventories have fallen to a healthy level, and it is possible that TV screen prices will recover in the second quarter due to demand from China.

Barclays has issued an "overweight" recommendation on AUO shares and has given a target price of NT$13 for the stock, while Credit Suisse has maintained an "outperform" rating and a NT$13.5 target price for AUO shares.

"I also prefer AUO, as the company has taken the lead over its peers in full high-definition (FHD) panel production. As demand for FHD smartphone screens is on the rise, AUO could benefit more from the trend," Chang said.

Chang said the gains posted by Innolux could be capped to some extent as investors are waiting for pricing of its new share sale, which is aimed at raising about NT$30 billion to partially repay company loans.

After Thursday's gains, AUO shares could face stiff technical resistance at around NT$12, while Innolux is likely to suffer corrections at around NT$11.50, the dealers said.

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