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AUO goes on the pick list +4

09:57 28-Dec-15

I've often spoken about how solution-based processing represents a sea change in the AMOLED industry, and there are signs that it will finally start to see commercial use in the next year or two:

• Industrial giant Merck KGaA has focused on soluble materials and collaborated with Taiwanese development efforts for many years.  Merck announced a new plant to produce materials for AMOLED displays and lighting devices this past summer.  The company claims it will be a leader in these materials by 2018, and has just reaffirmed those intentions in its outlook for 2016.
• Mitsubishi and Pioneer announced that they have started to mass produce color-tunable lighting panels using a wet coating process.  This is potentially significant for displays as well as lighting in that such methods could be a precursor to ink jet printing of displays.
• Ink jet display printing leader Kateeva began working with DuPont in June, saying "the industry is poised to take a significant step forward in achieving low cost mass production."  Shortly thereafter, Kateeva more than doubled its manufacturing capacity to ramp up production of its YIELDjet platform.
• Kateeva also partnered with Sumitomo Chemical at the beginning of the year to optimize YIELDJet for Sumitomo's polymer materials.  Sumitomo's main customer is Samsung Display, which purchases panels for AMOLED touch screens.  Sumitomo is now expanding its production capacity by 40% in order to meet increased demand and enable the use plastic substrates for bendable displays.

Taiwan has been a hotbed of innovation for AMOLED technologies, and I suspect that the shift may also herald its serious entry into mass AMOLED manufacturing.  An upcoming SA article will focus on AU Optronics as the primary beneficiary of such a move, in conjunction with the Apple secret lab that I wrote about two weeks ago.  AUO's latest work in transflective watch faces shows that there may be promise in combining AMOLED with Mirasol technology I mentioned there.

It's highly uncertain how things will play out, but AUO is a potentially ideal partner for Apple because it is pure producer rather than a competitor.  If Apple wants to leap frog the display industry, the more than 15,300 patents and nearly 22,000 applications that AUO holds worldwide will be vital, especially considering that AUO has already been successful in proving them against both LG Display and Samsung.  AUO's RGBY architecture could make for a clear lead in the mobile arms race, especially if eventually combined with innovations from ITRI such as PCOLED.

AUO has been a pioneer of AMOLED technology from the very beginning.  It developed the world's first double-sided screen in 2004 and its list of more recent AMOLED technological achievements includes

• 2013 - first 4K TV Panel
• 2013 - highest resolution display
• 2014 - first QHD phone screen
• 2014 - first in-cell touch for wearables
• 2015 - latest smart watch displays garnered the prestigious SID Best in Show award
• 2015 - demonstrated a flexible screen that can detect being bent in multiple directions

The company can continue to play both sides of the LCD/AMOLED battle in large screens via its alliance with 3M (MMM) on QDTVs.  Furthermore, AUO's AMOLED screens for phones are finally competitive and the current lineup of watch faces looks to be clearly best in class and earning wins in new products already.

I doubt the stock will really take off without publicity on the Apple angle, but I also see little downside given a PE of just 5 and 5% dividend yield.  Note also that cash flow is expected to almost double from 19 to 37 cents per share, due to cost cutting.  Nonetheless, subscribers should consider this a GRoDT stock, until there's more evidence of real collaboration and/or industry progress.

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