Entry Into Smart Cockpits And Micro LED Displays Will Expand High-Value Offerings

Key Takeaways

• AUO's focus on automotive, Smart Cockpits, and micro LED displays aims to drive growth and improve profit margins through innovation and premium product offerings.
  
• Strategic acquisitions, cost control initiatives, and overseas market expansion are set to enhance revenue, profitability, and diversify AUO's business model.
  
• AUO faces declining sales, weak demand, and high debt, with geopolitical risks potentially affecting future revenue and profitability.

Catalysts

Researches, develops, produces, and sells thin film transistor liquid crystal displays (TFT-LCDs) and other flat panel displays for various applications.

• AUO is focusing on growth in the automotive segment with the formation of AUO Mobility Solutions Corp. (AMSC) and increased engagement with OEMs, expected to drive double-digit percentage revenue growth, suggesting improvements in their organic growth and potential higher profit margins.
  
• Synergies from the acquisition of BHTC, as demonstrated by significant project awards amounting to over USD 15 billion, are expected to enhance revenue and lead to cost savings of up to USD 60 million, positively impacting their earnings.
  
• The company is leveraging its display expertise to enter high-value segments like Smart Cockpits and micro LED displays, which could drive more premium product ratios and improve gross margins.
  
• AUO is aiming for double-digit growth in Smart Vertical Solutions and Green Solutions, with efforts focused on overseas markets, which could diversify revenue sources and enhance net margins.
  
• Cost control initiatives, including asset sales and transitioning to an asset-light model, alongside the anticipated decline in CapEx and depreciation, should improve the company’s capital structure and profitability, potentially boosting their earnings.

AUO Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AUO's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach NT$10.0 billion (and earnings per share of NT$1.31) by about April 2028, up from NT$-3.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from -30.5x today. This future PE is lower than the current PE for the US Electronic industry at 17.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.43%, as per the Simply Wall St company report.

AUO Future Earnings Per Share Growth

Risks

• AUO faced a 12% Q-o-Q decline in net sales in Q4 2024, impacted by reduced consumer demand and lessened shipments, potentially affecting future revenue and profitability.
  
• The company's Mobility Solutions were hindered by weak demand across markets excluding China, and its automotive market expansion is contingent on stable market conditions outside China, posing revenue risks.
  
• AUO's Vertical Solution revenue fell due to early procurement, slow market momentum, and lower-than-expected solar PV module demand, affecting net margins.
  
• High debt levels with a combined long-term and short-term debt of NT$118.3 billion against cash and cash equivalents of NT$68.4 billion could strain future earnings and liquidity.
  
• Potential geopolitical uncertainties, such as tariffs and economic fluctuations, may rapidly impact the company's operations and financial performance, posing additional risk to stable revenue and operating margins.

Valuation

• The analysts have a consensus price target of NT$15.987 for AUO based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$353.7 billion, earnings will come to NT$10.0 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 10.4%.
• Given the current share price of NT$12.4, the analyst price target of NT$15.99 is 22.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.