Embracing eLEAP And Fan-Out PLP Technologies Will Provide Future Advantages Amid Industry Cycles

Key Takeaways

• Investing in premium, advanced panels and strategic technology collaborations could boost revenue growth and enhance net margins in high-value sectors.
  
• Diversifying into high-margin non-commodity markets aims to stabilize earnings and increase profitability by reducing volatility exposure.
  
• Heavy reliance on subsidies, risks in tech transitions, and potential downturns threaten Innolux's revenue stability and long-term financial flexibility.

Catalysts

Researches, designs, develops, manufactures, and sells modules and monitors of liquid crystal displays (LCD), color filters, low temperature poly-silicon thin film transistor (TFT)-LCDs, and TFT-LCD panels.

• Innolux is focusing on value-added manufacturing and premium products such as larger-size and advanced display panels, which could drive future revenue growth.
  
• The company's strategic collaboration on OLED products and environment-friendly eLEAP technology promises lower power consumption and innovative user experiences, which could enhance net margins by attracting high-value contracts in the automotive sector.
  
• Investment in microLED technology and its applications in high-end markets, along with projected cost reductions, could elevate earnings as production scales and costs decrease.
  
• The adoption of Fan-Out PLP technology, utilizing existing factory infrastructure with a 60% process overlap, offers a competitive advantage by reducing CapEx and enhancing ROE, which should positively impact profitability margins.
  
• The diversified product and customer portfolio strategy, focusing on high-margin non-commodity segments like automotive and medical, aims to stabilize earnings, reduce exposure to volatility, and improve net margins over time.

Innolux Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Innolux's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.0% today to 0.8% in 3 years time.
• Analysts expect earnings to reach NT$1.8 billion (and earnings per share of NT$0.23) by about April 2028, down from NT$6.5 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 84.5x on those 2028 earnings, up from 16.7x today. This future PE is greater than the current PE for the TW Electronic industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 4.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Innolux Future Earnings Per Share Growth

Risks

• The reliance on government subsidies, particularly from China, to boost demand for larger-sized TV panels may pose a risk if such subsidies are reduced or withdrawn, which could negatively impact revenue and market stability.
  
• Although demand for AI-related applications in the notebook sector is projected to grow, the forecast is dependent on inventory normalization and broader AI integration, presenting potential risks to revenue if these conditions are not met as anticipated.
  
• The transition to advanced technologies like microLED and eLEAP involves significant investment and may face delays or cost overruns, which could affect earnings and profitability if the technology does not meet market expectations or adoption rates fall short.
  
• The competitive panel manufacturing industry is historically cyclical, posing risks to revenue and profit margins during downturns, especially if diversification efforts don't mitigate the impact of these cycles effectively.
  
• The company's capital reduction strategy, while potentially improving return on equity, may limit financial flexibility and available resources for further growth initiatives or to withstand industry volatility, impacting long-term earnings potential.

Valuation

• The analysts have a consensus price target of NT$17.403 for Innolux based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$20.0, and the most bearish reporting a price target of just NT$16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$226.4 billion, earnings will come to NT$1.8 billion, and it would be trading on a PE ratio of 84.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of NT$13.55, the analyst price target of NT$17.4 is 22.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.