AU Optronics: Lowly Valued Despite Significant Improvement in Primary End Market

Amit Chokshi of Doshi Capital Partners presented his in-depth investment thesis on AU Optronics (NYSE: AUO) at Best Ideas 2018.

AU Optronics is a Taiwan-based global producer of panels utilized in televisions, desktops, notebooks, mobile devices, and commercial applications. AUO and its peers have struggled over the past five years to reign in supply as the primary market of televisions became saturated, resulting in a decline in average selling prices. However, since 2016, the age of TV sets in a number of regions globally has reached a level that has triggered a TV upgrade cycle, featuring larger screen sizes and more features, particularly thinner, bezel-less televisions. These characteristics have allowed AUO to generate higher gross margins and drive operating leverage.

Despite the significant improvement in their primary end market, investors value AUO below book value and less than 3x EV/EBITDA, despite relatively muted future capex. The market may believe AUO is at a cyclical peak with a commoditized product subject to an influx of competition from China and thus deserves a low valuation. While this view may ultimately be accurate, the company’s low valuation and clean balance sheet provide a low carrying cost to see if another thesis plays out. The panel maker market has a similar story to the DRAM market from 2011, whereby a number of competitors left the market and the remaining participants were disciplined on supply and targeting end markets. Chinese competition may re-emerge, but Chinese competitors have not shown an ability to produce panels with the high-level features consumers demand, resulting in highly price sensitive end markets that AUO has deliberately avoided. In addition, bezel-less TVs have allowed AUO to take a larger share of televisions profits as the integrated circuits that were produced by other OEM equipment manufacturers that were typically found in the back of the television panel are now applied directly to the panel itself by AUO through a process called “gate on array”.

AUO is keenly focused on avoiding price-sensitive markets and has focused on flexible OLED applications, the automobile market, and other commercial applications that require a high degree of specification and switching costs that reduce the price sensitivity of products. For example, AUO is already a top two or three provider of panels for the automotive market, and one could expect as technology and panel use increases across cars, the company will benefit. AUO has entrenched itself in a number of specialized end markets, and the peers are doing the same, which should result in more sustainable profitability. If this thesis plays out, market participants may ultimately re-rate the company at several turns above recent EV/EBITDA levels, which could result in a stock price 100-200% above recent levels within two to three years — analogous to what occurred in the DRAM market several years ago.

About the instructor:

Amit Chokshi is the Chief Investment Officer of Doshi Capital Partners, a New York-based single family office, where he manages the allocation of capital across public and private investments. Prior to joining Doshi Capital Partners, Amit was a Portfolio Manager at City National Rochdale (“CNR”), where he managed capital across multiple asset classes for high net worth, ultra high net worth, and family office clients. From 2007 – 2012, Amit was the Portfolio Manager for Kinnaras Capital Partners, a deep value / special situations hedge fund he founded. Prior to Kinnaras Capital, Amit was an Associate in the Leveraged Finance Group of the Royal Bank of Scotland (“RBS”) where he was involved exclusively in financial sponsor-backed middle market and mega cap transactions. Amit started his career as an Analyst at Morgan Stanley. He is a CFA Charterholder and served on the Board of the CFA Society of Stamford from 2006 – 2014. Amit has a B.S. in Finance from Bryant University and MBA from Emory University.

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