UPDATE 3-AU faces LCD slowdown after turnaround in Q3

* AU books first profit in 1 yr, better than mkt estimates

* Sees weaker PC, TV panel prices in Q4 vs Q3

* AU could dive into red again in Q1 - analysts

* Bets on new displays to drive future growth

* Stock down 2.3 percent before results (Recasts with comments, details and graphic)

TAIPEI, Oct 22 - AU Optronics' return to profit could be a blip in an ongoing downtrend as the spectre of weaker LCD prices looms and the company needs to prove it can sell more new products with fatter margins to stay competitive.

After several months of strong LCD sales, analysts say the industry could face a repeat of the downcycle in 2010 if demand dwindles, while sector leaders Samsung Electronics and LG Display in South Korea should suffer less than smaller players.

Analysts say AU, the world's No.3 LCD maker, could lose money again in the first quarter of next year after Taiwan's top LCD maker forecast weaker panel prices for PCs and flat-screen TVs into the final quarter of 2009.

"I don't have a crystal ball to tell me how bad the market will be next year but I am sure panel prices might drop for one to two quarters," said Robyn Hsu, who manages T$28 billion ($867 million) of equity assets for Taiwan's Capital Investment Trust.

In a downcycle, top TV brands Samsung and LG typically secure more LCD panels from internal production to maintain higher loading rates in their own facilities, and tend to place fewer orders with other suppliers like AU.

"TV is the key battle field now, so it's all about brands and that's why there has been a gap between Taiwan and South Korea," said Hsu, whose portfolios have no AU shares.

For next year, Samsung, which also sells cellphones and makes memory chips, could enjoy an operating profit margin of 10 percent and LG Display would have 7.1 percent, higher than AU's 6.2 percent, according to BNP Paribas.

The downturn this time may not be as severe as past ones due to the sector's better inventory management, but investors had shunned major LCD shares recently on fears over seasonal weakness into the fourth quarter and early 2010.

AU's Taipei-listed shares hit the year's highest level in late July but have since faltered. Shares of LG Display, which supplies to its namesake firm LG Electronics, have also been weak in the past several weeks.

No.2 LG Display also said LCD prices could fall in the fourth quarter after posting a record operating profit for the third quarter on higher prices of liquid crystal displays (LCDs).

AU, a supplier to top brands Dell, Sony and Samsung, booked a net profit of T$7.4 billion in July-September, marking its first net profit in one year and beating the T$6.69 billion forecast made by Thomson Reuters I/B/E/S.

NEXT BIG THING

Over the past several months, LCD makers, including AU Optronics, have managed to recover quickly from a severe slowdown, riding largely on the popularity of flat-screen TVs.

AU expects its fourth-quarter shipments of TV panels, which make up about half of its total sales, to rise about 10 percent from the third quarter, but the price falls in percentage terms for both PC and TV panels to be in low- to mid-single digits in the same period.

For 2010, UBS forecast that Samsung's capacity utilisation rate would stay high at 96 percent and LG Display at 95 percent, compared with AU's 80 percent next year, when the industry's capital spending would rise 16 percent to $17 billion.

AU President L.J. Chen is looking for the next big thing in the display market to ensure future growth.

"There is a new path in terms of new applications such as OLED and e-books," Chen told an investor conference, where his company released the results and guidance.

"I have very high hopes in the new areas," said Chen, whose company is developing new-generation flexible displays for electronic reading devices. Other new products include touchscreens and LED panels for laptops and TVs.

New applications would help drive flat panel display sales -- most of those using LCD technology -- up 5 percent to $93.3 billion globally next year after an estimated 15 percent fall this year, according to research firm DisplaySearch.

On Thursday, AU shares closed down 2.3 percent. Smaller local rival Chi Mei Optoelectronics lost 1.2 percent, similar to the main TAIEX's drop.

AU shares edged up 0.6 percent in the third quarter, lagging the big board's 17 percent gain in the same period. Chi Mei, whose quarterly earnings due out next week, lost 2 percent. (US$1=T$32.4)