Chimei Innolux, Taiwan's largest LCD maker, plans to spin off its touch panel business as it seeks bigger gains from a business expected to be one of its fastest growth engines.

An initial public offering will be as early as the second half of this year, a source with direct knowledge of the plan told Reuters on Tuesday. Analysts estimate the business accounts for 5-10 percent of Chimei's total sales for 2010 of about T$474 billion ($16 billion).

Touch panels are one of the hottest areas in technology at present thanks to the rapid growth of gadgets like the iPad and iPhone. Chimei's parent, the Hon Hai Group, is one of the biggest manufacturers of the Apple products.

The company has kicked off the IPO process, it may launch an offering as early as the second half of this year, the source said, declining to be identified as the plan has not been made public.

Chimei declined to comment. Its shares ended 0.4 percent higher in a broader market up 0.7 percent.

This would be positive for Chimei's operational management efficiency in the long run, as the nature of its core business is different from touch panels, said John Chiu, a vice president of Fuh Hwa Securities Investment Trust.

He said, however, the plan may disappoint existing shareholders of Chimei as profit from the touch panels would no longer contribute fully to the company.

George Chang, an analyst at Yuanta Securities, said selling the touch panel business will hurt Chimei's earnings.

It kicks out the profitable chunk but leaves the bad piece, Chang said, though he noted that since any new listed company formed would be purely a touch panel company, it would have a better investment theme.

Looking at the valuations of the existing touch panel companies, they definitely deserve a much higher premium than panel makers.

The source said Chimei Innolux seeks further consolidation after its creation last year through the merger of Chi Mei, Innolux and TPO Display, as the merger had failed to deliver the expected synergies.

The merger saw Chimei Innolux overtake AU Optronics Corp as Taiwan's largest producer of liquid crystal displays (LCDs) and was aimed at boosting Chimei's ability to compete with rivals like Samsung Electronics and LG Display in South Korea.

Chimei announced last month it planned to build a new touch panel factory in Shenzhen, China.

(Reporting by Taipei and Hong Kong newsrooms)