Last week we indicated that Sharp (6753.JP) was planning to reduce panel shipments to its largest customer Samsung, and Chinese brand Hisense (600060.CH), as the company’s new owner Hon Hai (2317.TT)/Foxconn (2354.TT) began to focus on re-developing the Sharp brand.  In that regard, Sharp has regained the rights to its own brand in Europe by purchasing a controlling interest (56.7%) in Cyprus-based SUMC[i] (pvt) for €85m ($88.9m US), the parent of SUMC in Czechoslovakia, to whom they sold the Sharp European brand rights starting 1/1/2015, allowing Sharp to control its own brand in the European market where SUMC sells ~800k units/year.  Hisense, who purchased the rights to the Sharp brand in North America in 2016 for $23.7m was also expected to negotiate with the company to sell back those rights, giving Sharp and its parent, full control over the brand worldwide. 

The Japanese press however, is indicating that Hisense CEO Jerry Liu has decided to keep the license, which includes a TV production plant in Mexico and brand rights in both North and South America (Brazil excepted), which is consistent with earlier comments made by Hisense President, Liu Hongxin.  The agreement, which is in effect for five years, was made by Sharp when it was facing substantial financial pressure, and is likely far more favorable to Hisense than Foxconn would like it to be.  While Sharp, under orders from parent Foxconn, can limit TV panel production to Hisense, the license likely contained purchase and/or supply specifications, which Sharp must abide by, so the refusal by Hisense to give back the license, and the likely ‘bad blood’ it might cause with the new owners, will be mitigated by the license itself, and of course, the alternative sources, particularly from Chinese panel producers, that are available to Hisense.

AU Optronics (AUO) reported strong December results with revenue of NT$ 31.16b, up 3% m/m and 21% y/y.  Large panel shipments were 9.76m, up 6.6% m/m and 9.8% y/y while small panel shipments were 12.61m, up 9.3% m/m, but down 1.3% y/y.  4Q results were NT$ 91.84b, up 6.8% q/q and up 10.1% y/y.  Quarterly large panel shipments were 28.32m, down 3.2% q/q but up 2.6% y/y, while small panel shipments were 35.74m, down 5.9% q/q but up 7.0% y/y.  These results put the full 2016 year at NT$ 329.1b, down 8.7% y/y, with full year consensus of NT$ 324.3b, which the company beat by 1.5%.

Consensus estimates for 4Q were NT$ 87.06b, as we noted last month, so AUO beat consensus by 5.5%, particularly significant in that December typically sees a 2.8% increase in sales at AUO, which the company handily beat, especially as the currency adjusted ASP was down 4.7%.  For the full year, AUO generated NT$ 329.1b, down 8.7%, as 1H results were quite weak while 2H results were strong. 

All in, AUO completed the year on a strong note, as pricing for TV panels remained strong.  Consensus estimates for 1Q 2017 are NT$ 78.84b, which would be up 10.8% over last years’ weak 1st quarter.  Much of this number will be built on continuing strength in TV panel prices and small panel shipments in March, after Mobile World Congress.  1Q TV pricing should remain strong in the 42” and 47” sizes regardless of overall demand, as capacity remains light for these size panels, but we expect much of that demand to be filled by suppliers by 2Q, when we believe the industry will move toward a more normalize pricing mode. 

The issue that caused the price gains seen in 2H, which began with production problems at Samsung Display (pvt), will begin to be mitigated by suppliers filling the size gaps in 1H 2017, but of more concern is the demand side, where TV brands, who have been seeing declining margins for a number of years, saw increasing margin pressure from panel price increases in the 2nd half of 2016.  While panel producers benefitted, CE brands had little room for the discounting that consumers have become used to, and as can be seen from Fig.2, prices of 40” to 43” panels are now higher than in 2014.  This tends to push panel producers toward increasing production of such sizes, as they give the producer leverage in price/volume negotiations with brands, but eventually balances out supply with demand.  Brands, who are now designing new TV set lines for the 2017 holiday season, will have the opportunity to propose sets using panel sizes that have less premium, which will help margins going forward and relieve some price and margin pressure.  On a longer-term basis, as can be seen from Fig.3, capacity growth continues across the industry after a well anticipated drop in early 2017, as Samsung closes older fabs and converts to small panel OLED production at others.  Recent announcements and ground-breaking for new ultra-large format LCD fabs will push TV panel capacity through 2020 and beyond, which should give TV brands a bit more breathing room as to margins, as new large panel fabs compete for business.

While Samsung is expected to announce its new flagship smartphone, tentatively titled the Galaxy S8s, at Mobile World Congress on February 27th, the company is being careful about rushing production after the disastrous Note 7 recall.  The Samsung component supply chain has begun to receive orders for the new phone, with initial deliveries beginning in February, with mass production scheduled for March, and release in April.  This differs from Samsung’s usual schedule, which anticipates the release date and has the product available for distribution upon the announcement, which helps to maintain customer enthusiasm.  While Samsung’s conservatism is likely based on a more careful approach to product testing, it could cause pre-orders to be a bit lower than usual, given the longer wait time to delivery.

Initial production is expected to be 10m units during the March/April build, which is the same as the previous Galaxy S7, and while Samsung expects the new model to be superior in performance and design (when don’t they…), and will sport a number of additional features (bezel-less screen, multiple security functions, etc), the new phone will be extremely closely watched by consumer groups to make sure there will not be a repeat of the Note 7 troubles.  At least through 3Q, Samsung maintains a substantial leadership in the global smartphone market on a unit basis, so the necessity for a ‘clean’ release is likely the highest its has ever been, particularly in light of Apple’s 10th anniversary iPhone release later this year and intense competition from Chinese vendors, so Samsung must balance the need for strong initial sales against a more cautious plan that reassures consumers about Samsung’s smartphone reliability.

As we noted on Monday, we expected LG (066570.KS) to announce a ‘wallpaper’ OLED TV line at CES this year, which they did (OLED65W7P & OLED77W7P).  The set is 2.57” thick and mounts to the wall with a magnetic bracket that is only 4mm thick, ‘blending’ (their words) the TV into the wall.  The “W” models (the promo states the W is for wallpaper, window, and ‘wow’) is thinner than the signage model we discussed on Monday, at 2.57mm (just over 1/10th of an inch) and will be available in 65” and 77” models.  Demos of the 65” product will be available in a few Best Buy stores, while the set itself (65”), which will list for $7,999.99 can be pre-ordered, although no delivery date has been set.  This is the same price as the current ‘non-wallpaper’ model, so we can assume that when the new 77” wallpaper model becomes available, it will be priced at $19,999.99, although currently, no 77” model is listed on the Best Buy site.

LG again demoed its ‘rollable’ OLED display, which can be rolled into a tube and carried, but indicated that the technology was not ready for mass production, and a ‘foldable’ version would use different materials as a substrate.

LG’s new ‘regular’ TV line is focused on ‘Nano Cell’ technology, which, without a more detailed description, seems to be a more structured quantum dot, likely with both better process control, which allows for a more uniform particle size (which makes for more precise color control), and an updated particle shell structure, but we reserve judgment until details are available.  Given that the new TV line is said to be 25% brighter than the previous line, we would expect that better light extraction films are also being used in conjunction with the enhanced materials.  LG also demoed a system that incorporates the sound producing system directly in the display screen, which, when fully developed, would change another aspect of consumer viewing habits by eliminating those nasty speakers or sound bars that the wife always complains about.

All in, LG has pushed the TV envelope with its OLED ‘wallpaper’ line, and while the battle between Samsung (005930.KS) and LG over which technology (Samsung’s quantum dot and LG’s OLED) is better, LG has stepped up its game by competing both at the technology level, and at the ‘physical’ level, by using OLED technology to create TV displays that would be almost impossible to recreate using LCD display structures.  Whether consumers are willing to pay a premium for these features is still an unanswered question, but LG has certainly laid down the gauntlet.

Beijing based Sigmaintell has indicated that 258m LCD TV panels were shipped in 2016, down 2.5% y/y, but the surface area of same has increased by 8% based on the increases in average panel size, which they estimate at 42.7”.  Current estimates have been falling between 250m and 270m, depending on the low-end size cutoff, but the general trend is similar to their estimates.  They break down what they believe are the panel size shares, which we compare against our estimates made earlier this year and those from 2015.

We had expected more of a drop-off in 32” TV panels, which are considered entry-level and have been the largest category for a number of years as they are quite common in emerging countries.  Sigmaintell's data seems to conflict with that notion, which was fostered by conversations with a number of panel producers that were lamenting the fact that Chinese panel producers have ‘taken over’ the 32” TV panel market by offering panels priced below those of Taiwan, Korean, or Japanese firms.  Their thought was that the need for 32” panels would decline quickly in 2016 as entry-level products moved up the size chain.  We are wary of the data from Sigmaintell on 32” TV panels as we do believe the size declined, and likely smaller sizes, which we do not include, are figured into their larger share number.  Great minds think alike in the 39” to 45” size category, but we diverge again in the 55” category, where we believe there was expansion, while they see a decline.  Given that this specific size has been one seeing significant growth over the last few years, we question such a steep decline.  The 65” category remains small enough that estimates vary little, but given the relative size of the screens involved, even small changes in share can influence the total area significantly as it is just under 40% larger when compared to a 55” TV screen.

While unit shipment share has a lesser value than dollars generated, Sigmaintell offers these LCD TV unit volume share comparisons for the top 6 panel producers: (see below).  As we do not yet have accurate sales data for December across the display producer space, in the table below we show TV panel revenue share, using a typical December sales estimate of -5% m/m:
 (see below)

Sharp sub to build new Gen 10.5 fab in Guangzhou

Sakai Display Products (pvt), which is jointly owned by Sharp (6753.JP), Dai Nippon Printing (7912.JP), Toppan Printing (7911.JP), and SIO International (pvt), which is a Cayman Island based investment firm owned by Hon Hai (2317.TT) founder and Chairman Terry Gou, has signed a cooperation agreement with the Guangzhou City government to develop a display location that will include a Gen 10.5 LCD fab, a TV assembly line and a white board fabrication line.  The expected investment is expected to be $8.84b with construction beginning in March 2017 and expected production in 2019, which will be based on oxide backplane technology. Sakai Display currently owns the world’s largest format LCD plant (Gen 10), located in Sakai, Japan, along with its two color filter fabrication lines, and a variety of component suppliers that are co-located on the Sakai site.  When the fab was built in 2009 it was by far the most sophisticated LCD production facility in existence, and while the timing of a fab that was geared to produce very large TV panels was likely a few years too early, it was a step that changed the way panel producers thought about the longer-term picture of the display industry.  Terry Gou, who has been a private investor in the Sakai plant for a number of years, just increased his stake in the company to over 53%, while reducing Sharp’s ownership to 26.7%.

Today however, there are two other large format fabs being built, both in China.  BOE (200725.CH) is constructing a  Gen 10.5 fab in Hefei which should see production around mid-year 2018, and China Star (pvt) is constructing a Gen 11 facility in Shenzhen, which is expected to be in production by 2Q 2019.  The new Sharp fab is expected to have a maximum raw capacity of 90,000 sheets/month with a 3370 x 2940 format, and if our timeline expectations are met, will increase Sharp’s overall capacity by 45.7% by the end of 2020, despite the fab not being at full maximum capacity.  When the fab is fully built out, which we expect will be by September 2021, the overall increase in Sharp’s capacity would be 68.5%.

During the last few weeks we have noted that Sharp’s new owners have made some aggressive decisions concerning their production plans relative to their customer base, particularly reducing their commitments to Samsung Electronics (005930.KS) and Chinese TV brand Hisense (600060.CH), in order to facilitate the resurgence of the Sharp brand worldwide, although we believe Samsung has recently committed to a 10% stake in the new China Star Gen 11 fab that has just begun construction, in order to guarantee capacity.  This approach, which is the antithesis of the previous management’s conservative style, is a major bet on the continuation of large TV trends that have been increasing the average panel size of LCD TVs over the last few years.  Now adding the construction of a new large format fab to the mix steps up the game even further for Hon Hai/Foxconn.  If they are successful in restoring the Sharp brand, the bet will pay off quickly in display ‘years’, but if not, they will have the same issue that the previous management had with its Gen 10 fab, which faced low utilization rates as the market for large screen TVs took longer to develop than originally expected.  Sharp also faces competition from the Chinese panel producers mentioned above, who are known in the display space for their ability to dominate a particular display segment, despite their more narrow focus.

All in, the biggest beneficiaries of the construction of these large format display fabs are the tool and component suppliers.  Companies like Applied Materials (AMAT), Orbotech (ORBK), and Coherent (COHR), who’s tools are essential to the production of LCDs, and substrate glass suppliers like Corning (GLW), Asahi (5201.JP) and NEG (5214.JP), will see demand from such large fabs positively impact overall demand.  That said, and we don’t want to put a negative spin on the resurgence of large format fabs, we have seen the industry over anticipate the demand side of the market more than once, usually citing trends (such as the increasing size of the average TV or the eventual adoption of an 8K TV format) that they expect will continue forever, which eventually play out or are changed by a technology breakthrough.  This makes us a bit more wary of very large financial and capacity commitments such as these than the panel producers themselves, and forces us to watch the industry even more closely to spot when trends are beginning to change.

There has been some speculation in reference to LG Electronics’ (066570.KS) OLED TV lineup for 2017 in the trade press lately, with the focus on a 55” demo TV that LG showed last year, dubbed a ‘wallpaper’ TV, as it is extremely thin (3.65mm or 0.1437”), very light (5.5kg or 12.125 lbs – avg. 55” TV weighs between 36 and 40 lbs.) and flexible.  The speculation is that LG will be releasing such a TV at CES as they have posted a short ‘teaser’ (https://youtu.be/5usEIbDjQqc) that shows a sheet being lifted to expose the words “See the next, January 4, 2017”.  Given that the sheet being lifted looks like a piece of thin paper, speculation that the next LG TV will be a ‘paper-thin’ OLED TV, such as they have demoed in the past. 

In November, LG posted a video titled “LG’s Wallpaper OLED Signage Installation Guide” for what is basically the ‘wallpaper TV’, as part of their digital signage offerings.  The 9 minute video explains how to unpack and install the OLED display (model 55EJ5C) in a commercial setting, giving a bit more detail about the product than the typical spec sheet.  Additionally, the Wi-Fi Alliance, an organization that certifies CE products that contain wi-fi communication capabilities, released certification for ~50 LG OLED TVs, and while there are many duplicates and regional varieties, there were some interesting changes that were noted, the most significant being the 2017 “W” configuration, which likely stands for “wallpaper TV”.

The basics as to the ‘signage’ model shown in the video (55EJ5C) are below, although this does not included the signage box, which contains the electronics and connectors needed to run the unit:

While the video gives a fairly detailed look at the display as part of the installation, it does give the indication that the display is flexible enough to bend when being attached to the wall frame, a bit less than the original demo photo (fig. 1) from May 2015 might have indicated, which was said to be less than 1mm thick and weighed 1.9 kg, but seemingly ‘bendable’. Given that the specs above, which are from LG Electronics, not LG Display (LPL) are a bit more oriented toward commercial use, particularly the surface treatment[i]  and weight, and would indicate either a newer version of last year’s demo, or a more ‘ruggedized’ housing.

LG’s current Signature OLED TV line consists of two models, the OLED65G6P[ii] and the OLED77G6P, with the 55” OLED TV relegated to the “E” model line, a lower spec model, which also includes a 65” model.  They also provide “C” versions, which are curved, and “B” versions, which are the entry priced units.  Prices[iii] range from $19,999 for the 77” Signature model to the $2,499 low-end model (although it can be purchased for ~$1,459 on-line), with 2015 models still available at some dealers.

While LG does not offer its ‘wallpaper’ display on its commercial signage product page yet, we would expect that the installation video was produced with the idea that the unit will be offered to commercial customers in the near future.  The commercial signage market would likely be able to absorb the higher cost of production, as we would expect relatively low yields (relative to rigid or curved OLED displays) when the product is put into production.  Of course, the real attraction for such a display would be the retail market, and while OLED TVs are still a relatively small percentage (<1% of units) of the total TV market, and capacity is limited to one commercial-volume producer, such a device would certainly catch the eye of the tech press and even as just a novelty, would wind up in the man-cave of every NBA & NFL player regardless of the price, and to make things even less clear, LG has stated that they will unveil a new OLED TV with an “exclusive hardware platform” at CES 2017, that “only LG can produce”.

The real issue however, is how many units could LG make?  The display, which is made by subsidiary LG Display would have to be produced either on a low volume pilot line or on a line that is probably being used for rigid OLED TV production or is being built for same.  While this is certainly a possibility, it would likely reduce the unit volume output that LGD has earmarked for rigid OLED TV production this year, both from parent LG Electronics and other customers, such as Sony (SNE), Panasonic (6752.JP), and Skyworth (751.HK).  The other consideration being the cost to produce such a device, which would likely be, especially at the onset of production, higher than LG’s rigid OLED TVs.  Given that LGD is currently above break-even (on an EBITDA basis) for its OLED TV panel production, a large number of ‘wallpaper’ TVs could depress their push to stay in such a profitable mode, or they could limit the number of units to a relatively small amount to lower the overall cost impact.

Whatever the choice by LG, it will probably be announced at CES this week, with a tremendous amount of follow-up fanfare, but the true test will be whether they announce a retail release date and if so, whether it will be available outside of South Korea and when.  We expect LG to make such a product available in limited quantities by March 2017, at least in South Korea, with eventual migration to China, which tends to be the best market for new display technologies.  The price of such a product will depend on size and how much of the cost LGE is expecting to recover, with current Signature 77” and 65” OLED products selling for $12,239/m2 and $6,870/m2 of display area respectively.  The concept however, is a good indication as to the ability of OLED to be used to produce display modalities that have not been available using other display technologies, and as such, will change the way consumers view content over the next few years.  As noted previously, LG Display will also focus its CES publicity machine on automotive OLED displays, including free-form, transparent, and mirrored displays, while highlighting their plastic-based QHD 5.5” smartphone and smartwatch displays.



[i] Hardness in this case is indicated by the ‘pencil’ scale, with 8H – 9H being tempered glass and 1H- 2H being PET plastic films used for inexpensive screen protectors.  At 2H, the coating material would have little effect on the flexibility of the display itself.

[ii] LG’s new ‘model coding’ system would show that these sets are OLED (used to be indicated by the letter ‘E’), with a screen size of 65” or 77”.  The ‘G’ indicates the model, the ‘6’ indicates 2016 production year, and the last letter indicates the type of TV tuner being used, in this case a standard ATSC tuner.

[iii] Suggested Price 

Screen Size: 55"
Resolution: 1920 x 1080
Brightness: 100 - 400 nits
Color Gamut: 108%
Color Depth: 10 bit (1.07b colors)
Response Time: 1ms
Surface Treatment : Hard coated
Lifetime: 30,000 hours
Operation Hours: 18 Hrs/Day/7 days/week
Dimensions:49" x 27.75" (approx)
Weight: 5.5 kg (12.125 lbs)
Internal Memory: 64 Gb
Source: LG

LG Electronics (066570.KS) debuted its OLED signage portfolio yesterday, citing a focus on project based commercial applications that are customized to the application and customer.  The company says it is in talks with several potential clients in the fashion industry and can develop displays based on the architecture needed by the client.  The company showed a display of multiple curved 55”OLED displays connected together, and has developed a 200 unit seamless display for a project in Singapore.

LG expects to ship these panels by 3Q 2017, although prices were not discussed, and will include a 3 year warranty, with an expected lifetime of 45,590 hours, which translates to 6.9 years at 18 hours/day.  LG has seen considerable success in the commercial display market, particularly in Taiwan, where it holds a number one 30% share, which, along with Australia, will be the 1st markets open to the new product line.

LG has been the champion of OLED TV since its rival Samsung Electronics bowed out of the technology for large screen TV production.  Large OLED panels produced by LG Display have been the only source of displays for large OLED TV applications, but have been receiving strong interest from a number of Chinese TV brands, prompting LG Display to expand production capacity.  While they expect to fill capacity through OLED TV sales growth for the next few years, custom B2B OLED project margins are less influenced by competition, as they are in the consumer retail TV market, and will help the OLED TV business at LG to move closer to actual profitability in 2017 or 2018.

Figure 3 - LG Custom Retail OLED Display Example - Source: LG

Figure 4 - OLED Capacity by Size - Source: SCMR LLC, OLED-A

Figure 5 - LG Display OLED Capacity - Source: SCMR LLC, OLED-A, Company Data