​Until recently Netflix (NFLX) has been inured to the idea of account sharing as a way to encourage the building of a massive subscriber base, but over the last year, while the company has made no overarching policy change, there is considerable evidence that there is a move to end the account sharing practice that so many subscribers partake in.  Netflix is quite open about its view of the practice, stating “A Netflix account is for people who live together in a single household” at the top of the “Sharing your Netflix Account” help page (https://help.netflix.com/en/node/123277), and goes further, stating “People who do not live in your household will need to use their own account to watch Netflix.”
 
Netflix tracks sign-in data for each account, so if a device signs in that is not associated with that account or is used often, Netflix may ask the account holder to verify that the device is legitimate before it allows access.  In order to verify a device, Netflix will send an e-mail link to the account holder with a short-term PIN.  That PIN has to be entered into the device requesting access to the Netflix account within 15 minutes or the device will not be allowed access.  Netflix indicates that ‘device verification may be required periodically’, although it does not specify whether that is for all devices, or just ones that do not have the same IP address as the account holder, but there are instances where Netflix will allow the user to watch from different locations.
 
If you have two houses, in theory, you need two Netflix accounts, as the IP will differ at each location, however Netflix will grant you the ability to watch from both locations, albeit with an occasional verification request.  Netflix uses the IP, account activity patterns, and device IDs, which are embedded in all mobile devices and many others and remain constant as long as the device does not undergo a factory reset, so there are instances when Netflix might question the validity of a particular device, but while the rules are specific as to ‘no sharing’ the policing is far more difficult to enforce and seems to spark considerable feedback from subscribers. 
 
Recent promotion of the ‘no sharing’ concept in South Korea led to a survey by the Korea Information & Communication Policy Institute late last year, which indicated that more than 40% of domestic users said they would cancel their paid subscriptions if forced to pay an additional fee for a 3rd party user, with only 2% indicating their willingness to pay the extra fee.  According to the data, only 42.8% of Netflix users in South Korea use accounts listed under their own names, with ~5m paid account subscribers listed at the end of  2021, which means another 7.9m users are using shared Netflix accounts, and if the statistics are correct, 2m paid and therefore an additional 3.14m subscribers would depart, bringing actual viewership (paid and unpaid) from 12.9m to 7.76m, a ~40% reduction.
 
While Netflix has not officially made any statements other than, “The time and fee for account sharing in Korea have not been formalized”, most industry observers believe the change will occur in March of this year and will likely be applied within 30 days of the announcement.  If it goes well and much of the survey is consumer bluster, Netflix will see incremental revenue.  If not, it could start a consumer revolt that would have imprecations across the entire streaming video industry, especially after a number of streaming services have recently increased monthly fees.

Corning (GLW) reported 4Q results of $3.41b, down 2.4% q/q and down 7.3% y/y and below consensus of $3.55b.  EPS was a reported $-0.04 but core results of $3.63b and $0.47 saw sales slightly ahead of consensus and toward the high end of previous guidance, while core EPS was $0.02 above consensus.   The company took a $150m restructuring/impairment charge in the quarter, primarily related to inventory.  Corning was able to institute price increases in both optical and life sciences, which, along with inventory reductions and “productivity improvements”, which seem to be rationalizing capacity to lower levels more in keeping with current demand, helped profitability and should help to increase margins in subsequent quarters this year.  That said, guidance was for $3.2b to $3.4b, below consensus of $3.58b and (core) $0.35 to $0.42, also below consensus of $0.46.
 
Key Points:
 
Weak Sales Guidance - Corning expects sales to decline between 6% and 11% against a company norm of -5% as a number of business segments see slower than expected demand.  While it is hard to call the return to pre-pandemic demand levels for most CE products a surprise, the rapid change in COVID restriction attitude in China was unexpected, with that event another rain cloud in what Corning was predicting would be a more sunny 1Q and we fault few managements for not anticipating such a radical change in philosophy.  That said, the direction in the display space was obvious by 3Q last year, and while the mantra of serving the customer at all cost was necessary in 2020 and 2021, most managements were slow to respond to what was an overheated CE environment last year.  Corning seemed to be half in and half out as to its expectations for direction in 3Q and 4Q last year, but now seems to have accepted a return to pre-pandemic levels and the uncertainty of China’s recent COVID ‘transition’.  That said, it is easy to be fooled by seasonality and we hope that the company is careful about responding to short-term changes in demand, especially if they are related to building seasonal inventory, as we expect consumers will be a bit more careful about how they spend on CE products this year.
 
Display recovery delayed – Management sees a recovery in the display space now pushed out by at least one quarter.  During the 3rd quarter call, management indicated it felt that the display industry had reached a low point toward fab utilization, and while they were cautious about calling for a quick recovery, their expectation seemed to be toward improving demand and higher utilization rates.  Both October and November did see utilization improvement, but China’s abrupt about-face toward COVID lockdowns, and the resulting rapid spread in December, pushed utilization back to previous low levels.  January has seen little change, which pushes out Corning’s expectations for a display recovery by 1 quarter.  More to the point however is what kind of recovery might be seen as the year progresses, and we expect more of a grinding recovery than a steep one, with only a few industry events or new products to push the space into the consumer spotlight..
 
Incremental improvement each quarter – Management expects sales improvement in 2Q and the 2nd half, although they were less clear about the momentum of such a recovery.  Citing the concept that they were primarily interested in serving their customers during the pandemic, inflation and supply chain issues caused less of a focus on productivity and profitability.   Corning’s focus has changed, and after both price increases and capacity rationalization, the necessity to ‘feed the beast’ is a bit less important than remaining profitable and able to return capital to investors.  While there is a bit more stability in raw material prices, albeit still at higher than pre-pandemic levels, we applaud that return back to maintaining a higher level of profitability by matching current capacity and costs to current demand.  It’s a harder balance to maintain, but given the uncertainty ahead, it is an absolute mandate.
 
While Corning has taken steps to realign itself with the current demand picture, even as we finish January, they were still unclear as to how the quarter would play out, and the cautious guidance reflects that.  The company admitted that it had been surprised by rapidly changing events during 2022 more than once and was certainly less certain about the momentum behind a recovery in a number of their business segments.  With display and specialty materials reaching just south of 50% of total company sales in 2Q 2020, their combined share of company sales has declined to 37.8% (4 year low of 34.5% reached in 3Q), and a return to those heady days seems a difficult case to make, and therefore less dependency on product and glass volume growth from these segments puts considerable pressure on Optical to carry that weight, making Corning more sensitive to the optical space than either display or specialty materials.  While the company hinted as to new products for AR/VR and its close ties to foldable display production, we expect glass volume growth will be modest this year, although we expect pricing will remain stable.
 
We do expect at least some seasonality in the display and specialty materials segments throughout the year, although from a sales perspective 1H comparisons will be difficult, but more will depend on the company’s ability to bring margins up in both segments as optical remains a wild card early this year.  Hopefully a more realistic outlook will hold display and specialty materials inventory and capacity to more reasonable levels, as we expect any bounce back in demand will be a bit more gradual this year, giving a bit more time to relight glass capacity when needed.  While there is no escape from the weakness in the CE space for Corning, at least they have enough business balance to continue to generate positive cash flow and maintain a solid balance sheet, which is more than we can say about many others in the CE space.
 

According to the Financial Times, the US Department of Commerce has told a number of companies that it will no longer issue US technology export licenses for equipment sold to China’s Huawei (pvt), further deepening the rift between the company and the US government, and escalating tensions between China and the US, likely of Taiwan.  The beleaguered company, once the largest global smartphone brand and largest telecom equipment supplier, has been on the receiving end of much anti-China sentiment and political rhetoric over the potential for the Chinese government’s rules that could allow it to force the company to use its equipment to monitor voice and data traffic, something all Chinese companies are subject to.  Huawei has been further accused of placing backdoors in its equipment just for that purpose, although there is little evidence that such software is more than just typical shortcuts or sloppy coding.
The focus of restrictions placed on Huawei, which was added to the US ‘entities’ list in 2019 by former President Trump, has seen a gradual tightening of trade restrictions, that began with a ban on the use of Huawei equipment in government organizations.  This grew to a ban on the use in all public networks, to that equipment’s physical removal, while restrictions on semiconductor equipment have also been escalating.  Tools needed for 5nm node processing were banned early on, keeping the company from producing its own smartphone processor silicon, and moved further to all tools needed for designing and processing less sophisticated chip designs.  That said, the US Department of Commerce still issued licenses to companies that could document that they were not supplying Huawei with technology related items that could be used to advance the country’s military efforts, such as AI or 5G (not sure how much 5G helps the military), at least until now.  It seems the US has taken an even harder line and is no longer issuing licenses for any technology to be sold to Huawei.
Details of the escalation are still unclear, but US Under Secretary of Commerce for Industry & Security, Alan Estavez, indicated a few month back that “The threat assessment is always changing,” and that, “We are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People's Republic of China's military, intelligence, and security services,” sort of a blanket statement that left open the door toward the increased trade regulations we are hearing of currently.
Earlier this month we noted Huawei’s push toward self-sufficiency, with the company’s recently released Mate 50 Pro smartphone containing ~90% locally sourced components, but also noted that a number of key components were produced and sourced by US companies, particularly the 4G processor, which is supplied by Qualcomm (QCOM) and a number of other components.  We point out that the phone is not equipped with the Android operating system, as Huawei’s ability to access the Google (GOOG) store for Android updates and applications, was taken away years ago, and the company has had to rely on its own OS, which has far less appeal to users.  While the list below is not conclusive, here are a few of the non-Chinese companies that provide other components for the Mate 50 Pro and have the potential to be unable to obtain export licenses to sell to Huawei going forward as an example of just one Huawei product.
 
Qualcomm  - 4G processor, power management, audio codec, RF transceiver, Wi-Fi, & power amplifier
SK Hynix (000660.KS) - Memory
Samsung (00930.KS) - Memory
Micron (MU) – Memory
HiSilicon (pvt) - Memory. 
Qorvo (QRVO) - RF front-end silicon,
ST Micro (STM) - encryption protection,
NXP (NXPI) - NFC, audio power amp, and battery charging management
Maxim (ADI) – Sensors, etc.
IDT (IDT) - Sensors, etc.
Skyworks (SWKS) - Sensors, etc.
Broadcom (AVGO) - Sensors, etc.
​

We had made a forecast for Chinese smartphone shipments for the 4th quarter and while the December numbers are not yet in, the official Chinese smartphone shipments for the last two months are 47.16m units, surprisingly 15.6% higher than our estimate, which pushes us to raise our December shipment number from 19.4m units to 22m units.  If this is correct (or close), that would put the full year at 265,65m units, down 24.3% y/y, and the 4th quarter up 16.4% q/q but still down 32.0% y/y, and above our most recent 252m unit estimate.  Most recently we have seen a full year tally of Chinese smartphone shipments totaling 287m units, which would imply a 44m unit shipment month in December, making it the best month this year, by 33%, so we are wanting to understand what the basis for that estimate was, given that our 11 month data is based on information provided by the Chinese government, which, if anything, leans a bit to the high side.
Over the last year 5G shipments in China have tracked fairly closely to overall shipments, representing between 85.1% and 72.2% of total shipments, although the spread narrowed considerably during 2H of 2022.  For the full year, using a proportional 16.97m 5G units in December, we estimate 5G shipments for the full 2022 year to be 207.6m units, or 78.1% of total shipments, down 22.0% y/y, the first year 5G shipments have declined since 2019 when China began releasing such data.  Given the current share, which we expect to expand a bit further this year, we expect 5G shipments in China to be a function of the overall health of the Chinese smartphone market, with far less dependency on the growth of 5G installations across the country than in previous years and more on China’s own macro environment. 
Strict COVID restrictions slowed 5G deployment progress across China last year, and with many of those restrictions being lifted, deployments will likely pick-up, but we are quite skeptical as to the coverage data that the Chinese government has been promoting, and if the data in the US is any example, it bears little practicality to consumers.  Typically many cities that are claimed as ‘covered’ have very spotty 5G service and while the coverage maps look well filled, the detail is far less so, with statistics used more for promotion and politics than actual consumer results.
Chinese brands continue to hold the major share of the Chinese domestic market (84.9%) and while it has deteriorated a bit over the last 4 years (86.5% last year), incursions, particularly by Apple (AAPL), have made little impact on overall domestic brand share in the Chinese smartphone market.  With Samsung Electronics (005930.KS) the only major smartphone brand with a very minor share in China, we expect relatively little change unless Samsung continues to expand and market its foldable line on the Mainland, which, while facing domestic competition, seems to be considered among the most prestigious smartphone devices with Chinese consumers, along with Apple.  However price sensitive buyers do have domestic foldable alternatives and there are still many pockets of nationalistic pride that would push marginal buyers to domestic brands, so for the 2023 year, we expect only a minor reduction in domestic share.
All in, it was a difficult year for CE in China, and smartphones in particular, but while we are careful to temper any enthusiasm against both a poor macro-economic situation on the Mainland, and a festering anti-China manufacturing posture for many global companies, we do take heart in that in recent months, while poor in terms of y/y performance, shipments have been, at the least, relatively stable, which we expect to continue into 1Q.  The Chinese smartphone market is maturing, and with that comes slower growth and more macro affectations, which certainly seems to be the case in recent months.  As that continues we expect the Chinese smartphone market to have basically the same competitive and economic characteristics of the global smartphone market and track more closely to the global markets each year.  That said, Chinese brands have the advantage of lower cost, but also face some political issues, such as those in India, that can offset those cost advantages.  It is up to both the Chinese government and Chinese smartphone brands as to how those issues will play out this year, and over the last year both did little to smooth those relationships that can help Chinese brands gain share outside of the Mainland.  Maybe 2023 will be different, although it is still hard to be overly optimistic.

The US International Trade Commission has opened an investigation into claims by Samsung Display (pvt) that alleges a number of device repair companies have been importing OLED displays and components into the US that infringe on four SDC patents.  While there is still relatively little documentation, as the case has yet to be made before an administrative law judge, the concept seems to be that some of the OLED displays being used by the repair companies listed below, violate SDC’s patents, and while it is unclear who produces the OLED displays in question, it is thought that the target of the SDC complaint is China’s BOIE (200725.CH), who has been supplying OLD displays for the repair of the iPhone 12 and 12 Pro, along with some that have made it into Samsung’s Galaxy S Series phones when repaired.
The complaint asks for a General Exclusion Order and a Cease & Desist, with the exclusion order being  a more general ban on the companies indicated and any companies that ‘show similar behavior’, to avoid companies bypassing current trade routes that are monitored, and finding other companies that will help them import the affected items.  BOE has been said to sell displays that do not qualify as primary grade to companies that perform display repairs on a number of products, and with the more flexible repair rules that have become available for Apple products, Samsung Display seems to be looking keep repair shops from replacing Samsung Display screens with those from BOE.
While this could have implications for BOE and potentially raise the cost of repairs, the ITC also considers the impact on the general public and even if the alleged violation proves to be true, it is up to the ITC to determine whether an outright ban would be in the interests of the public, as opposed to the financial benefit of SDC.  The defendants will cite consumer’s rights to repair a device any way they choose, but the typical patent infringement suit would normally take 24 to 36 months before a judgement is obtained, while the ITC usually takes a year to 18 months for such decisions.  Once a decision is made by the ALJ, it goes to the President to be approved, at which point an appeal can be filed in the Federal Court of Appeals, but if the President rejects the decision, neither party can appeal.

• Apt-Ability, LLC d/b/a MobileSentrix of Chantilly, VA; 
• Mobile Defenders, LLC of Caledonia, MI; 
• Injured Gadgets, LLC of Norcross, GA; 
• Group Vertical, LLC of Grand Rapids, MI; 
• Electronics Universe, Inc. d/b/a Fixez.com of Las Vegas, NV; 
• Electronics Universe, Inc. d/b/a Repairs Universe, LLC of Las Vegas, NV; 
• LCTech International Inc. d/b/a SEGMobile.com of City of Industry, CA; 
• Sourcely Plus LLC of Tempe, AZ; 
• eTech Parts Plus, LLC of Southlake, TX; 
• Parts4Cells, Inc. of Houston, TX; 
• Wholesale Gadget Parts, Inc. of Bixby, OK; 
• Captain Mobile Parts Inc.of Dallas, TX; 
• DFW Imports LLC d/b/a DFW Cellphone and Parts of Dallas, TX; 
• Phone LCD Parts LLC of Wayne, NJ; 
• Parts4LCDof Wayne of NJ; 
• Mengtor Inc. of El Monte, CA; and
• Gadgetfix Corp. of Irvine, CA.

​The CEO of Chinastar (pvt), China’s 2nd largest panel producer, gave a few hints as to the progress being made on the company’s T9 LCD display fab.  At a conference he stated that the project, which is slated for a capacity of 180k sheets/month in two phases, at a cost of ~5.2b US.  There have been rumors that the project, which is situated in Guangzhou, would be expanded to 250k sheets/month for an additional $1.63b US, but little has been said about such plans recently, and no mention was made at the recent conference.  What was mentioned was that while the fab is in mass production mode, and was the fastest fab construction ever in terms of capping, move-in, fab start-up, and mass production (according to the company), the fab is currently ‘capacity climbing’ toward a goal of 95% yield by the end of the year.
What makes this significant is that according to the CEO, when that target is reached, phase 2 construction will begin, with our estimate of early 2024 for phase 2 fanfare, and mass production at acceptable yields (85% or greater) by year end 2025.  All of this in light of how the LCD large panel space develops over the next 6 months, as there is currently little need for additional LCD capacity.  In China, there is a different mindset that tends to be company centric, and Chinastar, and parent TCL (000100.CH) seem bent on expanding despite the lack of current demand.  While boasting about early completion of such projects is gratifying for the company, it leaves a bit less room for slowing the progress of additional construction, which also delays the start of depreciation on a low producing fab and preserves at least some profitability, although these seem existential matters when you have a few billion dollars on the line, at least until its time to meet those utilization deadlines.

LG Display (LPL) reported official 4Q and full year results of 7.3t won ($5.92b US) and 26.15t won ($21.21b US), with the 4th quarter up 7.8% q/q but down 17.1% y/y, while the year was down 12.5%.  Things got a bit stickier at the operating level with operating income of -875.7b won ($-710.2m US) for the quarter, down 13.3% q/q, against a positive 4Q last year, resulting in a -12.0% operating margin.  The full year operating income was -2.085t won ($1.69b US), also against a positive 2021 full year result, with the full year operating margin of -8.0%.  The company took a 1.33t won ($1.06b US) non-operating impairment loss in the quarter.  

That said, management gave relatively little in terms of forward guidance, other than the very general ‘better 2H than 1H’ line, that area shipments will fall more sharply than the seasonal norms, and to expect that TV panel sales will again be lower than TV set sales.  Here is our take…
According to the first point of guidance, the second half will see better sales than the first half, which seems logical, if not a bit simplistic, as with LG Display, and most other display companies, the 2nd half is sweasonally better than the first.  LGD’s 5 year average (2H/1H) shows that 1H is typically down 16% over the previous 2H, and 2H is typically up 20% over 1H on average.  We expect there has, and later wording confirms, much hope in that prediction, as there is little hard evidence on which to base it thus far this year. 
According to the second point of guidance, the decline in area shipments between 4Q ’22 and 1Q ’23 will be greater than normal.  Based on our data, using a 5 year average including 2022, the typical decline in area shipments in 1Q is 11.9%, with the guidance implying a greater than normal decline in the current quarter.  Typically (5 yr avg.) sales also decline from 4Q to 1Q, and for LG Display that decline averages 19.4%.  if LG Display’s area shipments track to sales (they track within 2.7% over 5 years when normalized to 1Q 2017), the implication would be for a greater than 19.4% decline in 1Q sales.  A 20% decline, only slightly greater than average would imply sales of 5.84t won (down 9.7% y/y), while a 25% decline (10% over the norm) would imply sales of 5.476t won (down 15.4% y/y), and a 30% decline, only 10% below the seasonal baseline, would imply sales of 5.11t won for the 1st quarter (down 21.0% y/y), all of which point to a weak quarter and more difficult y/y comparisons. 
 
The third point, that TV panel shipments will again be lower than TV set shipments indicates the company’s continuing push to match inventory levels with orders, a difficult task at best given the volatility seem over the last few years.  That said, such ‘contract-based’ inventory management is possible in a less volatile environment, one which we seem to be falling into as the threat of COVID 19 decreases and Russia’s invasion of Ukraine becomes more normalized (not saying it should be, only that it seems headed that way).   LGD’s contracts with Apple (AAPL), which are currently oriented toward small panel OLED production, help, as Apple has been the most sucessful brand in maintaining relatively stable sales (and increasing share) during the last few quarters, and lower generic LCD TV panel inventory (see below) demands all work in that direction.  That said, increasing the JIT portion of their business substantially above the ~30% seen last year is an ongoing process that will see smaller incremental gains going forward, although the company has an optimistic target of 40% for this year.  If Apple maintains realistic targets this year it would facilitate LGD’s ability to move the JIT needle higher, but lots of ifs still remain.
One point that management made was toward the acccelleration of the company’s plan to exit the LCD TV panel business.  The company confirmed the closing of the company’s Gen 7 large panel LCD fab and plans for a 50% capacity reduction at its Gen 8.5 fab in China, and given the lack of traction on the demand side, and the excess capacity available to buyers, particularly in China, this continues to be a logical path.  However LGD does have customer contracts that are volume related, meaning they have an obligation to deliver display area targets, essentially access to production capacity as needed by customers.  Existing capacity commitments under those contracts must be met or penalties and ill-will could be generated, which means the capacity reductions targeted for the China fab could take time to implement as contracts are worked down this year.
On the more positive side, the company was a bit more forthcoming about their prospects for OLED, particularly small panel OLED, not usually the company’s focal point for OLED.  Management has separated the company’s large panel OLED business (OLED TVs) into a ‘separate cash-generating unit’, to be better able to monitor its progress, and manage the balance between margins on OLED TV displays and those on small panel OLED smartphone displays, such as the ones they produce for the iPhone.  Given that on a /m2 basis, small panel OLED devices have a higher ASP, it is essential that LGD manage those two segments of their OLED business separately, particularlyt as the TV business remains weak.  LGD, while maintaining that capex (3t won or $2.43b US) will not entail more than “minimum ordinary investment other than order-based projects”, will have to gear up ‘IT’ OLED production for Apple’s 2024 further infiltration into OLED displays, which will take at least some of that ‘project-oriented’ capex this year.  Perhaps some of the 5.2t won ($4.22b US) spent in 2022 has included some of that build spending (We note that LGD mentioned that last year’s capex was higher than expected), but we expect that LGD will increment capex later in the year.
LGD gave some detail about its OLED business, other than asserting that it is capable of producing 10m units this year, which is certainly a positive, as they broke out OLED as a percentage of sales for the last 5 quarters.  While it lacks the detail that would isolate the small panel OLED business (smartphones, tablets) from the large panel business (TV), it does show that the trend in LGD’s OLED business is more a function of its mobile OLED sales than its OLED TV sales.  When looking at Figure 3 LGD’s overall OLED share of sales (red) tracks closely to the company’s share of mobile dispay sales share (blue), while relatively poorly to the company’s TV sales share (yellow), which indicates that while the OLED TV panel business can, at times, generate a larger portion of company revenue, the small panel OLED business seems to be what is driving growth  We do note that the TV share shown in the chart also includes LGD’s LCD TV large panel business, which continues to shrink, so there is some play in that category, but the close tracking between total OLED share of sales and mobile share of sales is noticeable, along with the general weakness seen in the TV space.

​The Q&A served little, as most of the few questions asked were not directly answered by management, although when pressed they indicated that the company was, in addition to all mentioned above, working toward developing three new business segments, Hi-end gaming monitors, transparent OLED displays, and thin-film speakers.  The most attractive of the group is the gaming monitor business, and given that the space is one that is already recognizable and fits the company’s emphasis on OLED (high response time, high contrast, wide color gamut), we expect this category has the most chance for near-term success, and the company indicated that it was in discussions with 8 or 9 potential customers and expects to be in production this year.
Transparent OLED displays are, in our view, a bit more problematic, and when the company called the potentiual products ‘a solution product, not a standalone product’, it seems they have already faced the more unusual circumstances that limit the use of transparent OLED displays.  We do believe they are practical and viable in retailing, and can be a better alternative to more typical opaque signage, but applications in retail tend to be customized, and while that leads to higher margins, it is less condusive to mass production.
While LGD has been in what is loosely called the speaker business, we did not expect the company to promote its thin-film speaker technology, one that it has been using in its OLED TVs for a number of years.  Given our extensive background in the audio business, we have strong opinions as to this product category, which we will not get into here, but have difficulty understanding how LG Display will create a mass market product here.
All in, while much of the 4Q call was of little consequence, and at this early point in the year, especially given the poor economic environment, we expected little.  We had hoped that LGD would write off as much as possible, which they seem to have done, and was happy for the bits of insight into the company’s OLED business, but a bit more on the company’s thoughts about how the CE business might play out would have been helpful.  As noted above, the CE space seems to be settling into what we consider a more ‘normal’ mode, where sensativity comes from the fine balance between normalize supply and demand, without the exogenous factors that have run the CE show since 2020.  While most in the space do not look forward to sweating over the small stuff again, we look forward to a year that might not see spectacular changes but a more steady and measured progression toward better CE products, more rational planning, and less frenetic start-up investing.  Maybe we should be careful what we wish for but every environment has its opportunities.

Yesterday we spent some time looking at the characteristics of AR glasses, particularly focused on the progression of the technology behind those devices.  While the technology is certainly important and will help to drive the industry forward, we noted that over the last year or two, the AR space has been seeing new interest from larger consumer electronics companies, some of whom are new to the space but have significant clout in other CE product categories.
In the very early days of AR, the industry was dominated by large CE and technology companies as indicated below, however as there was relatively little consumer traction, by 2017 all of the AR players were small and/or private companies.  This continued until 2019 when both Microsoft (MSFT) and Google (GOOG) released updated versions of previous models, now more oriented toward the business community.  This drove a new crop of small AR developers to enter the space in 2020, which saw a large expansion in the number of models released, although all were from small AR companies.  By 2021 the space had attracted a number of Chinese CE companies, as well as small players, and last year major Chinese CE players offered their first forays into the AR space.
While detailing all of the companies in the AR space would be an arduous task, we show a quick summary of those companies having announced AR products that are expected to be released this year.  Some are well-known, while others are just passing through start-up mode.  We expect more such announcements this year, and potentially an MR device from Apple (AAPL), but even at this early point in the year, there are a 13 brands scheduled to release AR product this year, only two short of the total number of brands releasing Ar product for the entire 2022 year, so we expect the 2023 total will be higher than last year as the space develops better hardware and continues to look for practical applications.

​Here are the companies expected to release AR product this year:
Digilens (pvt)
Owned by SBG Labs (pvt) – Sunnyvale, CA – Purchased at foreclosure sale.  Leader in holographic Optical waveguides.  Investors – Dolby, Samsung, GLW, OLED
 
TCL (000100.CH) – $24.11B Sales - 2021
Broad-based Chinese CE company.  Appliances, TV, Smartphone, etc.  Owns  – Chinastar (pvt)
            
Oppo – (pvt)
Owned by BBK Electronics (pvt) who also owns Vivo (pvt), OnePlus (pvt), and iQOO (pvt).  Major Chinese smartphone brand.  Also produces other CE products. ~17,000 employees
 
Ximmerse (pvt)
Guangdong, China – Investors include Lenovo (), & Qualcomm (QCOM)
“Rhino” series of mixed reality devices.  Specializes in position and tracking.
 
Dream Glass (pvt)–
Fremont, CA.  Small VC backed AR Developer
 
Lenovo (992.HK)
Large Hong Kong based Chinese CE manufacturer best known for laptops. – $60.74B Sales – 2021
 
Engo (pvt)
Owned by MicroOled (pvt) – Producer of Micro-OLED displays and optical modules based in Grenoble, France.  Also promotes Activelook™ smart sport glasses.
 
Guangli (pvt)
Small Hangzhou, China based producer of AR glasses specifically designed for swimmers
 
Brilliant (pvt)
Owned by Brilliant Labs (pvt), a small NFP based in New Brunswick, Canada.  Product is an open platform monocle that can be used for educational purposes.
 
Nimo (pvt)
Milpitas, CA based (India really) company building AR glasses that are a substitute for a laptop or computer.
 
Campfire (pvt)
San Mateo, CA start-up that is focused on a collaborative AR platform that is currently oriented toward CAD and is built around an easy to use AR device that also converts to VR.
 
Rokid (pvt)
Hangzhou, China based AR developer that has released Ar devices each year since 2020 with a focus on sources that have a video output.  Investors include Bilibili (9626.HK), a major Chinese streaming service
 

​We have mentioned Samsung Display’s dominance in the foldable OLED display market a number of times, and while there is still some disagreement as to how many foldables were shipped last year (we have seen estimates between 13m and 19m) SDC’s share of the foldable OLED display market is between 75% and 80% and is expected to rise again this year.  Giving SDC a major leg up in the foldable OLED display business is the fact that parent Samsung Electronics accounts for over 75% of total foldable device shipments, with the assumption that all of those foldable displays are p0roduced by SDC.  Further, Samsung  Display has also supplied foldable displays for the Xiaomi (1818.HK) Fold 2, the Oppo Find N2 and Find N2 Flip, the Vivo X-Fold and X-Fold+, all among the most popular Chinese foldable smartphones.
 
There are competitors, primarily China’s BOE (200725.CH), who has supplied the foldable displays for Huawei’s (pvt) Mate XS2 and Pocket S, and the Honor (pvt) Magic V and Magic VS, while Chinastar has supplied the foldable display for the Motorola (MSI) Razer 2022, but most significant was BOE’s win for the Asus (2357.TT) Zenbook 17 foldable notebook, a major psychological win for BOE.  That said, recent indications are that Samsung Display will be replacing Huawei’s foldable display in upcoming Huawei foldables and even potentially replacing Visionox at Huawei, who had supplied one foldable model last year.  The foldable OLED display market is expected to grow ~25% in unit volume this year so SDC should enjoy their world dominance for at least another year before the others gain the necessary experience to challenge the leader.

​Japan Display’s (6740.JP) largest shareholder Ichigo (2337.JP), a $5.8b asset manager based in Tokyo, has decided to convert 658m Class B preferred shares to common stock that it received in 2020 when it bailed out JDI.  This will increase Ichigo’s share of the common from 49.28% to 56.7%, and while Ichigo still has 1.02b Class A shares and 5,540 Class E shares, the Class B shares were the only preferred that had voting rights.  JDI has also borrowed 28b¥ from Ichigo.  While Ichigo has been JDI’s largest shareholder before the conversion, the increase in common shares held by Ichigo, whose CEO is also the CEOI of JDI, will reduce the company’s free float ratio below 35%, which would force JDI to lose its listing on the Tokyo Exchange, however there is an exception that allows the violation to be sustained for 5 years if the 3rd party owns the shares to support a company’s business in a turnaround situation, which this would certainly be the case.  JDI will file for the exception after its fiscal year ends in June, which we expect will be approved.