Earlier this month we noted that BOE (200725.CH) had opened its Gen 8.5 LCD line in Fuzhou a number of months earlier than scheduled, and ~7 months ahead of our schedule.  The new fab, which when fully built out, will have a capacity of 120,000 sheets/month (phase 2) will focus on both TV and monitor panel production, and will have some capabilities for oxide backplane production, although we believe the bulk of backplanes produced at the fab will be a-Si.  We now believe the fab is in actual commercial production and is shipping product to a variety of customers including Samsung and a number of domestic Chinese TV brands.

We note that our previously updated expectations for production from this new BOE LCD line were for a gradual ramp starting in March and full phase 1 capacity (330,000 m2/month) by early 2018.  We now accelerate that production schedule by ~ 4 months.  While on an industry basis, this will only add ~0.2% to the total industry capacity for the year, it is an indication of how aggressive BOE, and other Chinese panel producers are on adding capacity.  Further, BOE will be producing 43” TV panels at this plant, a substitute for 42” TV panels which are in short supply and have seen continual price increases after the closing of Samsung’s L7-1 LCD line, which is being converted to OLED production.  While we expect BOE to take full advantage of the higher TV panel prices, we also expect to see some volume discounts established in order to fill the fab as quickly as possible, and BOE is able to produce 43” panels more efficiently than typical for 42” panels, which gives them some leverage in their price negotiations.

In order to regain share in the Chinese smartphone market, Samsung Electronics (005930.KS) is said to be stepping up its component procurement from local suppliers.  In particular, BYD Electronic (285.HK), a spin off of BYD Co. (1211.HK), a Shenzhen based automotive and component supplier whose lead company investor is Berkshire Hathaway (BRK).  BYD Electronic has received an order for high-end smartphones from Samsung, according to Taiwan press, and Samsung has been courting a number of other Chinese component suppliers, with O-film Technology (002456.CH), Holitech Technology (002217.CH), Truly Opto (732.HK), and BYD’s ODM division. 

We note that back in July 2016, Samsung invested $450m in BYD Co., supposedly under the concept of a way for Samsung to improve its automotive semiconductor results, but BYD will use the capital to expand its battery production and for R&D toward ‘new-energy’ vehicles.  The relationship between the two obviously is broader than just the automotive market as Samsung broadens its touch with BYD in order to lower the cost of assembly on the Chinese mainland.  The new relationship is said to be replacing some existing component suppliers in Taiwan, but we cannot point to specifics at this time.  

Universal Display (OLED) reported 4th quarter and full year 2016 results last night.  Yesterday we posted our expectations for the quarter, 2016 year, and for 2017, so what did we get?  Starting with the simple stuff, consensus estimates for 4th quarter revenue was $68.6m, which the company beat by 8.7%, reporting $74.577m.  The full year 2016 company guidance was $190m to $200m ($195m sp[i]) and consensus was $192.9m, putting the consensus beat at +3.1%, and +2.2% over our full year estimate.  Reported EPS was $0.55, 31% above consensus and 22% above our estimate, which put full year reported EPS at $1.02, 14.6% above consensus and 10.9% above our $0.92 estimate.  As we have noted many times in the past, at this point in the development of OLED technology, the accuracy of quarterly estimates is of far less importance than the full year results, given the potential for pushes and pulls during the industry’s capacity expansion phase.  While its always nice to be accurate on a quarterly basis, and we know investors are sensitive to quarterly performance, our true focus is on yearly metrics.

Guidance for 2017 was set at $230m to $250m ($240m sp), which was slightly (-1.6%) below the 2017 revenue consensus of $243.9m.  No EPS guidance was given, while consensus for 2017 is $1.29.  The table below gives some further 4Q detail as to reported metrics and our expectations.



[i] Single point

Yesterday we noted that we were watching for the following points (in a different order):

1.       Color relating to the expiration/renewal of the Samsung Display (pvt) IP license and material supply agreements

2.       A continuing increase in emitter sales, particularly red emitter

3.       Some incremental improvement in LG OLED TV royalty

4.       An increase in non-Korean product sales

5.       A realistically optimistic view on 2017 sales that has some correlation to OLED capacity growth

1.       While Universal Display cannot speak about potential negotiations with customers, nor do we believe that such negotiations are near any conclusion, we do believe that Samsung will be looking to sign a new long-term agreement with UDC as the old one expires at the end of this year.  Should negotiations bog down as the 2017 year ends, we would expect a limited term renewal, but we do not expect Samsung to push for single year agreements with annual renewals.  We do note that the current IP license contract has called for increases each year, and we were surprised that the 2017 increase was $15m, boosting the full year to $90m.  As this rate was negotiated in 2013, and was based on the expected growth of the industry, we had expected the yearly increases to diminish as the industry grew larger and the rate of relative expansion slowed.  That has not been the case as can be seen from Fig.1, and bodes well for the IP license revenue in a new long-term contract.

1.       Commercial Emitter sales in 4Q increased, looking at the aggregate of both red, green, and other colors as seen in Fig.2., but declined on a total 2016 y/y basis.  Our focus was on red emitter material, which is used in every RGB OLED display, and now potentially in OLED TV displays, while green is an option in many cases.  Therefore red emitter sales should grow in step with industry capacity expansion.  Of course, that excludes the increases in material efficiency that is the goal of every OLED panel producer, which can lessen that correlation, but given that UDC reports dollar value of emitter materials, not units shipped, the effect of ASP and volume discounts must also be considered.  That said, we have been concerned that there has been no red emitter growth this year, making it more difficult to project long-term material sales that grow at industry expansion rates. 

UDC kindly supplied a bit of color in that they indicated that total emitter shipments were up on a y/y basis, which indicated that the primary cause for the lack of growth was pricing.  While this sounds even more onerous, cumulative material price discounts are part of the supply contracts that UDC has with all of its customers and are already built into our industry model.  That said, as customers reach those volume targets, the value of material sales is impacted, although there is a ‘terminal volume’ at which no further discounts are given.  UDC counters this issue by developing new materials, which restarts the ‘cumulative volume clock’ at full price as the new material is adopted.  This year’s lack of emitter growth has been affected by a delay in the adoption of some of these new emitter materials by key customers, which would have boosted emitter dollar values as ASP’s were reset to higher levels.

This remains a concern, as the adoption of new materials is at the option of the customer, but upon detailed examination we note that looking at commercial emitter sales does not paint an complete picture, as UDC sells these new materials to customers for testing, but does not book them as commercial sales unless they are being used in a high volume commercial product.  We believe a portion of UDC’s ‘developmental’ material sales includes these new materials, and as such, the commercial emitter material sales should be ‘adjusted’ to give a better picture of emitter growth, particularly red emitter.   Fig.3 illustrates the absolute and adjusted red emitter quarterly growth in 2016 and indicates red emitter growth.  Further, looking at ‘developmental’ material sales itself, there was significant growth in the 2nd half of 2016, which would imply both a higher volume of new materials being sampled to customers and a larger base of new customers that are not yet in commercial production but are using UDC emitter materials.

Given the constraints of our AM note, we will continue the review of the UDC results in our next note in order to give the depth we feel is necessary when discussing the OLED display space.  Don’t touch that dial!

While Mobile World Congress, the go-to place to see and hear new product announcements from smartphone suppliers, is about to begin (2/27), Samsung is taking the high road and setting its own dates and formats for the release of its 2017 flagship Galaxy S8 smartphone, likely a result of a more careful and extensive testing cycle after the disastrous Note 7 calamity.  Samsung will show off the S8 in New York on March 29th, but will not launch the phone until April 21st, while rival LG Electronics will use the more traditional Mobile World Congress setting to show off its G6 smartphone on February 26th, with actual sales starting on March 10th, a full 42 days earlier than Samsung.  If you are very desperate, you can pre-order the LG G6 staring on March 2, while Samsung has yet to set a pre-order date for the S8, although the whisper is April 13th.

While we poke fun at the drama associated with the release of new smartphones, this will be an unusual year for smartphones generally.  Worldwide sales growth has slowed, and competition from Chinese vendors has forced major brands to compete at three price points rather than one over the last few years, and even the upstart Chinese vendors (Xiaomi - pvt) are seeing themselves losing share to the ‘new’ upstarts, OPPO (pvt) and Vivo (pvt).

But the real key this year, and trailing into 2018 will be the 10th anniversary of the iPhone and the release of the iPhone 8/X/whatever later this year.  Given the significant delay between current releases and the iPhone release (no official date yet), the smartphone market, we see little near-term impact from the potential iPhone on the S8 and G6, but given the potential for a ‘break-through’ 10th anniversary Apple product, there could be a more rapid decline in non-Apple smartphone sales as the Apple release gets closer.  While Apple has done little on an official basis to encourage potential converters to wait for the new iPhone, the tech press seems to devise a new feature, button (or lack thereof), display, size, and ‘concept rendering’ on a daily basis. 

From Apple’s perspective, what could be better?  Free brand advertising on a major scale without having to commit to anything from a production standpoint, and a degree of free market research on such potential features from the world of Apple sycophants, with the average smartphone buyer/converter thinking about maybe holding off that upgrade until they can get a look at the new iPhone.  But there is a catch, and while we expect the iPhone 8 line to set new unit volume records, the ‘feature bar’ for Apple continues to get higher with each new press revelation.  Apple will have to prove it can do more than a ‘slightly better than what is out there’ product and find a way to truly innovate the iPhone in ways that are both beneficial to the user and ‘flashy’.  This is not an easy task in a highly competitive and maturing market, even for a marketing giant like Apple, and the success or failure of such a product line will impact the entire smartphone market in its most important 4th quarter holiday period.  While we expect this mantra has been emblazoned on the foreheads of all Apple product developers for many months, we hope that Apple’s perspective is larger than buttons and cameras, or 2018’s smartphone market will be another one of slightly larger screen sizes and slightly thinner phones.

In the display space there are independent panel producers, such as AU Optronics (AUO) and BOE (200725.CH) and there are semi-captive panel producers that operate as subsidiaries of their customers, or are lesser investment vehicles for same.  These ‘captives’ have to balance their status with their parent organizations with their external customer base, while making sure their fabs are as full as possible, a slightly less onerous task than what faces the independents, but one that carries its own difficulties.

Some of the semi-captive relationships are simple such as LG Display (LPL) and LG Electronics (066570.KS), while some are more complex, such as Sharp (6753.JP), but the balance between filling the parent company’s needs and developing external customers, while maintaining high utilization rates can be a daunting task, and one that changes both yearly and quarterly. That said, for the last few years the percentages have not changed much, with the base around 32% and the peak around 47%.  However last year, as we have noted previously, Sharp was purchased by Hon Hai (2317.TT)/Foxconn (2354.TT), and the new Sharp owners made a significant change in their plans that has affected the entire TV display industry.

The yellow line in the chart below indicates that the new combined entity of Sharp/Foxconn will now buy almost all of their TV panels from their semi-captive supplier, and Sharp, the panel supplier, will limit its outside client’s sales to less than 10%.  While the idea behind this change is based on the new owner’s desire to resurrect the Sharp TV brand, using owned assets to contain costs, Sharp’s outside customers, primarily Samsung Electronics (005930.KS) and Chinese TV brand Hisense (600060.CH) were left to scramble to fill the panels that they had thought would come from Sharp. 

This came during a cycle where Samsung Electronics had been decreasing its reliance on its subsidiary Samsung Display, and Samsung Display had been diversifying its customer base in a similar fashion, a result of a period when Samsung Electronics (and most of the industry) saw rapidly slowing TV sales, and had to cut its quarterly/yearly targets, leaving Samsung Display with idle production capacity.  Vowing to keep this from happening again, Samsung Display began to add external customers, as can be seen by the red line.  Samsung Electronics was also diversifying its TV panel supplier base, to avoid causing the same problem, given its participation in Samsung Display’s results.  Samsung Electronics contracted with Sharp, BOE and others to give Samsung Display the opportunity to expand its external reach.

This was actually working well until Sharp was bought by Hon Hai/Foxconn last year, and the management of Hon Hai/Foxconn decided that they would use the well-known Sharp brand name, which had fallen out of favor on a world-wide basis, to build an ‘in-house’ brand for the combined entity.  While the idea is certainly valid, the abrupt way in which the decision was made, essentially telling Samsung Electronics that it would no longer be supplied by Sharp, had undertones that seemed to indicate as much of a desire to resurrect the brand as to cause discomfort to the share leader, forcing them to scramble to fill the missing TV displays before the 2016 holiday season.  This issue, an earlier problem with production at Samsung Display, and Samsung Display’s intention to convert older production lines from LCD to OLED, set the tone for a ‘panic’ scenario, where buyers switched from ‘buy what we need for a good price’, to ‘make sure we have what we need, regardless of price’, with the result being the first increases in TV panel prices since early 2015.

The question that comes to our suspicious minds is how much of the Sharp/Hon Hai/Foxconn shift was to benefit the Sharp brand, and how much was to help to bolster TV panel prices?  We can’t see into the mind of Hon Hai Chairman Terry Gou, but as the founder of the world’s largest contract manufacturing business, we would imagine the answer would not be based on a single concept.  If the restoration of the Sharp brand was the ultimate goal, why cut off a big customer so abruptly, knowing that it will likely eliminate Samsung Electronics as a Sharp customer for the foreseeable future, should the Sharp brand be unsuccessful.  LG Display and China Star (pvt) will be filling in the gaps for Samsung Electronics and we cannot answer the question, but the scenario seems to be playing out like a season of Dynasty, just without the face slaps and giant hairdos. 

Universal Display (OLED) will release 4th quarter results tonight after the close.  Based on full year company guidance ($190m - $200m), 4th quarter revenue should be between $65.7m and $75.7m, with consensus at $68.6m.  UDC does not give EPS guidance, but consensus for 4th quarter is $0.42.  That said, we are watching for the following:

·         A continuing increase in emitter sales, particularly red emitter

·         Some incremental improvement in LG OLED TV royalty

·         An increase in non-Korean product sales

·         A realistically optimistic view on 2017 sales that has some correlation to OLED capacity growth

·         Color relating to the expiration/renewal of the Samsung Display (pvt) IP license and material supply agreements

These are hefty expectations and rarely do companies think with the same perspectives as we might, but the phrase ‘two out of three ain’t bad’ comes to mind when setting our quarterly and yearly expectations.  That said, the tech press machine has adopted OLED as its new darling and has been ‘educating’ the public into a frenzy since the rumors that Apple (AAPL) might adopt OLED for its upcoming iPhone family release hit the presses (just an expression since there are no ‘presses’ anymore).

Visions of “Back to the Future” type displays are now emblazoned in the minds of everyone from Japanese schoolgirls to advertising executives, and expectations continue to grow at geometrical rates, but we know that reality bites, and technology develops at a pace not set by expectations but by companies with budgets, shareholders, competing projects, and high capital costs.  We are very big proponents of OLED as a technology for displays, for a variety of reasons, so we make cautionary statements out of the desire for the successful implementation of the technology, but we have seen the same ‘expansion’ of expectations for the OLED space before, only to see disappointment when the reality does not live up to hyped up expectations. UDC is only one company in the OLED supply chain, albeit an important one, and all face the issues that are typical of a major manufacturing and technology change.  We caution investors to set realistic long-term goals for investments in the OLED space rather than focusing on the latest patent or Digitimes story.  

According to Taiwan based Trendforce, Apple (AAPL) has abandon the idea of using a flexible OLED display for the upcoming iPhone 8 Anniversary smartphone.  Citing poor production yields and drop test results the firm is saying that Apple will wind up using a rigid substrate (glass) that will have conformed edges, similar to the Samsung (005930.KS) Galaxy smartphone line. 

Apple, along with every other smartphone manufacturer has been looking at OLED displays as a way to further differentiate their products in a very crowded market.  Given the size of Apple’s iPhone customer base, they command a look at every technology change or potential change in the display space, the same way Samsung Display gets a demo of every new display production tool.  That said, there are limitations, some very specific ones, that despite what Apple would like, the display industry cannot supply at a given point in time.  Here, it comes as a revelation to some that Apple would be unable to use a flexible OLED display for their upcoming anniversary iPhone, yet even if Apple was happy with the specs, two large questions remain, would they and could they?

As far as would they goes, of course they would.  If a company that is known for its leading edge products has the opportunity to leapfrog an entire industry (I feel Steve Job’s ghost looking over my shoulder) it would be the coup of the decade.  However, if the opportunity carries significant technology risk, the answer is less clear, especially given the recent Samsung Note 7 issue and its impact on the Samsung brand.  So Apple management weighs the monstrous publicity revolution such a device would generate against the potential for the technology to backfire, becoming the recurring nightmare that Apple marketing folk wake up from on a regular basis.  Not quite as simple a decision as the results of a drop test might indicate.

Then there is the issue of could they?  The answer here would be dependent on what modality Apple would use the technology.  Would it be used for one of the three potential iPhone 8 models or all three?  Would it be just for a ‘gold edition’ that was extremely limited in production volume?  Would it actually serve a purpose to have a flexible smartphone?  While these are all significant potential questions, the answers are moot, and the point that Apple was abandoning the idea because of poor production yields answers the question.  Such a device cannot be produce for a high volume product today.  Not because no one wants it, but because the manufacturing technology needed is not far enough along to provide both a reliable source and a practical price.

But wait there’s more…

Since there are a limited number of small panel OLED producers, especially relative to small panel LCD producers, and these small panel OLED producers have limited capacity, and in most cases very limited OLED production experience, one can see the funnel through which a flexible smartphone might pass through getting narrower by the second.  Bur there is even more… the amount of OLED capacity just mentioned is for all types of OLED substrates, but a flexible OLED device would have to be produced on an OLED line designed for flexible OLED substrates, which is another smaller subset of OLED small panel capacity, and if you believe that most OLED producers have relatively limited high volume production experience, those that have experience with high volume flexible OLED production could probably fit into a small auditorium.

But, but, but there is even more…

Who might have the ability to make a flexible OLED?  There is only one OLED producer that can make conformed OLED displays today, and those are easy to make compared to a truly flexible device, and that is Samsung Display, a subsidiary of (trumpets please) Samsung Electronics, Apple’s biggest competitor.  One has to consider the concept that if Samsung Display has developed the skill to produce high volume flexible OLED displays, who would get first crack at it?  OK, Samsung Display is a business on its own and of course they would love to have a display customer as large as Apple, but we would have to expect that Samsung Electronics has been jointly developing and likely funding a flexible display program at SDC for many years, and it would take a lot of visits to the corporate offices to convince Samsung Electronics to give that up to a rival before they used it. 

We don’t mean to be flippant in our evaluation of the Trendforce note, but this is a topic we have spent a great deal of time on.  The aspects mentioned thus far are structural, and do not begin to reflect the vast number of technical issues that remain to be solved when speaking about a mass produced flexible OLED device, but we certainly don’t rule out the possibility, and in fact, believe that display flexibility will be the biggest long-term driver in the display space for the next decade.  We have seen many flexible OLED demos over the last few years, and believe that eventually some will be able to move into scalable production, with Samsung likely the first to make the technology practical, and maybe sooner than most believe, but that funnel is very narrow, and while we have absolute faith that the industry will eventually solve those problems necessary for the mass production of flexible OLEDs, it seems disingenuous to blow off the idea due to ‘production problems’ or ‘low yields’.  It’s a bit more than that and we would be happy to detail our models, assumptions and conclusions with investors on request.  Watch the funnel get smaller in the charts below…

Note:  Raw capacity is the stated maximum capacity of a particular facility.  It represents the capacity if the fab is fully built out (this is usually done in two or three phases, not all at once) and is running at 100% capacity with no downtime.  Of course this is only a reference number as real operating circumstances are far different.  We model both ‘raw’ and ‘utilized’ capacity, with ‘utilized’ capacity taking into account a wide variety of additional factors such as equipment optimization, maintenance, ramp time, producer experience, and typical build-out schedules.  These factors do not include actual product yield, which would be considered when evaluating unit volumes rather than capacity in m2.

…and two ‘teasers’…

February LCD panel pricing for monitors, notebooks, and tablets was flat m/m.  Monitor demand remains seasonally weak but new recycling rules in China that take effect in April have pulled forward enough demand to keep monitor prices from declining.  We would expect to see relatively small seasonal monitor price declines for the next 2 – 3 months as inventory levels seem normal and balanced against supply.

Notebooks panel pricing was also flat for February, with the overall notebook supply chain seeing some part disruptions that are allowing brand notebook panel buyers to hold back orders a bit to try to negotiate better pricing from panel producers.  Panel producers have been increasing prices for a number of months and are taking a hard line toward letting prices decline for fear of starting a trend, so prices remain deadlocked until next month.  On a seasonal basis alone, we would expect to again see relatively small seasonal price declines next month.

Tablet panel prices were flat in February, with the same push and pull between brands and buyers holding things steady for another month.  The only places we have seen any price concessions were for long-term contracts, as tablet panel producers refuse to give short-term price reductions.  If demand does not pick up during March and April, it could leave panel producers with inventory that will be getting stale, leading to lower prices to move the older inventory, but things have not progresses far enough that panel producers feel burdened by tablet inventory enough to start discounting.

Phone panel pricing was down 0.3% in February, as pre-release build projects are winding down.  Until new models are released at Mobile World Congress next week, and retail customers cast their votes as to whether they are seeing enough to upgrade, we would expect to see little price movement, but if we were betting folk, we would expect some downside over the next few months.

TV panel pricing, the elephant in the room, was mixed, but on a general basis was flat to slightly up.  We say mixed as we have noted in the past that structural issues at Samsung Display (pvt) early last year, and the closing of their L7-1 line have caused shortages with certain TV panel sizes, particularly those between 40” and 50”.  Further, Sharp’s (6753.JP) new management’s decision to ‘reallocate’ panel production to the Sharp brand, and away from Samsung has exacerbated the problem.  But underlying that aspect, is another that we believe is more significant.

TV brands are always under pressure to cut prices or offer discounts, and given that the TV biz is already a relatively low margin business, this can become a very big issue both from the consumer perspective and from a brand profitability perspective.  Back when there were only a few LCD TV brands dominating the TV market, price competition was more of a wink and a nod between brands, however as the TV market became global rather than regional, new highly discounted brands (Vizio (pvt) for example) made substantial inroads in the TV market and set the tone for the discounting that TV consumers have come to expect.

Life for TV brands has been more difficult since comparative on-line pricing became available, and margins have remained slim, but through most of this period (essentially until mid 2016) TV panel pricing was in decline, which gave TV brands a little flexibility on set level pricing.  As with all cyclical products there came a time when panel pricing could decline no further, as even the most efficient panel producers were working at or below manufacturing breakeven.  It took the right combination of events, a manufacturing problem at Samsung Display, a bit of an economic recovery in North America, and a Chinese population that continues to pay premium prices for new features, to snap the downward TV panel price cycle.  But what about the brands?  Now they face the discounting demands of the general TV consumer, which are even more ingrained in the on-line buyer, the competition from brands in what is now a worldwide market (we bet investors had never seen a Chinese TV in the US until a year or so ago), and now to add insult to injury, increases in the price of TV brand’s main component.  What is a brand to do?

As they have done since the TV industry began, they complain, they watch what limited profitability they previously had wither away, and they complain again, but the real question becomes, when will they stop promoting their growth by setting forever increasing year over year unit volume targets, and start to retrench?  Panel producers are in the catbird seat now, and certainly will do everything they can to avoid letting panel prices begin another down cycle, but at the first sign of buyers lowering targets, they will shift from the ‘raise prices until they bleed mode’ to the ‘fill the factory, don’t worry about price’.  The panel business is one that is based on efficiency and only works when factory utilization rates are high, so when (not if) the TV brands finally refocus on profitability rather than share, we would expect the rise in panel prices to come to a quick halt.

We are certainly not doomsayers, and we have yet to see the signs in the day-to-day comings and goings of the display industry that such is the case, but over the last 20+ years of following the space, we have learned that the industry is lemming-like.  When it moves, it has a tendency to move in one direction without much thought about the cliff on the horizon.  JOHO

As we have noted in the past, the new management of Sharp has decided to focus on bringing back the Sharp brand, and as such has reduced TV panel output to outside customers, particularly Samsung (005930.KS), Hisense (600060.CH) and Sony (SNE).  While business makes strange bedfellows, Samsung and LG Display, normally bitter rivals, seem to have agreed on a supply agreement that has been rumored for some time.  We believe that the CEO of LG Display (LPL) stated yesterday that while the final details had yet to be worked out, the company expected to begin shipping panels to Samsung and Sony by July.  We do not expect LGD to be the only supplier to Samsung, with smaller amounts from other suppliers who can fill specific requirements, but we expect LGD will supply the bulk of the missing displays. 

While we would expect LGD to take a bit out of Samsung’s hide for filling the gap, we would also expect to see a bit less price movement in the 40” – 50” TV panel size range once Samsung is able to reconcile the supply form LGD, as we would expect their buyers have been in the market trying to grab as many compatible displays as possible, without much regard to price, and those producers able to fill such orders taking full advantage.  If all goes according to the LGD plan, we would expect to see more normal TV panel pricing beginning in early summer.  Of course, deals like this can go awry on a moment’s notice, and Samsung is not known for making friends with its suppliers, let alone its biggest competitor, but in this case both parties win, although LGD more so, which gives the deal a better than average chance of completion.  On a longer term basis however, we would expect Samsung to either upgrade its relationships with Chinese producers China Star (pvt) and BOE (200725.CH), who can produce large panel TV displays in volume.  We note that Samsung Display is a 10% owner in China Star along with TCL (000100.CH) and the local Chinese government.

While we have not heard direct confirmation that an across-the-board slowdown in the Chinese CE market is in progress, we have heard from a number of vendors that both smartphone and TV inventories remain high after the Chinese New Year holiday, and levels will be worked down during 1Q.  We note that 1Q is typically the slowest quarter in the display business, with holidays reducing factory production days and holiday goods already on retail shelves, but we have also heard little from panel producers about lower utilization levels expected for 1Q.  This is an unusual situation in that while unit volumes are expected to be flat to moderately down, most panel producers are citing expectations for no change in factory utilization rates.

Further, in situations where inventories are above average seasonally adjusted levels, panel pricing has a tendency to decline, which has only modestly been the case most recently.  We continue to focus on a number of patterns, particularly 32” TV panels, which are essentially an entry level size for emerging markets, and 55” TV panels, which have become standard to the majority of worldwide TV buyers.  Neither category has seen any real price deterioration and those panel sizes (40” – 45”) that have been in short supply due to Samsung Display (pvt) issues, continue to increase in price, albeit at lower monthly increases than seen in 3Q.

So the question is, who do you believe?  Panel producers, who have a vested interest in continuing the price increases that have put them back into profitability, anecdotal inventory reads, TV brands, who are for the most part are setting higher shipment goals for 2017 than in the previous year, despite lackluster TV growth, or Chinese smartphone vendors, who expect to see sales from inventory during the 1st quarter?  We always go with pricing, which is why we track it on a monthly basis, but when all of the signs are pointing in different directions we become suspicious, as we are currently.  At a gut level if feels like everyone is saying what they hope rather than what they expect, which usually leads to a disappointment.   Maybe our gut is wrong, but the stars do not seem to align in this situation, at least for the time being.