Chinese companies listed on Mainland exchanges are different from US companies in regard to what and how they communicate with investors and the public.  While much of the information that US investors get from public companies comes from press releases, conferences, and quarterly calls, many Chinese companies are less forthcoming and press releases can be difficult to interpret, aside from the inconsistencies of document translation.  At times however, some Chinese companies can be unusually forthcoming, particularly when it comes to global status or improving conditions, but the everyday grunt work of trying to understand the day-to-day nuts and bolts of Chinese companies can be a challenge to say the least.  Larger Chinese companies that we deal with usually have a large enough IR department that there can be at least the beginnings of Q&A, while smaller ones rarely answer questions directly, but when we do get answers we have to determine how much is self-serving and how much is real information.
In the case of BOE (200725.CH), China’s largest display producer and at times the largest in the world (units), is an influential company in the display space with a wide variety of display and other assets.  On occasion we can get answers to questions but the company is as skilled in ‘corporate speak’ and many US companies.  That said, since the beginning of the year we have been able to get a few questions answered which we list below with the question, the company response, and our comment (red).

• Has the shortage of display drivers affected your business?
  • No, there have been no material shortages that have affected production – ‘material’ is key but we take it at face value as of early March.  Glass and driver ICs are the primary concerns but BOE is large enough to be able to pull glass from a number of suppliers.  Corning (GLW) produces Gen 10.5 glass at BOE’s plant in Hefei (B9) and is the likely supplier for Wuhan, so a pull-in for Wuhan would also mean increasing production for GLW through mid-year at least.
• What is the status of the Gen 6 OLED fabs in Chengdu and Mianyang?
  • Both are in production and are growing with ‘climbing progress’ – We expect this means capacity is available and now looking for customers to fill capacity
  • Flexible OLED yield is >80% for ‘mature products’ – Mianyang would likely not be producing ‘mature products exclusively so overall OLED company yield Is likely lower.  Chengdu is likely above 80%.
• Did you meet your flexible OLED targets last year?
  • Due to COVID-19, we produced about 36m flexible OLED panels in 2020.  Still double 2019. – A 10% miss is just low enough to be acceptable under COVID but no target for 2021.
• What is the status of the Gen 5.5 (B6) fab in Ordos?
  • Currently focused on mid to high-end smartphones but able to produce wearables, etc.
  • Unit volume grew ~8% last year – Unit volume relatively unimportant without size breakdown.  No info on area production.
• What is the status of the Wuhan Gen 10.5 LCD fab?
  • With a design capacity of 120,000 sheets/month the fab was able to run 90,000 sheets earlier this quarter and is in ramp mode, with full production expected by the end of June.  Focus on 32” panels at the onset. – We pull in our production model for Wuhan G10.5 which is a bit ahead of our model.
• What is the status of your automotive display business?
  • #2 worldwide in 8” or over automotive displays (Jingdian subsidiary) with 12.3” dashboard, a-pillar, and OLED taillight.
• What is the status of the Fuzhou OLED fab (B15)?
  • Under planning – We push out our ramp up date to 6/22 with a very tentative notation.
• Do you expect to have any in-cell products this year?
  • In-cell pen technology ready by end of 2Q – No mention of in-cell touch offerings.
• Have you begun mini-LED production?
  • We have delivered mini-LED product to customers – both 65” and 75” – No mention of commercial production to date but TCL’s (000100.CH) 65” and 75” QD Mini-LED TVs sound strangely similar to the BOE mini-LED backlight models, without BOE actually saying so.

Huawei (pvt) is the largest patent holder in China and according to Statista, is the 9th largest patent holder globally of US granted patents, just behind Apple (AAPL) in 2020, and holds the largest number of patents relating to 5G.  While these are important metrics, they become even more important when one compares the number of patent family filings for 5G relative to those for 4G and while no tally has been done yet for 2020, the years between 2017 and 2019 are quite telling with 4G patent families numbering in the hundreds (2006 to 2010 timeframe) while 5G patent families in comparable years number in the multiple thousands, and of the 10,763 (6/2020) granted patent families, 2,893 were deemed to be SEPs (Standard Essential Patents), the most important to the industry.
Why all this focus on 5G patents, particularly Huawei’s 5G patents?  Huawei announced that it will begin charging CE companies for the use of its patents, including those for 5G, and is going to begin negotiations for licensing and cross-licensing with companies that produce mobile devices, in the same sense as others have done for years.  The company expects to see between $1.2b and $1.3b in fees for the period from 2019 to 2021, some of which will include 5G.  Taking it a bit further, the company’s Chief Legal Officer indicated that it will be charging a ‘reasonable fee’ for access to its IP portfolio but will cap the per phone royalty at $2.50.  Apple and Qualcomm (QCOM) have been fighting over the $7.50 royalty Qualcomm charges for each iPhone, which Apple cites as unfair and Qualcomm considers it a small price to pay for the technology.
Huawei says it believes the US trade sanctions against it will not limit its ability to license with US companies as the patents are publicly available, although the situation will likely wind up in the courts considering the growth of 5G going forward.  Apple and Qualcomm reached a settlement in April of 2019 that extends to 2025 (2 year extension also possible) with Apple expected to maintain using the Qualcomm modems in the iPhone family for the next few years, but some of the Huawei IP could sit aside from Qualcomm IP and could require licensing by Apple and others.  Huawei’s well publicized cap at $2.50 was a jab at Qualcomm and a way to point out how reasonable it might be when licensing its IP.

When it comes to 5G speed is king and everybody wants to be the fastest, so OpenSignal wanders the streets in the US testing to see what and where is 5G actually offering high speed service.  In passing they also test 5G smartphones when they have a fixed site and the data in the chart below shows the results of their survey taken between November 11, 2020 and February 26, 2021.  Samsung (005930.KS) is obviously the winner here, with 60% of the top 25 and two of the four folding smartphones, which present their own issues with 5G antennae.  

In the category of ‘most improved’, usually reserved for those in class that need the most encouragement, Apple (AAPL) shines, with a 2.3x improvement in 5G download speed over their 4G offerings, but was far behind in 4G download speed relative to other brands.

​As we noted previously Sharp (6753.JP) had indicated that the board had authorized the sale of its 1.03m shares (24.55% voting rights) in Sakai Display Products, to an undisclosed by ‘unaffiliated’ buyer.  Sakai Display Products is the holding entity for Sharp’s Gen 10 LCD fab in Osaka, Japan.  As of Last Friday the board decided to cancel the sale as the company ‘received a proposal from the assignee to cancel the purchase of SDP shares’.  The company indicated that it is continuing discussions as to the sale of shares but gave no indication as to with whom or whether it was the same party previously noted (they have never disclosed same).  We note that Sakai Display products is owned by Terry Gou, the founder and chairman of Foxconn (2354.TT), the company that owns a controlling stake in Sharp.  At the same time Sharp also noted that it will take a ~$145m loss associated with Sakai Display Products primarily due to Sakai’s impairment, which pushed the equity affiliate into a loss for the 3rd quarter (12/31/20), and was likely ‘clearing the decks’ for the share sale.

​Last September a number of Chinese TV set brands increased prices.  The increases were relatively moderate, between $15 and $30 US, with selected models rising over 15%, but as panel prices have continued to rise, we expect another round of similar or greater price increases to be put in place in the spring, including TCL sets, who have been excepted from most price increases.  TCL owns Chinese panel producer Chinastar (pvt), which not only gives them a guaranteed source of panels but gives them a lower cost than if they were to buy such panels in the open market, meaning from other panel producers. 
This advantage, also shared to a degree by Samsung and LG, can only protect set prices for so long, and we expect TV set prices at TCL to join the next round of price increases regardless of their protected supply.  Chinastar can only survive if they remain competitive with other panel producers and while they might supply some panels to parent TCL for less than market prices, they cannot without underperforming the rest of the industry which shareholders tend to use as a guideline.

​Back in January we noted that South Korean rivals Samsung Electronics and LG Electronics were at odds over the term “QNED”, which both were trying to get approved as a trademark in the US Patent Office.  Both companies seem to have staked a claim on ‘QNED’ despite the fact that the term means different things to each company.  Samsung Display has been developing an OLED/QD technology that uses a blue fluorescent OLED emitter as a basis, along with quantum dots to create an RGB display.  During that development, Samsung found that substituting a blue nano-rod LED structure for the blue OLED material would be an alternative that would eliminate some of the issues that surround the use of blue fluorescent OLED emitter materials.  SDC calls that alternative technology QNED.  LG Electronics has developed a TV technology that combines a more sensitive color filter, mini-LED backlighting and quantum dots, to create an LCD based ‘almost OLED’ TV line that it has recently introduced.  LG calls this alternative technology QNED.
As these are two very different TV technologies, although that will likely make little difference to consumers who will decide on a far less technical basis which is the better of the two, the battle between LG and Samsung continued until the US Patent Office stated at the end of last month that neither could trademark ‘QNED’ as it was an abbreviation for ‘quantum nano emitting diode’, which the USPO considers a generic term and not a unique trademark.  Of course, that applies only to the US, as LG at least, has applied for trademark status for QNED in 11 countries, including Korea, Australia, New Zealand, Canada, and Europe, with Samsung likely the same.  Regardless of the ruling, the word can still appear on products, which will serve only to confuse consumers, most of whom would not know the difference between the underlying technologies.

As we noted yesterday there are a number of demand scenarios that could occur this year with COVID-19 the driving force that will determine the outcome.  The supply side in 2021 however is a 2nd order function as capacity additions and subtractions will be based on demand, which is based on COVID-19 outcomes.  While this complicates things a bit, in reality the large panel capacity outlook this year is determined by producers in two regions, South Korea and China, given their combined share of the large panel display market (area) was 79.1% last year.
Before COVID-19 became global large panel prices had been in decline, and both Samsung Display (pvt) and LG Display (LPL) the two large panel producers in South Korea, had been making plans to reduce or completely end large panel LCD production.  Not only was this a function of large panel pricing which put many panel producers in loss mode, but was also a function of the increasing competition from Chinese Large Panel LCD producers, who had been adding capacity for a number of years and through construction and operating subsidies, were able to produce commodity LCD panels competitively.
As the COVID-19 pandemic both reduced worker availability and increased demand for certain large panel products, the large panel market tightened and panel producers began to see profitability.  This changed their outlook, and Chinese capacity expansion plans that had been put on hold began again.  At the same time, both Samsung and LG reevaluated their plans for reducing their large panel LCD capacity, given a more profitable outlook, and most of those plans, which would have been implemented at or near the end of last year have been postponed. 
Postponed might not be the proper word here, as we suspect both Samsung and LG will reinstitute those large panel LCD capacity reduction plans at the first sign of a change in large panel price direction, given that the competition from China remains the same or has increased, so while speculation that such plans by Korean large panel LCD producers have been extended through 2021, we believe those plans could change in a heartbeat.  At this poi9nt in the year we have little choice but to make certain capacity assumptions for all producers based on current circumstances, but as we did on the demand side, there are a number of possible scenarios for capacity, based on the global COVID-19 pandemic and how it has and could continue to change our lifestyle.  Rather than do what would be some very complex calculations, we have chosen to lock in a capacity scenario at this time in order to plot the industry outcome against the scenarios we created previously.  Hopefully we will be able to set up an ‘if…then’ set for all 16 possible supply/demand scenarios at a later date, but for now we use the capacity data indicated below.

For each of the demand scenarios we mapped out yesterday, we show how that demand will match up with large panel LCD capacity this year, along with the static results from 2020 for comparison.
In the “Slow Burn” scenario, after a year (2020) where demand outstripped supply in three of four quarters, oversupply levels off and at its worst sees ~4.3% of yielded overcapacity, which would likely see panel prices stable or declining.  Again we note that each of these demand is plotted against t same supply model.

​In the more draconian “Black Diamond” scenario, the oversupply worsens as the year progresses, leading to what would likely be a rapid decline in large panel prices in 2H ’21.  We note however that our assumptions on yield are also static in each scenario, which would mean that even in an overcapacity situation, panel producers continue to run at high utilization rates, which while it might happen for a short period of time, would likely not continue to be the case if panel prices began to fall rapidly.  That said, there could still be room for panel producer profitability as panel prices decline, given the steep rise they have taken over the last few months, but we expect if the “Black Diamond” scenario were to take place panel producers would begin to reduce utilization at the end of 2Q.

​In the “New Normal” scenario, as we noted yesterday, demand increases and along with that panel producer optimism toward capacity expansion plans also increases.  While there is a slight bit of yielded overcapacity even in this scenario, much will depend on plans at Samsung and LG toward their large panel LCD capacity, given they would likely continue to produce at current levels for the year.  If either makes the more long-term decision to wind down capacity further, even this small amount of large panel LCD overcapacity could evaporate quickly and tighten the market, raising panel prices further.
 

In the “Avalanche” scenario, even with the quick drop off in demand seen in yesterday’s charts, producers continue their optimistic view toward capacity expansion and modest yielded oversupply continues, keeping panel prices relatively stable throughout the year.

Lastly we look at the “Average” of all the scenarios, where there is moderate overcapacity for the 2nd half of the year.  While we do not count the average as a scenario, it does smooth the variations in the more specific demand scenarios and represents a middle ground for those that do not see the extremes this year.

​All in, we note that there is one factor that could change both sides of the large panel LCD supply/demand equation and that is the consumer and device elasticity.  We have seen some consumer level price increases as panel prices have increased, but as lower cost panel inventory is depleted overall device prices will continue to rise.  There is certainly a lag between when panel prices rise and consumer device prices rise as brands are willing to work against lower margins until they reach a pain point.  We expect that in some of the scenarios, particularly where yielded capacity remains tight, continuing price increases will begin to have a more onerous effect in 2H, particularly in the TV set space, but it is only one factor along with a host of others that could affect panel and device prices this year.  Each month we will update both supply and demand models with actual data to see which of the scenarios are closest to reality.

2020 was an unprecedented year (there we said it, and we won’t again).  The COVID-19 pandemic has made such radical changes in the way we interact and communicate that we had to throw out any normal means of understanding and predicting how the year would play out in the world of consumer electronics.  While we might have seen the worst from COVID-19, there is still little understanding as to whether the changes made to human society by the pandemic are permanent or transitory, which adds another level of uncertainty to the art of predicting what this year will look like to CE companies and those who invest in them.
Some were obliged to make predictions last year, only to change them a number of times as the variables shifted, which seems a bit counterintuitive, and we expect the same sources will do the same this year, despite the ‘unlevel’ playing field we are still on.  We prefer to do something different, creating a number of scenarios that represent possible outcomes for the CE space and letting investors decide which looks most like their world view, since that what they would do with a single estimate regardless.  By presenting and explaining each scenario, we believe investors can see how each progresses and the outcome of each and providing a away for us to update each scenario as the year progresses with actual data.
Each scenario is based on four device categories, notebooks, monitors, and tablet, which make up much of the CE space other than smartphones and wearables. The scenarios estimate monthly and quarterly display panel unit volume for each category along with 2020 data, which will be the same for all and a reference point.  Each scenario tracks the monthly progress of panel demand based on that particular set-up and we summarize the data for each at the end.

 
Scenario 1 – “Slow Burn”

• COVID-19 weakens a bit early in the year but remains a part of the global landscape throughout 2021.
  • Notebook demand weakens slightly early in the year but remains strong as work-at-home remains active as an alternative to crowded offices and forced transportation.
  • Based on the above, monitor demand weakens slightly as office demand does not improve.
  • TV demand weakens as students return to physical classes in the Spring.
  • Tablet demand continues to rise as an alternative to more expensive notebook purchases, leading to an overall gain in panel demand of 0.9%.

Scenario 5 – Average
While this is not a scenario in itself, as it does not have specific parameters, we thought it helpful to take an average of all four scenarios to see what that looks like on its own.  

​All of the above are calculations as to unit volume demand, and while this is an important metric, it is only a part of the more important calculations that drive the display industry and consequently the CE space.  Given that unit volumes do not indicate the necessary production capacity needed to produce same, it is essential to convert unit volumes into production area in order to better understand whether the industry can meet such demand.   We convert unit volumes into area calculations and match them to our industry expectations in the next segment, which should further define these scenarios in terms of industry capacity and tangentially panel pricing.  While there are other aspects to panel pricing aside from absolute demand, we look at these calculations as indicative of how panel prices will respond to the various scenarios and give us a basis for making adjustments on a monthly basis as the year progresses.

​Chinese TV brand Hisense (600060.CH) has issued a notification indicating that due to recent continuous increases in the prices of raw materials, panels, and silicon components, the company will be instituting a price increase of 5% to 10% on its TV products as of March 16.  Hisense has roughly a 9% share of the global TV market, up from 6.5% in 2019, which is close to that of its Chinese rival TCL’s (000100.CH) 10.9% (), but far smaller than leader Samsung (23.6% - 3Q 2020).  With LG Electronics (066570.KS) holding the #2 position at 11.6%, the race is getting very tight among the top players and Chinese TV brands have been making progress penetrating additional markets including the US where both brands are offered by major CE retailers.  While the price increases seen here are relatively minor, we expect more to follow across the entire TV space as panel prices have continued to rise over the last few months.