While sales of LCD panels in Taiwan are only about 25% of total global panel revenue, display companies are required to report monthly sales which gives us a bit of granularity toward what are usually quarterly statistics.  February sales in Taiwan were down between 3.8% and 7.9% m/m as noted below, while yearly gains were strong, especially given the very weak sales seen last February at the beginning of the COVID-19 pandemic.  Typical large panel m/m seasonality for February is -8.1%, so we look at the February Taiwan panel sales data as slightly better than average, despite the m/m decline.
As we have noted previously, component shortages have been cited as a mitigating factor as to LCD fab utilization, although thus far we have seen little indication that such shortages have made a discernable difference to most panel producers, who have been shifting production to the most profitable panel applications which currently are IT products.  Much has been said about shortages at the silicon level however, with stories that foundries are allocating resources to the highest bidder on an almost daily basis.  While this will eventually stymie some panel production given that display drivers and similar components are not always the most profitable for foundries, we could see some production delays as older inventory is worked down.
All in, February panel sales are looking to be a continuation of the strength seen over the last 9 or 10 months, and that strength seems to be keeping panel sales above seasonal norms.  We do question the elasticity of display product pricing and how these continuing panel price increases will affect device production costs and the ultimate price to the consumer.  High cost display inventory continues to filter through the CE supply chain and brands must deal with the higher BOM, which leads them to higher prices or lower margins.  Some have the ability to share the rapid price changes with suppliers and in some cases with retailers, but the longer panel price increases continue, the less room there is for those kinds of negotiations and the specter of CE price inflation will be the result, a hard sell to consumers who are used to the opposite.

While the US once again ‘studies the issue’ a South Korean provincial government has taken matters into its own hands and has signed a MOU with Australian Strategic Metals (ASM.AU) to begin the process of building a rare earth processing plant in Ochang, South Korea.   The plant, which will cost between $35m and $45m would initially produce 5,200 tons/year with expansion plans for an additional 10,000 tons by 2024.  The Chungcheong Provincial government will provide utility service, licenses, and a grant if the company’s board approves the final project plans, which is expected to be finalized in June of this year.
The objective of the project is to reduce South Korea’s reliance on Chinese rare earths, which are key components in both semiconductor and display production.  With China as the dominant player in the mining and processing of rare earth materials, South Korea is particularly vulnerable to the Chinese government using rare earth exports as a way to counter other trade sanctions.    While the US is a rare earth producer, it is still an importer, with relatively little processing capacity and relatively low stockpiles, a very sensitive issue for both the semiconductor and aerospace industries.  The MOU would put the Australian company’s plant near both semiconductor and display production facilities, and would reduce the country’s dependence on Chinese rare earth imports by a significant amount when completed.

​New TV sets are being released.  While announcements about new models came earlier this year, those sets are actually becoming, or soon to become available.  Along with those new sets is the constant push from retailers, particularly on-line retailers that this is the time to buy 2020 models, as discounting to clear inventory is at a peak (their words).  Given that we have been collecting data on a select set of TV set prices since October of last year, we thought it might be interesting to see how much discounting of 2020 models was actually going on.  We didn’t reprice our entire list, but looked at the top 15 sets, which tend to be the ones featured in ads.  In particular, we have seen a substantial number of ads proclaiming ultra-low prices for OLED TVs, a number of which are part of that top 15 set list. 
According to our data, there were no sets in the top 15 that were selling for a lower price than our last price check a bit over a month ago, and a number of sets, particularly Sony (SNE) models, were higher in price today than last month.  All of the OLED models were at the same price as last month or higher (one model), and even outside of the top 15, sets from Hisense (600060.CH), which had varied considerably in price earlier, remained at the same price as last month.  The only new sets were from Vizio (pvt), which saw a new 65” set on ‘clearance’ ($949), which has sold for under $900 on Amazon (AMZN) last year.
All in, the best time to buy TVs according to our data was in early February, and while some sets are still at those prices, a number are higher today, making the overall average best in February.  While buying TVs is a very subjective purchase, we note that TV set pricing varies considerably during the year, and buying current year models in 1H is usually a poor idea..  Given that on-line sales are becoming a larger part of TV set buying, we note that ads featuring price cuts and discounts can be deceiving, as interim price hikes just before the ‘discounting’ can negate any real savings.  This is a game that has been played by brands and retailers since CE products have been available to consumers and at times gets negative press when discrepancies become obvious, but currently there are ways in which to track on-line CE prices and while they can include 3rd party sellers that can skew numbers, they can give at least a basis for comparison.  “An educated consumer is our best customer”, a slogan for the now defunct off-price retail clothing chain Syms, is the antithesis of the truth.
Extra Note:  LG (066570.KS) is celebrating its 55th year selling TVs by offering to its South Korean customers 2m won ($1,760 US) in ‘benefits’ if they purchase a 2020 8K OLED TV.  While that sounds like a lot, the TV (88”) sells for 47m won, or $41,362 US.  If you are looking for a less expensive deal in Korea, they are also offering $88 in benefits if you buy a 77” OLED TV and a 55” or 48” OLED TV together…

China is intent on dominating the mini/micro LED market, and Sanan (600703.CH) as the country’s largest producer of LEDs is leading the charge with a $1.8b production project in Ezhou that is about to begin sampling product and has begun construction of the project’s phase 2 plans ahead of schedule.    The phase 1 plant is expected to begin trial production at the end of this month after being topped out in early February, and campus facilities are being finished currently.  The project was put on hold temporarily last year, a result of the COVID-19 pandemic.
What makes this unusual, is that phase 2 construction has begun, which is about 6 months early than originally planned, indicating Sana’s willingness to up the stakes in the mini LED battle.  Sanan has been working with Samsung (005930.KS) and Apple on developing mini-LED product and when the project is completed (both phases) it will be able to produce 1.6m GaN, 750k GaAsN, and 84k of packaged product for 4K mini-LED displays.  We estimate completion of phase 2 production by the end of this year.
As we noted earlier, China is making a big push to become the de facto source for mini-LEDs and is competing directly with Taiwan for share.  As can be seen in the table below (see 12/08/20) a number of Chinese mini/micro LED projects were started in 2019, including the Sanan project.  While we expect Sanan is likely the most aggressive of China’s LED producers, other projects should be coming on line this year, with the new capacity creating more competition for this developing market.  Such competition will go toward reducing prices for mini-LED backlight arrays, but there are still process bottlenecks that need to be addressed.  We expect Apple’s entry into the mini-LED device space will help to legitimize dedicated mini-LED production capacity and will go a long way toward improving process. The sooner the better.

​On the first of this month we noted that Chinese panel producer Visionox (002387.CH) trading was suspended from trading on the Shenzhen Stock Exchange for up to 5 days, as the company was notified by its largest shareholder, Tibet Zhihe Capital Management (pvt) that it would be transferring its shares to Visionox’s 2nd largest shareholder, the Kunshan Economic & Technological Development Zone, a city run management company that administers the special economic zone in Kunshan.  Yesterday, the company confirmed the transaction and the stock reopened limit up, although the stock returned to pre-announcement levels today.
In typical fashion, Chinese trade press is spinning the transaction, which moves control of the company to a state-owned entity, as a positive event that brings together ‘the resources of Hefei and Kunshan…to further increase the production capacity and market share…leading to a win-win situation and the state-owned institutions.’  While that certainly could be the case, and Visionox is already building new capacity, our experience has been that state controlled display companies are more likely to be mismanaged, particularly as state officials have a relatively short tenure, and I many cases, a reversion to state ownership is an alternative strategy when company and market oriented funding is less than needed.
Visionox is in a good spot currently, as panel prices have been rising, but again the company is still dependent on local government subsidies for both expansion and operations, and we expect will continue to be as new capacity comes on line and begins depreciation.  With competition increasing among small panel OLED vendors, we are not quite as sure that this transaction was one of strength, but we are certainly willing to give it a year to see if the new controlling shareholders can more the company further toward fiscal independence

TV Set producer Vizio (pvt) has filed with the SEC for listing for the 2nd time, with the first filing, made on July 24, 2015 and withdrawn those plans in 2016 after reaching a deal to sell the company for $2b to Leshi Internet Information & Technology Corp, which luckily did not actually occur.  Leshi, aka Le.com (formerly 300104.CH), once known as “China’s Netflix”, was a video streaming service run by founder Jia Yueting, a former tech support officer who purchased a number of companies, including low-end Smartphone producer Coolpad (2369.HK) in 2015, Le Vision Pictures (pvt), a large Chinese film producer and distributor, a video-as-a-service company, started Faraday Future (potential symbol FFIE - SPAC), an electric vehicle development company, and had a very short relationship with China’s Truly (7321.HK) Display that ended in a lawsuit.  Due to issues of leverage and default in China on $72m he owed to Ping An Group (000100.CH), his assets in China were frozen along with holdings in the US and the BVI, with a final bankruptcy filing in 2019 with over $2b owed to various entities.
So Vizio actually dodged a big bullet by not joining forces with LeEco and has been developing its TV set business, starting by the unusual step of finding a home in big-box retailer stores, when they found that the more typical TV retail outlets did not want another brand competing against key brands like Samsung (005930.KS) and Sony (SNE).  Vizio was able to establish its brand with giant stacks of TV sets that were usually right near the entrance to such stores and always seemed to be on sale.  Vizio has been able to produce TV sets that are less expensive than name brands but have almost or the same feature set without any major technical problems, and has established a strong share in North America, which has been as high as #2 for much of the last two years on a unit basis.
Built into Vizio TVs is their Smartcast OS, which is the support vehicle for streaming services and the company’s somewhat controversial ACR system which identifies user content and helps advertisers target relevant ads.  All in Vizio runs a mostly outsourced model with Vizio’s TV set and sound bar production done on an ODM basis, with a mostly ‘hands off’ approach from the company after design input.  The company has a concentrated sales platform in that its four largest retailers made up 85% of device revenue last year, with Best Buy (BBY), Costco (COST), Sam’s Club (pvt), and Walmart (WMT) all contributing greater than 10% each, none of whom have long-term contracts.
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Suppliers:

​Customers:

​Current holders of the company’s private shares are as follows (pre-deal):

Vizio will be the only US based public company producing TV sets under its own brand, with others, such as Westinghouse and RCA licensed to other manufacturers.  While this is an ideal time for a TV set company to come public, given the COVID-19 pandemic’s stay-at-home lifestyle change, the company carries the same cyclical risks and burdens of other TV brands.  Profitable for the last two years and on and off profitability in previous years, will likely continue to be the case for Vizio, but we note that the company has moved far up the scale in terms of credibility as a legitimate TV brand over the last few years, particularly in North America.  We have no stake in the company but we do have a Vizio 55” TV, which is the 2nd Vizio TV we have owned personally over the last few years.  Our experience has been positive.

​Drought is a global issue and an outgrowth of global warming.  While its impact is usually delineated with pictures of dried up rivers, dead fish, or long lines to get water, it also has a significant economic effect.  The semiconductor industry spends about $1b on water and wastewater systems each year and the average semiconductor plant uses between 720,000 and 2.9m gallons of water each day.  That is down from higher number in 2017, with more careful use of such resources, but the average integrated circuit still requires ~2.2 gallons of water to produce, of which 1.5 gallons has to be ultra-pure water.
The world’s largest semiconductor company, Taiwan Semiconductor (TSM) has 9 of its 13 fabs in Taiwan, where the country is facing the worst drought in 56 years. The Taiwan government has assured the population that the island has sufficient water to supply both the public and its key tech industry participants wet until late May when the monsoon rains are expected to alleviate the issue.  That said, during the next few months precipitation is expected to fall short of historical average levels, and while thus far there have been no water-related issues, TSM fabs are running at or near full capacity to meet demand, especially in automotive semis, where shortages are beginning to affect output of new vehicles.
TSM itself has ordered small amounts of water for some facilities top prepare for possible restrictions, and of course the entire island is implementing a $600m program to build 11 water recycling plants, but the program will not be finished until 2026, leaving Taiwan vulnerable.
With 70% of Taiwan’s water going to agriculture and 10% for residential and commercial use, Taiwan’s industries only gets about 20%, and last year’s below average rainfall in many areas and a lack of typhoons (not one hit land in 2020 vs. 3 to 4 normally) set the stage for a difficult year currently, but the government says that recent conservation measures have saved over 700m tons of water giving the island a cushion until late May with an additional month for good measure.    With TSM and other semi fabs allocating production resources due to strong demand, shutting down any foundry line would be a big blow to the industry and to those dependent on their product.  Pray for rain!

At the end of 2019 the Japanese government approved a ~$2.2b program initiated by the Ministry of Education, Culture, Sports, Science & Technology known as the Global Innovation Gateway for All (GIGA).  In that budget was capital allocations for high-speed connections to each school in Japan, and for a PC/Tablet for every elementary and secondary school child by 2023.  The program not only covered public schools and universities, but private schools, who share 50% of the cost, with local governments implementing the network projects, with a 10% penalty if they did not start the program in 2020.  On the hardware side, the program has allocated $450 per student, regardless of the school type or level, for a PC or tablet.  With ~13m students in Japan’s primary and secondary school system, that comes to a lot of PCs and laptops.
While offerings in Japan will certainly differ, in the US, Best Buy offers 40 laptop models selling for under $450, of which 18 (45%) are Chromebooks.  Not all Chromebooks are less expensive than laptops, but given that they are designed to be working primarily in the cloud, they tend to have less storage and less powerful processors than their Windows OS brethren.  Since programs like GIGA described above, are all oriented toward on-line computing, Chromebooks are a solution that allows such programs to meet the budget limits of such vast numbers of students.
The impact of these programs is significant, and we believe one of the reasons why the strength in notebook/laptop demand has reached unusual proportions, even during the COVID-19 pandemic.  Japan itself is the perfect example, with Chromebook sales soaring last year, which we show below, and while the 1.8m units sold in Japan last year represented about 6% of all Chrome book shipments last year, the incremental increase from 2019 was astounding.  Of course, not all of that increase came from the GIGA program, given the COVID-19 outbreak, but Japan is not the only country to implement such programs, although theirs’s is a very comprehensive one.  Given that the program in Japan (and others) are continuing through this year and next, we expect at least some incremental demand in lower-priced laptops and Chrome books.
 

​Solas OLED (pvt), for lack of a better term, a patent troll based in Ireland, has been on a winning roll in court recently, with a victory over LG Display (LPL) in which a license agreement was reached, and most recently a win against Samsung, in which a Texas District Court Jury granted Solas $62.7m, citing two OLED patent infringements, which the company alleged were used by Samsung in its Galaxy S and Note series smartphones.  Solas also has a pending trial against Samsung before the International Trade Commission and has won similar suits against LG (066570.KS) and Sony in German courts.  The company also has a pending suit against Apple (AAPL) in Texas over three OLED patents, which was an outgrowth of failed negotiations with Samsung and LG over licensing, and is putting pressure on both Apple display suppliers by dragging Apple into the suit.

​The Guangzhou government and Hongli Display Electronics (300219.CH) signed an agreement late last year to begin the 2nd phase of the Hongli Mini-Micro LED Semiconductor Display Project, which has begun construction.  The phase II project is in addition to the Phase I, which went into operation in December of last year.  The Phase II project, which is expected to cost a bit over $306m is expected to be in production in the 1st half of next year and will have a capacity for 160,000 75” units, or 10,000m2/month at P0.9.  As we have noted, China has been quite aggressive in building capacity for LED production that is dedicated to mini and micro-LED production, and while micro-LEDs are still a bit down the road, competition in China between its own producers is already ramping quickly, and will serve to bring down mini-LED prices quickly this year.