Back in mid-March we noted that Shanghai based Tianma Microelectronics (000050.CH) was expected to restructure its assets through a non-public offering where companies of China Aviation International (pvt) (aka AVIC), a state owned aerospace and defense company, will sell their portion of Xiamen Tianma, the display producing assets owned by a JV between China Aviation and other investment and industry funding organizations, which are managed by Tianma Microelectronics.  As part of that deal, entities of AVIC will retain an ownership of 31% of Tianma itself and Tianma will issue shares to 10 or less non-public investors to raise capital for the transaction and its G6 LTPS fab, which is slated to begin construction this month.
Now the company is expected to buy a 78.1% stake in what we believe is a JV between Tianma and NLT Technologies, formerly known as NEC LCD, a division of NEC Corp (6701.JP) and AVIC.  The transaction for the US JV stake is expected to be priced at $5.268m, valuing the JV at $6.7m, and making the entity a wholly-owned subsidiary of Tianma, which the company believes will allow it to improve the existing assets and reduce layers of management, the same statement made concerning the AVIC purchase.
Tianma’s current share of the display market by capacity is ~1%, with a focus on small panel display production.  Tianma has restructured a number of times over the last few years under the same basic mantra of ‘increased efficiency, faster time to market, and flexible customer support’ but has been unable to grow significantly over the last three years.  As can be seen in Fig. 2, the company is currently adding significant Gen 6 capacity with both LTPS backplane and flexible OLED lines for which it is raising capital as noted above, but even with the fulfillment of its timeline goals, Tianma will remain under 2% of the total gross industry capacity by 2020.  Earlier this week we noted that Tianma began production at its Wuhan, China OLED fab.  The company generates ~87% of its revenue from small panel production and is the smallest of the three Chinese small panel LCD display producers (BOE – (200725.CH), Infovision (pvt) & Tianma), with a 19.8% share of Chinese small panel monthly revenue, but holds an 8% share of worldwide LTPS capacity.

The Chinese press has indicated that Kunshan, China based Visionox (pvt), known for its PMOLED[1] displays, has expanded its production at its Gen 5.5 production line, and now has reached its phase 2 goal of 15,000 sheets/month.  The company has been producing 5.5” and 5” FHD and HD Displays, along with 1.2” circular and 1.45” AMOLED displays on a 5,000 sheets line previously.  What makes this noteworthy, should it be confirmed as true, would be timing, as we had expected the phase 2 expansion (15,000) to be completed in September of 2018, and phase 3 (15,000) to be completed in September 2019.  We do note that back in December 2016, Visionox signed a supply contract with SFA Engineering (056190.KS) for $93.5m worth of equipment and services for the expansion of the Visionox Gen 5.5 line, but with a scheduled delivery date of August 2017.
Both translation and hyperbole issues surround a number of smaller Chinese companies on a routine basis, making it a bit difficult to pinpoint the level of production at such companies, and Visionox is no exception, as the press seems to be quoting two company managers that stated, “In January (2017), the project has not yet formed such a scale, Nissan (poor translation of fab location or company name) can only 3,000, and now the Nissan (sic) can reach 15,000.”  This seems to imply that the new 15,000 sheet/month line is in production, a few months ahead of the SFA equipment delivery date.  Again, the quotes here could be referencing the actual capacity of the phase 2 expansion when completed, which is more likely the case.  Further references included a total of 12 OLED lines, which would represent a full 30,000 sheet/month build out, at 2,500 sheets/month each, but no timeframe is mentioned for completion.
We do not update our OLED industry model without at least tacit confirmation that the Visionox fab expansions have been pulled forward by such a significant amount, although we do expect that the small lines are being added on an individual basis, so the reference to 15,000 sheets of additional capacity is likely to be added in 2,500 sheet increments, and the ramp time for each should be at least 6 months,  While this could put some capacity at Visionox into production ahead of our estimates, we are cautious about making any major changes in scheduling.  As it stands, even with the full phase 3 capacity build out, Visionox would represent slightly over 1.5% of OLED capacity in 2020.


[1] PMOLED – Passive Matrix OLED

The China Electronics Video Industry Association has indicated that the domestic ‘color’ TV market say a 5.2% decline in shipments to 11.79m units in 1Q 2017, although TV retail sales were up 1.8% due to price increases.  The price increases have been a discouraging factor to Chinese consumers who are used to generally declining TV set prices, and question why the change has occurred.  A representative of Innolux/Sharp offered this explanation, “..in recent years, East Asia and Southeast Asia (have seen) more natural disasters, largely affecting the production capacity of the LCD pane (industry), especially the earthquake and flood disaster,” and added, “the price increase should be a gentle rise curve…like the elevator up.”
While the ‘it’s not our fault’ explanation is quite common in the display space, there is a bit of truth there, but more so the lemming-like nature of panel buyers who stampeded to the edge of the cliff last year and are now facing the question of, “is it better to miss unit volume targets or to meet targets and not make any money?”   Chinese TV brands have reduced the number of new models being released this year by ~25% (even on-line models were reduced by 15%), and it would seem Chinese consumers have begun to make that decision themselves, but there is hope on the horizon, as Chinese LCD producers continue to add capacity, despite the unusual capacity drop this year, which should begin to reduce supply constraints, real or otherwise.
We track over 130 a-Si display production lines, 47 LTPS and 22 Oxide lines, along with over 80 OLED lines, and we expect a-Si capacity to resume expansion toward the end of this year, as a number of new lines begin ramp procedures and production.  Does this mean we go back to historic panel price reductions and increasing TV set margins?  Likely not in such a smooth pattern, but consumers will only accept higher prices if they think they are getting something worth the premium, and there has been little to incentivize those buyers in recent quarters.  If prices do not decline enough to grab consumer attention this holiday season, we would expect to see 2018 as one where panel prices return to historic reductions, attracting consumers back into the TV market.
But, even the Chinese display industry has worries in the back of its mind as, despite the government’s aggressive support and funding of the display industry, there is a fear that adding too much capacity might also be a problem, as it was in previous cycles for the rest of the industry.  There are a number of ultra-large format fabs being constructed, planned or considered by a number of panel producers that are capitalized well enough to make them a reality, and while the pressure to gain share in the TV panel space, especially at large screen sizes, is enormous, at what point does it become self-defeating?  We only bring it up because it has happened before, and it rarely gets mentioned until it is already affecting the industry, but it is something to think about for 2018 and beyond.

Korea based UBI research has indicated they believe Samsung Display has begun construction on a new Gen 7 OLED fab (A4) that will be in production as early as 2Q 2018, with the theory that Samsung Display wants to stay ahead of its rivals, who are basing much of their OLED production on Gen 6 fab lines.  A gen 7 line would have the advantage of being able to produce more devices/sheet, but the true test is really efficiency, which is most important with larger size displays, particularly TVs.  There are also problems associated with larger size panels in reference to tools related to deposition as glass sizes move above Gen 6, and while UBI cites the fact that Samsung Display had previously been producing OLED TV displays on Gen 8 OLED lines, we note that Samsung Display ended that production due to its inability to produce panels at what they considered reasonable cost and closed its Gen 8 (V1) pilot line.
While it is certainly possible that Samsung Display would be encouraged to build such a Gen 7 line for small panel production in light of the necessity to supply its internal customer (Samsung Electronics), a number of Chinese brands that are looking to expand OLED smartphone offerings, and Apple’s foray into OLED for the IPhone, there has been considerable speculation concerning conversions of existing LCD fabs to OLED, with little comment from Samsung Display.  We believe the conversion of the L7-1 Samsung LCD fab is progressing (from Gen 7 LCD to Gen 6 OLED) and they have yet to decide on when and if the L7-2 fab will be converted, and there is also speculation that the L6 LCD line could be converted from LCD to OLED but little on details has been available.  We have built L7-1 into our OLED industry model and L6 in aggressive scenarios, but we hesitate to speculate further until we can get confirmation from tool vendors that can specify Gen 7 formatting.  

LG Electronics (066570.KS) has decided to release the LG X power2 smartphone in June in Korea.  What makes this phone different is that it comes with a 4500 mAh battery, which is 50% larger than the Galaxy S8 and is 1200 mAh larger than the LG G6 smartphone, which has the biggest battery of all LG smartphones to date.  LG has stated that the phone and battery will allow users to watch videos for 15 hours or browse the internet for 18 continuous hours.  The company also has added rapid charging that can restore 50% of battery capacity in 1 hour.
While Samsung takes the more conservative battery route, and rightly so, LG seems to want to satisfy those Korean consumers that need extended time with their smartphones before charging, particularly those consumers that have ‘frequent outside activities’.  That said, the phone will not be released in any other countries as “…it wants (LG Electronics) to satisfy demands from South Korean consumers wanting a battery with large capacity due to the use of a smartphone for long time and to observe responses from consumers at the same time.”  Hopefully, this does not mean, “if it doesn’t explode, we will sell it in other places”.

Rather than spending hours reading through comments from lovers and haters of the new Samsung Galaxy S8 phone, we cede to a survey done by Morning Consult, a DC based pollster who ran a survey earlier this month (2,202 respondents) focused on smartphones generally, and more specifically on how consumers respond to each feature on the new phone.  Starting with the brands themselves, the data indicated that on an over basis, Apple (AAPL) edged out Samsung Electronics (005930.KS) by 3%, within a 2% margin of error, but among women, that edge increased to 7%, and strangely, among those respondents who watch (maybe watched) the O’Reilly Factor, the numbers were only slightly different, at 33% for Apple and 32% for Samsung.

More detail reveals what features make consumers more likely to buy the Galaxy S8, hopefully yielding similar results to Samsung’s expectations, with ‘waterproofing’ being the most important draw, and the curved edges being the least (does this bode poorly for flexible phones?).  Given that getting older smartphones wet was a major cause for invalidating the warranty and/or getting a new phone, likely before all payments were made, it is understandable that consumers would be most inclined to want this feature, but Bixby, at 37%, is certainly going to feel a bit distraught after the daily fanfare that AI has been receiving from the media.

However, a teardown of the S8, as it appeared in the Korean market, reveals considerable detail as to the cost structure of the phone, with a BOM of $301.60 and manufacturing cost of $5.90, for a total cost of $307.50.  This is considerably higher than previous models, $43.37 higher than the Galaxy S7, and $36.29 higher than the S7 Edge, which is closer to the S8.  The 5.7” OLED display, which includes touch, represents 28.2% of the BOM, which compares against the Galaxy S7, where the 5.1” display cost $55 and represented ~22% of BOM, and the iPhone 7 where the display cost $43 and represented 19.6% of the BOM.  The unsubsidized Galaxy S8 64 GB version sells for ~$720. 
We note that the versions of the phone that will be sold in the US and China will use the Qualcomm (QCOM) chipset, while other countries will use the Samsung Exynos chipset.  We note also that Samsung has taken a more conservative view of the battery after last year’s Note 7 meltdown’s, with a less dense 3000mAh battery for the S8.

As we have noted in the past, panel demand and consequently panel pricing was extremely weak in the 1st half of 2016.  This makes 2017 y/y comparisons a bit less relevant, as the gains will be greater than normal until 2H 2017.  It can be seen in Fig. 1 how the comparisons turn positive starting in September of 2016, and have remained so thus far.  The question is will they be able to sustain such positive y/y momentum for the rest of 2017, which we believe would be very difficult as we near the 2nd half.  The rate of change had been increasing since January 2016, but peaked last month and should see harder comparisons for the rest of the year.  Tables with March panel producer winners and losers are below.
On a m/m basis, things look a bit different, with comparisons following a more seasonal pattern with January and February being weak comparisons, and March being a typical ‘bounce-back’ month.  However, we note that during the previous months, panel pricing has been on the rise, while shipment growth (large panel) has been erratic.  Panel pricing in April has been flat to down in all categories, so shipment growth become more important, and would be necessary to sustain positive m/m revenue gains across the industry.  This leads us to expect weaker results in April from panel producers.  At the brand levels, although it is a bit early to expect margin improvement, CE brands will begin to see less pressure on costs and will begin to have the ability to start being more aggressive toward retail discounting, at least in theory.  That said, more likely CE brands will not start discounting to any large degree at the onset of 2Q, as they now have the chance to increase profits.  If panel prices remain flat or decline going forward, the CE industry’s profitability will move from the panel producers (supply) to the CE brands (demand), a more typical scenario.  This has significant implications for the industry, but given that May could be more of a defining month, we wait a bit before making assumptions for the rest of the year.

Shanghai based Tianma Microelectronics (000050.CH) will begin production at its new Gen 6 OLED fab as of today, according to the company.  The fab, which is in Wuhan, China is a Gen 6 two phase project that was started in January 2016, and has the gross capacity of 30,000 sheets/month when fully built-out, which we believe will be in late 2018.  While the fab is now ‘lit’, meaning the line is operational, we do not expect much in the way of actual commercial production until the end of this year at the earliest, as while Tianma has considerable experience in the production of small panel LCD displays, it has little experience in small panel OLED display production.  The fab also produces LTPS backplanes, which can be used for both LCD and OLED displays, so the near-term production could be oriented more toward LTPS until the OLED lines are optimized.  Tianma also has a gen 4.5 OLED pilot line which has been in operation for a number of years.
While the company showed typical conformed/flexible OLED displays at the lighting event, we believe the new fab is based on rigid substrates, and flexible OLED demos are being produced on the pilot line, which is the case for most other ‘flexible’ OLED producers.  Tianma holds a relatively small share of gross industry capacity (1.2%) but holds an 8% share of worldwide LTPS capacity and a 3.6% share of worldwide small panel capacity.  Tianma is a significant provider of LCD panels ranging from 19” to 1.25: to Chinese CE and industrial brands.

Both the Taiwan and Korean trade press have indicated that Apple (AAPL) will be testing the use of micro-LED technology in the 2018 version of the Apple Watch, with the basis for the speculation a comment from IDC.   The focus is a plant in the Hsinchu Science Park in Taiwan, which was opened in 2015 with little fanfare, in fact, the Apple name never appeared on the factory.  The theory is that Apple will substitute micro-LED based displays for the OLED displays that are currently being produced for Apple by LG Display (LPL), and should the test prove successful, the technology would be adopted for other mobile devices.  The plant in Taiwan will be producing the relatively small quantities needed for the Apple Watch.
We have noted a number of issues that surround the use of micro-LEDs in previous notes and believe that Apple has always extended its R&D reach to encompass all potential display technologies. While not all come to fruition, the company would be remiss if it did not pursue micro-LEDs, along with OLED technology, however producing a relatively small number of specific devices does not mean there is a clear path to mass production and widespread adoption.  We have learned in the display space that there are few instances when a particular technology is ‘fits all’, and each, hopefully, has a place in the display supply chain, just as the case in solid state lighting where we believe LED and OLED lighting will share the overall market or in the TV space where OLED and quantum dots will both be available.  Even if the ‘test’ is successful (more from a manufacturing and profit standpoint, as consumers would see little difference), high volume production of micro-LEDs for larger displays would not be available until 2020, assuming the manufacturing issues could be addressed.

Merck KGaA (MRK) has launched a three year program funded by the European Union’s Horizon 2020 R&D program that is developing materials and device architectures using TADF[1] materials.  Merck will coordinate the development project along with partners Microoled (pvt) (based in Grenoble, France), the Fraunhofer Institute for Applied Optics & Precision Engineering (pvt), based in Jena, Germany, Durhan University (pvt) in the UK, and Intelligentsia Consultants (pvt), based in Luxembourg.
The program is working toward improving TADF characteristics, which to date, have yet to meet commercial specifications.  TADFs are fluorescent materials that can be ‘tricked’ into performing in a similar manner to phosphorescent OLED materials, which have much higher light output levels than fluorescent materials.  As TADF materials are based on materials that are not based on heavy metals such as platinum or iridium, they are expected to be less costly than the phosphorescent emitters materials used in OLED devices today.  Further, the development of a blue phosphorescent emitter, the holy grail of organic material science, might be easier using TADF materials, at least according to companies such as Cynora (pvt) and Kylux (pvt), who are developing such materials independently. 
While TADFs have been touted as ‘OLED killers’ by some (usually those with a serious stake in the technology) there continues to be developmental issues that currently limit their use to R&D projects, the primary being lifetimes.  Just as OLED phosphorescent OLED materials went through a ‘lifetime extension timeline’ during their development, TADF materials will do the same.  We do expect to see some TADF materials sampled late this year or early next year, but the adoption of these materials, even the more commonly used red or green emitters, will take time, both from the specification standpoint and from the manufacturing supply chain.  While this could mean that we don’t see real commercial TADF material adoption until 2019 or 2020, they do represent a less expensive alternative to metal-organic phosphorescent materials.  It is far too early to predict whether or when this will have an impact on the OLED supply chain, but new projects like the Merck/EU project above, will help to accelerate their development and bring them closer to commercial adoption, and panel producers are paying close attention, as Kyulux investors include Japan Display (6740.JP), JOLED (pvt), LG Display, and Samsung Display (pvt).


[1] Thermally Activated Delayed Fluorescence