According to the Korean press, Samsung Display (pvt) and LG Display (LPL) are re-evaluating plans to close a number of LCD fabs and convert them to OLED production facilitates.  The original concept for both companies was to take relatively low efficiency LCD fabs and either completely close the fab, or convert them to small panel OLED production, which has been in relatively short supply and would potentially be facing increased demand from smartphone brands wishing to add or increase the ratio of OLED smartphones to their lines, in particular, Apple (AAPL) and Chinese brands. 
The conversion of such LCD fabs to OLED would give these producers more OLED capacity, however it also has the effect of reducing the supply of LCD display panels, and while in recent weeks the upward pressure on LCD panel pricing has moderated somewhat, the closings that have already taken place and the prospects for additional closings will keep the display industry in a relatively tight supply situation.  By holding back the prospective closings, industry participants will better be able to fill demand for those panels that have seen substantial price increases, and participate in the improved pricing and margin environment.  

The potential decision by Samsung Display (Matters have been made worse in this regard due to the acquisition of Sharp (6753.JP) by Hon Hai (2371.TT)/Foxconn (2354.TT) and their subsequent decision to revive the Sharp brand.  This reallocation of display panels by Sharp’s management, caused them to curtail panel supply to Samsung Electronics (005930.KS) and Hisense (6000060.CH), the world’s 3rd largest TV brand behind Samsung and LG Electronics (066570.KS), tightening the market further, and forcing Samsung Electronics to go to rival LG Display for replacement panels, limiting LGD’s ability to supply its other potential customers.  We believe Sharp had been supplying ~10% of Samsung Electronics’ display panels before the change last December.
Of course altruism for the industry is not the only motivation here, as Samsung owns Samsung Electronics, which provides a significant portion of the company’s profitability, and Samsung Display is a subsidiary of Samsung Electronics, so by missing out on the ability to capitalize on the TV panel price increases seen in recent months, the overall Samsung profitability ‘chain’ becomes limited.  But what about OLED?  The objective for Samsung’s conversions was to take less efficient LCD plants and convert them to small panel OLED production, which has been in relatively short supply since it became a viable commercial display product.  As small panel OLED becomes more popular, along with the potential for Apple to add significantly to demand with an OLED based iPhone display, Samsung Display, as the primary supplier (90%+ of small panel OLED), needed the converted capacity to supply the industry with OLED displays, another profitable product for the company.
The tradeoff is complicated, as Samsung Electronics, as a TV brand, has seen rising costs and lower TV margins over the last year due to the panel price increases.  Should Samsung Display limit its plant closings and conversions, the result would likely be panel price stability, or the potential for panel price declines.  This would be less desirable for Samsung Display, but very helpful to parent Samsung Electronics, who would see TV margin improvement.  Samsung Display also plays into the equation, as the timing of the conversions, some of which would not be completed until 2018, would leave the company without revenue in either the LCD or OLED categories for these fabs, so the question then becomes, is it better to continue to produce what are now higher margin TV panels on the fabs in question for the near term, or lose the near-term revenue and build the potential for additional OLED capacity down the road? 
Normally, Samsung takes the longer view, and tends to build for the long-term, but things are moving far more quickly in the display space than they have over the last few years, and the issues facing Samsung management are far different than in previous years.  With the Samsung Electronics vice-chairman under indictment, and the dissolution of the Samsung office that controlled affiliates as a group, each affiliate has greater control over their own fate, and the affiliated division heads now in control have a far more detailed view of the issues facing the consumer electronics and display industries than the previous oligarchy.  Will this mean better decisions?  That depends on how well the affiliates work with each other, but we would expect the focus will be somewhat shorter-term and oriented toward near-term results in order for the ‘new’ management to prove their abilities and expertise. 
We doubt the changes will be as cut and dried as the Korean press might indicate, and such decisions are more likely to postpone rather than eliminate, but will this affect Apple’s OLED project for the iPhone 8?  Not likely, as we would expect that any agreement between Apple and Samsung Display would be based on a pre-payment toward ‘available volume’, giving Apple semi-dedicated production lines at Samsung Display, based on an agreed upon schedule of capacity expansion (which would be partially financed by an Apple pre-payment).  Would it change Apple’s ability to release an OLED iPhone this year or was the potential decision by Samsung to slow the conversions (if true) due to Apple’s less aggressive OLED plans?  We will map those rather complex scenarios in days following, but we can look at the impact of the potential Samsung and LG changes.
Samsung Display has three commercial OLED facilities named A1, A2, and A3.  A1, the smallest of the three, has been producing OLED displays since 2009 and uses a gen 4.5 rigid substrate.  A2 has been producing since 2011, and is a gen 5.5 fab, but has some capability for both rigid and flexible substrates.  A3, which began limited production in mid-2015 is a Gen 6 fab that is designed for flexible substrates, and continues to be expanded.  While Samsung has other R&D and pilot lines, including the Gen 8 lines where it originally produced OLED TVs, their OLED production is based on the three ‘A’ lines.  The two major conversion projects were the conversion of L7-1, a Gen 7 LCD fab that was put into service in 2005, with a capacity for 140,000 sheets/month.  The conversion to a Gen 6 OLED facility was expected to be done in two phases, with the 1st being put into ramp mode in 3Q 2017 and the 2nd roughly a year later, but the total OLED capacity would be close to 44,000 sheets/month. The 2nd conversion, a Gen 5 a-Si line going back to initial production in 2003 has the maximum capacity of ~200,000 sheets/month, with expectations for the three phase conversion producing 60,000 sheets/month of mixed rigid and flexible OLED capacity, scheduled for phase 1 ramp early in 2018, although few details as to substrate size format have been revealed. 

Table 1 gives a rough idea of how the conversions would affect Samsung Display’s overall capacity on a quarterly basis, but does not give a picture of how the conversions would affect Samsung’s overall capacity on a monthly basis.  In the case of L7-1, we believe the fab began to slow production in 3Q 2016, at least on the 1st line, with the goal of the actual conversion taking place at the beginning of this year, and limited OLED production beginning in September 2017.  This timeline, which is just for the 1st line, leaves a hole in Samsung Display’s production that extends for a minimum of 9 months and potentially for a year when including the downward ramp of L7-1 production last year.  The L6 conversion, which we believe was still on the drawing board until recently, has a similar negative impact on Samsung Display’s overall capacity, and an even more tenuous timeline, but the fact that the conversions would likely take ~9 months still remains.  Figure 2 below gives a more ‘timeline’ representation of the Samsung Display conversion process as it stood before today’s press conjecture, and as can easily be seen, the impact on Samsung Display’s overall capacity is quite significant.  We note that this chart includes only the conversion of amorphous silicon backplane large panel fabs, as fabs based on LTPS[1] or IGZO[2] would tend to be used for small panel production.

​
[1] Low Temperature Poly Silicon

[2] “Oxide” – Indium Gallium Zinc Oxide

While translating these numbers into unit volumes and factory revenue will take a bit more time, and while TV panel production always seems to have the press headlines, small panel production generates more revenue than large panel.  While this is not the only consideration, it certainly enters into Samsung’s decisions.  One more important issue is that of equipment, in particular OLED deposition tools.  We have indicated many times in the past that the production of OLED deposition tools is limited to a very small group of companies with Canon Tokki (7751.JP) the share leader.  Tools such as these have lead times of 9 months to 15 months, and therefore tools have to be ordered far in advance of need, and have to be configured to the specs of the OLED lines.  Changes to Samsung Displays OLED capex spending timeline could have an effect across the entire industry, giving others access to Canon tools that they might not have had if Samsung Display followed what was thought to be its OLED conversion schedule, although the likelihood of Samsung Display doing anything more than storing a pre-ordered OLED deposition tool for a few quarters would be very unusual.  That said, others who supply materials used in the OLED process, would see changes to buying patterns should Samsung Display make any changes to its conversion schedule.
While all is still at the conjecture stage, any change in plans by Samsung Display would be considered significant, especially as to how it affects the OLED display space, the OLED supply chain, and panel pricing across the board.  We will continue to evaluate these potential plan changes in days to come, with a full evaluation of the impact on Apple’s OLED plans, and will model a number of scenarios that will detail the overall impact on the display industry. 

RiT Display (8104.TT), a division of Ritek Corp (2349.TT), has been a producer of PMOLED displays since 2000, and while few know the name relative to the typical list of OLED producers, the company is a dominant player in its particular OLED display niche, PMOLED.  In this niche, we believe they are the volume leader, and are expected to be increasing capacity from 15,000 sheets/month to 18,000 sheets/month in the near-term, with the ultimate goal of 25,000 sheets/month by the end of this year, a 66% increase in capacity.  The Rit Display line is based on a Gen 2 substrate, which is 370mm x 470mm, and would be considered small relative to typical commercial OLED lines, but the RiT product line, whose displays range in size from .48” to 3.21” (average 1.29”) can produce over 350 displays/sheet, which translates to 5.25m units/month, increasing to 8.75m/month by the end of the year.
Most investors are a bit fuzzy on the difference between AMOLED[i], the most common form of OLED display, and PMOLED[ii], a form of OLED display that is used less often, but is RiT’s stock and trade.  A Passsive Matrix Display addresses each sub-pixel by sending signals down a mesh of horizontal and vertical pathways.  At the point at which the two meet, the sub-pixel (color dot) is turned on, with the intensity based on the amount of current reaching the sub-pixel.  This is a simple addressing scheme, but due to the large number of ‘addressing lines’ can only be used for relatively small displays. 
An Active Matrix OLED display uses the same sub-pixel arrangement, but does not have the horizontal and vertical ‘addressing lines’.  Instead, each sub-pixel is controlled by a TFT[iii] circuit that senses the amount of current (brightness) being sent to the sub-pixel, and maintains that level until it is given new information.  This avoids the necessity to keep high current flowing to each sub-pixel and reduces the power consumption of the display.  While this is a simplistic description, it illustrates some of the limitations of PMOLED relative to AMOLED, but there is certainly a place for PMOLED displays, particularly in devices that do not need a rapid refresh rate, such as CE device panel displays or monochrome wristbands.
While considered the poor stepchildren of AMOLED displays by many, the PMOLED business was ignored as full motion video became a staple in the mobile display business, however PMOLED has seen a resurgence as low function displays, such as the wrist bands seen below, become more popular.  We believe the abilities of PMOLED to provide a relatively low power demand display in circumstances where a full color OLED display would be overkill, is leading to the expansion by industry leader RiT Display.   While OLED smartphones and OLED TVs get most of the attention, lowly PMOLED displays seem to be moving from sitting with the cousins at the kid’s table to moving up sitting with Grandma at the adult table in recent months.


[i] Active Matrix OLED

[ii] Passive  Matrix OLED

[iii] TFT – Thin Film Transistor

KT Corp (KT), aka Korea Telecom, has introduced a system at the network level that can increase smartphone battery life up to 45%.  The technology, which is being applied to KT’s entire 14m LTE user base in South Korea, is an improvement on existing DRX[i] technology, which is currently used.  Smartphone batteries have seen a 12% improvement in battery life over the last three years, while LTE data traffic has increased by 260%, leading to complaints that battery life is decreasing, and while technically this is incorrect, the battery drain from the almost constant pull of data through LTE networks makes it seem so to consumers.
By using the new technology, called C-DRX (Connected Mode Discontinuous Reception), KT says it was able to increase the life of a Galaxy S8 battery that was running continuous streaming videos, from between 9 hours/57 mins. and 10 hours/36 mins. to 14 hours/24 mins., a 45% increase.  DRX technology creates a cycle during which the user equipment (smartphone) takes a break from continuously monitoring the Physical Downlink Control Channel, which carries the data and control signals needed by the smartphone.  While this system helps to reduce battery drain during the ‘break’ cycles, if the data channel is trying to send data while the receiver is ‘resting’, the system misses that data segment, resulting in an average data loss of 0.06% in South Korea.  While that seems small, if your video freezes or jumps, it can be considered important.
The C-DRX technology, which keeps the transmission ‘sleep/awake’ cycles coordinated between the sender and the receiver, holds the ‘send’ transmission when the receiver is ‘sleeping’, and releases that information and data when the receiver wakes up.  Of course these cycles are extremely short, but the ‘off time’ adds up, and becomes the key to extending battery life, without changing the battery composition.  Applications such as news, social networking, advertising, and location confirmation, regularly poll networks for information and lead to continuous battery drain, often not understood by users, but the use of such newer LTE technologies can significantly reduce that drain without significant data loss, and on a general basis, C-DRX can result in a 15% - 20% reduction in power usage while web browsing and even greater reductions when used for streaming video.


[i] Discontinuous Reception

Aixtron (AIXA.GR) announced it has partnered with a major OLED display manufacturer to provide an OLED deposition system that will be used to qualify and develop the tool for commercial production.  The tool, which is based on Aixtron’s OVPD (Organic Vapor Phase Deposition) system, which is licensed from Universal Display (OLED) and based on the work of Dr. Steven Forrest, differs from traditional OLED deposition systems that use VTE (Vacuum Thermal Evaporation) to deposit organic film structures for OLED displays.  The Aixtron system uses the OVPD process, which mixes the organics with a hot inert gas, and a close-coupled showerhead , to reduce the extraneous organic material that builds up in the reaction chamber during the VTE process.  This material, which has to be removed periodically, can flake off and become a contaminant, and wastes a very significant amount of organic material.  The OVPD system is said to increase the material efficiency significantly.
The Aixtron tool being jointly developed here is a small format system, slightly larger than the Gen 1 beta tool (300mm x 400mm) that the company has previously mentioned, but is one step above a ‘proof of concept’ platform, with the goal of qualifying the system in a production environment.  Aixtron will still have to make significant investments to bring the tool to a commercialization stage, which will likely entail a partner or JV, but any process that can increase the efficiency of small or large panel OLED production will be of interest to OLED panel producers and equipment vendors.

​Not surprisingly, Taiwan based Trendforce has indicated that smartphone shipments declined 23.2% q/q in 1Q 2017, to 307.05m units.  While the 1Q decline is not unexpected, it does seem a bit below expectations, which we believe were ~-17.8%, although in recent years the 4Q to 1Q decline in smartphone shipments has been increasing as seen in the table below.  Chinese Smartphone vendors also saw a decline of 25.5% to 141.725m units.

Early last month we indicated that Samsung Electronics (005930.KS) had shown a foldable smartphone demo to a selected group of potential customers at the recent Mobile World Congress, but we have been talking about a ‘foldable’ device from Samsung, Nokia (NOK), Japan Display (6740.JP) and Lenovo (992.HK), among others, for a number of years, particularly Samsung Electronic’s “Project Valley” development programs.  It seems now that Samsung will be running a small pilot program for such a device around the middle of this year to provide the smartphones to customers for evaluation.  Sounds like the industry is taking a big leap forward?  It’s not, as this smartphone is not based on a foldable display, but a dual display with a hinge that allows the phone to be opened, a concept that has been around for a number of years.
The idea of a foldable smartphone, the holy grail of those in the flexible display business, is a difficult one, given that components that drive display pixels, batteries, and other component systems are also required to bend or flex thousands of times with no ill effects.  Samsung’s recent debacle with the Note 7 can indicated just how even a small amount of stress can affect components.  But where there is a will, there is a way, and the display space is not one known for a ‘can’t do’ attitude, and the device we are speaking about is not even the 1st iteration of a dual screen, foldable phone.  We harken back to March, 2011 when Kyocera (6971.JP) released the “Echo”, a dual screen device that opened to ‘tablet’ mode, with a whopping 4.7” combined display.  It did not sell well.

​LG Display (LPL) also has its fling in the dual screen space with its October, 2011 “DoublePlay, that had a sliding slide-out keyboard that included a 2” capacitive touch screen, a sort of half-hearted attempt at a dual screen phone.  It did not sell well either, and not to be outdone, Samsung itself released the very strange “Doubletime” smartphone in late 2011, which opened to a second screen and a keyboard.  While dual-screen smartphones seemed to fade into obscurity after 2011, Russian smartphone manufacturer Yota (pvt) gave us the YotaPhone in November of 2013, followed by the YotaPhone 2 a year later, both of which had an electrophoretic secondary screen.  It is no longer available.
Back to present day, with Samsung’s alleged foldable smartphone, which is not foldable, as the Project Valley concept phone below shows, but is a dual 5” screen phone that opens to a ‘tablet mode’, using a hinge between the screens.  Samsung is using this early iteration of a foldable phone to gain insight into how consumers will use such a device and will not be mass produced.  In fact, component manufacturers are expecting only 2,000 to 3,000 units to be produced this year, and will be distributed to major brands for evaluation, with the potential for larger volumes toward the end of the year.  With both screens being almost bezel-less, the device will set the tone for what eventually is expected to become an actual flexible, foldable display, as shown in Fig. 5, but we expect such a truly foldable display will not be available for mass production until 2018 at the earliest, and more likely 2019/2020.  While most are concerned as to the date when such a device will be released, we are more concerned as to its value to consumers, who will be the ultimate arbiters of the concept’s success.  If the device does little to help consumers with smartphone functions, it will go into the nnuls of ‘non-practical’ but interesting mobile display technology, rather than selling millions or billions.  Samsung was smart enough to bring the conformable screen to its Galaxy line from the standpoint of providing a number of functions that allow the user to see information without having to turn on the phone, a very plausible application of the display.  Hopefully, this early iteration will give them the insight to do the same with a truly flexible display down the road.

Back in early February, we mentioned that BOE (200725.CH) had turned on its newest Gen 8.5 LCD fab in Fuzhou, China.  We believe the fab is now in production and is delivering product to a number of brands including Samsung Electronics, LG Electronics, and almost all of the Chinese TV brands.  The new line, which will have a capacity of 120,000 sheets/month (phase 2) and will focus on both TV and monitor panel production will have some capabilities for oxide backplane production, although we believe the bulk of backplanes produced at the fab will be a-Si.  .
While there are a number of producers[i] of 43” panels, the BOE fab has been focused on the fact that it can cut 10 43” panels from a single Gen 8.5 substrate, while other fabs can cut 8 from the same size substrate, making it far more efficient.  43” panel pricing has been on the rise as a shortage of these TV panels arose from both plant closings and production issues at Samsung Display (pvt) last year.  Once BOE becomes fully qualified and is operating at utilization rates comparable to other vendors, the increased output could alleviate some of the upward pricing pressure on 43” TV panels.


[i] LG Display is the largest producer, with AU Optronics and China Star smaller suppliers.

According to Samsung Electronics and mobile operators in South Korea, the new Galaxy S8 smartphone has received nearly 1 million pre-orders.  The phone has broken the records set by the Note 7, which gained 200,000 pre-orders in the 1st two days of release last year, and the S7, which received 100,000 pre-orders during an equivalent period.  Samsung is expected to hold a press conference in Seoul on Thursday to release sales goals and projections.  We note the S7 has sold ~49m units globally since its release, with the S8 expected to beat that number.

Yesterday we noted that the Korean Stock Exchange asked LG Display (LPL) to respond to a request for information concerning an alleged 1trillion won investment by Google (GOOG) to ensure a stable supply of OLED displays for Google’s Pixel Smartphones going forward.  LG Display gave what would be called a ‘non-responsive’ answer to the request for clarification and the exchange has decided to reopen the request.  The ‘details’ of the LG Display response (loosely translated) were, “The flexible OLED market is expanding and the interest of various customers is expanding.”

Toshiba (6502.JP), which has been facing enormous losses relating to its nuclear power business, has been in discussions concerning the sale of its semiconductor business.  However, the Japanese press is citing potential negotiations between Toshiba and a number of TV brands to purchase the company’s TV business.  While Toshiba had a 3.4% share of the TV market last year, slightly above Sharp’s (6753.JP) 3.2%, and far behind leaders Samsung Electronics’ (005930.KS) 21.0% and LG Electronics 12.6%, they sell over 600k units in Japan alone, but lose a substantial sum on the overall TV business.
Toshiba has withdrawn from the TV manufacturing business and licenses it’s brand to Vestel (VESTL.BIST), a Turkish based company that was the largest TV brand in Europe a few years ago, and remains a TV producer for a large number of brands across Europe, however the Japanese assets seem to hold the most interests for potential buyers.  We believe Innolux (3481.TT) is the primary supplier to Toshiba, with Innolux being a division of Hon Hai (2317.TT)/Foxconn (2354.TT), who recently purchased the assets of Sharp, and is trying to revive the Sharp brand.  Foxconn has been named as a potential buyer of Toshiba’s chip business, among others.