LG Electronics (066570.KS) has stated that it will be closing its mobile division by July of this year after 23 quarters of losses.  The company had been in discussions with a number of possible buyers for the division but could not reach terms that were lucrative enough to produce a sale of the division rather than an actual closing.  While the mobile division at LGE has been generating losses for years, we note that in previous years it has been LGE’s 3rd largest division behind the Home Appliance and Home Entertainment divisions, but fell to last place in sales last year, while generating the biggest division operating loss.  The table below breaks out LGE’s divisions in 2020 and shows sales and operating profits in US dollars with and without the mobile division.

LGE’s mobile division has a number of production facilities, primarily in Hai Phong City, Vietnam, Taubate, Brazil, and Qingdao, China.  While we expect all three are for sale, the plant in Vietnam, which is able to produce 10m smartphone/year is the largest production asset, and LGE had been in discussions with Vingroup (VIC.HNX), the largest conglomerate in Vietnam, concerning both the Hai Phong and Taubate plants, but have been unable to agree on a mutually acceptable price.
The LGE Vietnam sub-group, which we expect is primarily the output of the plant, ran a 3.5% operating profit last year, so a brand with a decent share of the APAC market would likely benefit by purchasing the plant, and whatever price could be negotiated would certainly look better on the LGE books vs. a full write-off, but compensation and base salary for existing workers has been a stumbling block for other South Korean foreign plant sales recently, and that could be the problem keeping the facility from being sold currently.  It’s in a good neighborhood….

​While such metrics leave a great deal to be desired in their ability to be verified, Xiaomi (1810.HK) indicated that on the first day of release, the Mi Mix Fold, sold 40,000 units in the first minute of its availability.  Since this is Xiaomi’s first foldable, there is no comparison to previous Xiaomi models and most reference points for new model smartphone sales are based on one day at a minimum, and usually at least a week or month. As on-line pre-orders can sit in queue until the actual moment of release, trying to judge how popular a new phone might be based on the first minute of sales is a waste of time.  Hopefully Xiaomi will give more relevant data as time passes.

As we have noted, the semiconductor capacity shortage being faced this year has incentivized foundries to increase both short-term and long-term capex, however given that there are only a limited number of key semiconductor tool vendors, all increases in construction cap\ex must be followed by spending for semiconductor equipment, which can have lead times extending to 12+ months.  Tool vendors must be careful not to over promise on delivery dates, which will leave foundries with incomplete fabs, but also face their own limitations on production capabilities.
In order to make sure that there is not a gap between construction and equipment move in, semiconductor manufacturers must work themselves into equipment queues at a number of tool vendors, and during periods of high capital spending in the semi space, this can become contentious.   While constant contact between potential semiconductor producers and equipment vendors is normally expected, when executives get on planes to make visible visits to tool vendors, it tends to indicate the level of competition for tool vendor capacity.
It seems that Samsung executives have been on planes this week, making appearances at Applied Materials (AMAT) and Lam Research (LRCX) after a trip to ASML (ASML) recently.  In fact the Vice Chairman of Samsung Electronics made an unusual and highly visible to ASML last October to maintain a smooth relationship between the companies, given ASML is the only supplier of EUV equipment necessary for production at 5nm and below.  With announcements of new or increased capex spending by Samsung, TSM, and Intel, we expect lots of miles will be flown by managements to keep tool vendors from reallocating resources.  While TSM as the largest foundry has a well-established relationship with primary tool vendors, we give Samsung credit for being an early capex ‘announcer’ and shaking the hands (metaphorically) of tool vendors as others are just announcing and formulating long-term spending plans.

​AU Optronics (AUOTY) has indicated that they will be adding a small amount of capacity to their Gen 6 line in Kunshan, China, which has been built out to 36,000 sheets/month, against a total potential capacity of 45,000 sheets/month.  The increase, which will be put into production in the 3rd quarter of next year, will add another 9,000 sheets/month to the fab’s capacity or 0.45%.  While that is a small amount of additional capacity, that fab is producing IT products, essentially monitor and notebook panels, so 9,000 sheets/month on an annualized basis represents 108,000 additional sheets, and if. For example, that production was split between 27” monitors and 14” notebook panels, at current panel prices that annualized increase in panel sales would come to $138.7m, or a 1.4% increase in sales for a 0.45% increase in capacity, assuming 100% utilization.
While these numbers are assuming panel prices stay at current levels, any further increase in IT panel prices would enhance the improvement, so the risk to AUO, as with all other panel capacity expansions, is when utilization starts to fall, which is usually accompanied by falling panel prices.  Such a double whammy is the bane of panel producers, which is why AUO has almost always taken a more conservative stance toward panel capacity increases, focusing more on improving mix by adding more premium products.  While cyclicality in the industry don’t always allow even this conservative philosophy to produce profits, it is the inverse of China’s panel producers’ philosophy, which is more focused on building share by rapidly increasing capacity.
Right now, given the high utilization rates and panel price increases seen over the last year, the Chinese philosophy wins out, but there is certainly something to be said for a more conservative approach to expansion and a greater focus on profitability.  Last month the AUO board approved capex of NT$455m (~$16m US) for “factory and capacity optimization and adjustments.”  Company management did note that they expected the shortage of key components to worsen in 2Q, as compared to 4Q ’20 and 1Q ’21, citing glass substrates, PCBs, and polarizers more specifically, along with ‘persistent’ IC supply issues, with component and material lead times extending to roughly eight weeks from a pre-pandemic four weeks.
 

On Monday we noted that Chinese OLED panel producer Visionox (002387.CH) had received a substantial order from Honor (pvt), the former Huawei sub-brand that was recently separated from its founder in order to avoid the trade restrictions placed on Huawei by the US government.  While the order we mentioned was for flexible displays and touch components, we expect that the relationship between the two companies will continue, as Honor is expected to source foldable displays from Visionox for its first entry into the foldable device market. 
Honor is expected to release the “Magic X”, its first foldable in the 2nd half of the year, one of a number of smartphone brands that have either indicated that they have such products under development or are in the process of qualifying components.  Currently 5 smartphone brands have released foldable smartphones, with Samsung the leader, heading into the release of its 3rd generation Galaxy Fold later this year.  While Motorola has focused on the more compact '‘flip” type foldable, (Samsung also has such a device), others have taken more of a ‘phablet’ approach, with what are normal sized smartphones when closed, opening up to tablet size.
Among those that have yet to release a foldable smartphone is China’s TCL (000100.CH), who has shown a wide variety of demos and prototypes as part of their ‘fold and roll’ development project.  TCL has developed an unusual hinge system that it combines with a rollable OLED display, which allows the phone to be unfolded and then further expanded by pulling out the rolled portion.  The concept here is that while this is a bit thicker than a normal smartphone, it allows a normal sized phone to expand to 8.85 inches, but can expand further to become a full 10” tablet, larger than any existing smartphone foldables.  TCL has also shown a 3 way folding device, using the same proprietary hinge system, and while the company has not promised to convert any of these demos into actual products (in our lifetime), they are quite adamant about entering the foldable space.  As TCl is the parent of Chinastar (pvt), we would expect they would at least have a pole position as a supplier for such a product.

As the world’s largest semiconductor foundry, Taiwan Semiconductor (TSM) is a harbinger of the health of the industry and at the least an anecdotal source of the structural issues that face the industry currently.  While we are not going to go into great detail as to the nuance in TSM’s 1Q results, there are some points that should be recognized by investors in the CE space.   While sales were up only 1% q/q in US dollars, on a y/y basis they were up 24.7% and continue the trend of expanding semiconductor demand and high utilization that has been seen since 3Q of last year.  Aside from the standard rhetoric about the new digital age and seasonality, HPC (High Performance Computing – ASICs, GPUs, and AI processors) continues to grow as a percentage of TSM’s business on a q/q basis, a good portion of which is being driven by crypto-mining, while the smartphone segment seems to be growing, but at a slower space.
Embedded in the HPC gains is the rise in the price of bitcoin, making mining a more lucrative endeavor, but that demand is also competing with demand for graphics components that are actually being used in consumer devices.  Most of the other platform categories are seeing modest q/q revenue growth, but when growth on a y/y basis is examined (Fig. 3), slowing smartphone growth is even more pronounced, taking seasonality out of the mix.  Here’s what the 1st quarter y/y results looked like by platform for this year and last year.
 

​All in, it is difficult to remove the effects of COVID-19 from TSM’s quarterly results, but comparing against the pre-COVID y/y performance does give some indication as to where a longer-term baseline should be drawn for each platform.  While automotive is still a relatively small portion of TSM’s wafer business, it seems to be growing more consistently than the others, as the only segment that saw higher y/y growth this year over last year, even considering the constant stories about how foundries have allocated less resources to the automotive space and more to higher margin components, which seem to be primarily in the HPC category.  Huawei (pvt) is also a factor in the slower smartphone growth at TSM, but given how strong overall demand has been in recent quarters, the order reductions from Huawei that are a result of US trade restrictions, are likely easily made up by others.  More on TSM to follow…

​Yesterday we noted that a power outage at TSM’s Nanke plant caused at least part of the line to shut down, putting ~30,000 wafers at risk, and while the plant is now operational, the company is still evaluating what portion of those wafers on the line could have to be scrapped.  Industry estimates are for up to $35m in potential losses from the outage.   It seems that the problem was caused by a contractor working at the nearby Wistron (3231.TT) plant, which is undergoing expansion.  It seems that the contractor accidentally cut the 161KV underground powerline, which caused systems to trip at a number of locations.  While details are not known yet about the impact on other manufacturing facilities sourced by the same cable, it seems that voltage drops at Innolux (3481.TT), UMC (UMC), Corning (GLW) and others were part of the same issue, although the extent of any damage is still being evaluated.
For whatever reason, the semiconductor space seems to be having a bad run of luck, at a time when the industry is seeing great demand.  Just yesterday, a fire broke out at a plant in Taiwan that makes copper-clad substrates, which shut down the entire facility, following a string of natural disaster occurrences that have caused production problems at various fabs around the globe, along with an unusually large water shortage in Taiwan that has caused 7 of Taiwan’s primary reservoirs to be at less than half of capacity, causing certain regions to reduce water consumption by 7% to 10%, although the government insists that such shortages have not affected companies in its many science parks.  TSM has begun to transport water to some of its facilities by truck.

​As we have noted, the rise in bitcoin prices and China’s tacit acceptance of bitcoin as a legitimate payment method has caused demand for any device with a high core count and large cache to skyrocket.  Graphics processing cards are based on just such processors, with the AMD (AMD) Ryzen 3970X the cream of the crop.  That said, such processors and the graphics cards that they power are in short supply, so much so that prices have doubled over the last few months and have become so hard to find that some have taken to more desperate measures to get them.
A few days ago, a number of merchants in China sent recall notices to customers using AMD’s name and logo, stating that there was a recall for Radeon RX580 graphics cards, that were said to have ‘safety hazards in circuit design’ and should be immediately returned to said dealers for replacement.  AMD got wind of the scam and issued a statement saying that such recall statements were fictitious and false, with the company reserving the right to pursue legal responsibilities for individuals or merchants who misappropriate the company’s name.  At between $500 and $1,000 per card, if you could find one, somebody was looking to build out a few more bitcoin miners for a bit less than others might be paying. When someone goes that far to scoop up a few graphics cards, you know you have a shortage.
 

​Yesterday we noted that Apple’s ‘Siri’ had indicated that there was a potential Apple ‘event’ scheduled for April 20, usually reserved for announcements of some merit.  Not to be outdone, Samsung has just indicated that it will be having one of its ‘unpacked’ events on April 28th, to reveal ‘the most powerful Galaxy device’.  While the one minute teaser gives little information as to what Samsung might be revealing, speculation ranges from the Galaxy Z Fold 3, Samsung’s next generation foldable smartphone, to a new processor, or even a new laptop.  The Galaxy line, while primarily known for smartphones, also encompasses tablets, earbuds, wearables, and formerly media players, cameras, and projectors.
While we certainly don’t rule anything out, Samsung’s foldable devices tend to be released in February or September, with the Galaxy Note smartphone line usually announced in August or September, and the flagship ‘S’S series smartphones, February or March.  Those dates, and ‘the most powerful’ theme of the teaser would indicate a better probability for a laptop announcement, especially given that the Galaxy ‘book’ line is due an update, having been initially announced in October of 2019, and rumors that Samsung was potentially going to expand their laptop line with two new ‘Pro’ models with OLED displays, which would fit the theme, and also satisfy Samsung’s mandate to expand the use of OLED displays in IT products.  A new high-end laptop line, especially one with OLED displays and S-Pen support, would add to Samsung’s ‘premium’ product tier, and at least some of the component shortages facing other laptop brands would be less of an issue for Samsung, given their internal semiconductor production capabilities.  Of the top 20 best rated (customer rating) laptops on Best Buy (BBY), 9 were either sold out or unavailable currently.

The TV market, in its normal mode, is a replacement market, with such replacement product based primarily on reducing the user’s cost.  Last year however, COVID-19 created a new paradigm and shifted consumer interest from replacing older TVs with the lowest cost possible TV to more premium TVs, given their increased viewing time at home.  This caused brands to find that their supply of premium TVs, both OLED and Quantum dot, was rapidly reduced early in the year, normally a period of low demand, leading brands to increase their interest in both technologies.  Given that OLED capacity was limited to one supplier, LG Display, quantum dot enhanced TVs became the technology of choice.
There are a number of manufacturers of quantum dots but the quantum dot equivalent of Universal Display (OLED), the holder of much of the material and device IP for OLED materials, is a private company, Nanosys (pvt).  Their IP is licensed to a variety of middle men, essentially companies that either create the quantum dot material and package it into films or similar products, or license and buy the materials directly for Nanosys.  Nanosys produces its quantum dots in its production line in California, which can support 50m units (55” equivalent)/year and have begun production at a new line in Japan that when fully built out will support an additional 75m units, but the device IP, which covers a number of possible device modes, is the key to understanding the potential income stream for Nanosys.
If we look at quantum dot usage in consumer devices, the primary application is the abovementioned QD film that is used to enhance the quality of the backlight in LCD TVs.  Almost all TV brands are offering QD enhanced TVs, with the number of Nanosys QD SKUs increasing by almost 40% last year, but the real push behind quantum dots in the display space goes far beyond what is a relatively simple (relatively) enhancement film.  To better understand the potential for quantum dots going forward we will look a bit more closely at the technology and its potential applications, especially in comparison to other display modalities.  Stay tuned.