According to Taiwan based Trendforce, TV shipments declined 31.5% q/q and 8.4% y/y to 44.05m units, with poor sell-through in China the major cause of the decline.  Typical 4Q to 1Q decline in TV unit volumes[1] has been 22.1%, which gives us a bit of caution as to the weaker than expected 1Q results.  2Q expectations are for a ~8% increase in shipments, with the typical1 q/q loss being 0.8% but we caution that last year’s 1st half saw very significant price and unit volume declines as the industry contracted, so the 2Q q/q numbers are skewed to the negative, which is not typical.   Trendforce is lowering its full year TV set unit volume estimate by 2.2% from 224m units to 219m units, which is essentially flat with last year.  Samsung Electronics (005930.KS) remained the share leader among the top vendors with a 23.0% share, a 1.3% gain over last year, while LG Electronics (066570.KS), TCL (000100.CH), Hisense (600060.CH) and Sony (SNE) all declined, but Samsung also had a 34.8% decline in units q/q, with only Sony having a bigger q/q decline (46.8%).
China will be entering the Dragon Boat Festival holiday at the end of this month, which might help to stimulate TV sales, but the malaise that has hovered over China has been primarily caused by high panel pricing, which has led to low margins for TV set producers.  These low margins have reduced the set brands ability to offer significant discounting, which Chinese consumers have become used to.   With some stability in TV panel pricing, set manufacturers could cut costs a bit further, although they have been doing same for the last few quarters to offset panel price increases, and see a bit more room for discounting, but it will take TV panel price declines to give set manufacturers the room they need to price TVs for the 4th quarter holiday period, and panel producers are not quite ready to give in to that theory.  Panel producers have seen high utilization rates and strong margins, the ultimate goal in such a cyclical business, and do not want to change the profit balance, but a continued push toward holding TV panel prices at these levels will eventually stifle the TV set industry and reduce overall panel demand, which in turn, will not be good for the panel producers.  No one wants to kill the golden goose, but sometimes it is necessary to keep the goose egg retailers in business…


[1] Last two year average

While we noted that BOE (200275.CH) had committed to the construction of a Gen 6 OLED fab in Chengdu, China back on 12/30/2014, and had capped the fab as of April 19th of this year, the Chinese press has indicated that the fab is now in production.  It would seem that our timeline (and that of the Chinese press) was a bit behind, as now it is said that the fab was capped in July 2016, rather than last month.  This obviously makes more sense given that the capping process (finalizing the roof construction) would lead to equipment move in and tuning, which would be expected to take 6 months rather than one.
Our timeline for the fab however, has not changed, with our expectation for phase 1 production to begin in June and phase 2 production to begin early in 2018, followed by phase 3 in June 2018.  This is a very aggressive build schedule, but BOE is known for meeting or beating their construction schedules, and we believe they will keep to this timeline.  Our expectations that the fab will have a maximum capacity of 45,000 sheets/month when fully built-out also remains.
That said, actually producing product is a bit different from having an ‘opening’ ceremony, which usually represents the fab’s ability to run a glass substrate through the entire line.  It can take considerable time for the OLED process to be refined enough by panel manufacturers to begin to produce samples and eventually bring the line to an acceptable yield, and much of those refinements are based on the experience of the display production team.  We model a slower ramp for BOE than we might for Samsung Display, based on OLED production experience, although we believe the Chengdu fab is based on rigid OLED substrates, far less problematic than flexible OLED production.

Hon Hai (2317.TT), Apple’s (APPL) primary iPhone assembler is said to be offering ‘grants’ to employees with more than 3 months of working employment as part of a recruitment program adding significant worker capacity to its assembly plants.  The ‘grant’ bucket is expected to be ~$870,000 US, and the total living allowance for qualifies employees is expected to be $87.09, implying 10,000 new or qualified employees.  The implication by the Chinese press is that Hon Hai is anticipating the release of an Apple iPhone later this year, and is ramping staff to meet Apple’s goals.  In recent weeks there has been speculation that Apple might postpone the next iPhone release until 2018 as certain parts seem to be in short supply. 
While the increased hiring by Hon Hai is a data point, it is just that, and while we still expect Apple to release a 10th anniversary iPhone this year, there are still a few hurdles that need to be reached.  That said, we believe Apple will tailor the upcoming iPhone and its variants to whatever limitations are placed on it by the smartphone supply chain, and while considerable speculation as to features continues, Apple has said little to indicate that they are concerned about supply constraints.
We would expect Apple to have to make final decisions about the iPhone by early summer, and at that time we expect more detail from suppliers as to the feature set, with an endless set of ‘leaks’ to ripen the speculation.  Hon Hai is a significant supply chain participant for Apple, and the hiring could be a sign, but the details are far more important to the supply chain than the release date, which can always be moved.  

LG Electronics is expected to be adding OLED displays to its smartphone lineup for the first time since the October 2013 launch of the G Flex and the follow-up G Flex 2 in January 2015, both of which were built on plastic OLED substrates.  The upcoming V30 smartphone, which remains unannounced by LG, is expected to have an OLED display (5.7” or larger) with the potential for conformed edges, and the G7 smartphone, the successor to the current LG flagship G6 (released in March) is also expected to be based on OLED technology.
We note that while LG Electronics is known for their OLED TVs, LG Display (LPL) their display production arm, has capabilities for both large panel and small panel OLED production and has been producing OLED displays for other customers, including China based Xiaomi (pvt) as we noted in our 04/19/17 note, and while it is difficult to absolutely classify fabs as ‘small panel’ or ‘large panel’, as they can be repurposed if absolutely needed, we classify small panel fabs as those less than Gen 7 and large panel fabs as those Gen 7 or above.  The chart below shows LG Display’s OLED capacity, although it includes capacity for LGD’s OLED lighting fab which we expect to begin production at the end of this year and would not be used for small panel OLED production.  LGD will have small panel OLED capacity from three fabs by the end of this year and should be able to easily meet LG Electronics demand for rigid or flexible small panel OLED displays, even with low yields, but the question of ability to produce a conformed display similar to the Samsung S8, is really what is at stake.  Samsung Display (pvt) has had significant manufacturing experience producing such displays, while LGD has not, and the ability to produce high quality conformed displays for its parent will be a challenge for LGD.
That said, we expect, regardless of the initial yield, they will be able to produce ‘flexible’ displays this year, and will eventually gain the expertise needed to bring yields up to LCD levels, at which point there will  be a viable competitor to Samsung Display’s domination of the small panel OLED display production space.  Pressed for timing, we would expect LGD to be in volume production for a conformed OLED smartphone display by mid 2018, and possibly earlier.

According to an unnamed Samsung official, the Korean press has indicated that Samsung has sold more than 10m Galaxy S8 units since its release on April 21.  The Samsung flagship smartphone was released in the US, Canada, and Korea, followed by Britain, France, Germany, and Italy a week later, with 120 countries, including China, slated for the end of this month.  Expectations are for 20m units to be sold by the end of June and 60m units for the year, which would be the highest in Samsung’s smartphone history, as the S7 has sold 55m units through 1Q 2017.

The end of smartphone growth has been touted in a stream of articles in the CE trade press over the last year, leading one to expect the category to wither away and die over the next year or so, yet the numbers do not reflect the demise of the smartphone, only a shift in the power base, and even that has to do as much with the timing of new models as the popularity of brands.  But there is a change, and it can be seen in growth rates.
Unit volume leaders Samsung and Apple saw little, if any growth over 2016 (1Q), while Chinese brands saw 31% growth y/y, with Oppo (pvt) and Vivo (pvt) seeing 93% and 82% growth respectively.  As we noted, the timing of new releases contributes to some of the weak comparisons, as Samsung’s S8 delay will push increased unit volumes into 2Q, but Chinese brands continue to gain share and increase volumes.  We would expect they will have a more difficult time penetrating markets outside of Asia, and the popularity of brands can be a fleeting thing, as original Chinese upstart brand Xiaomi (pvt) has seen, but for now, despite the small individual brand unit volumes, Chinese brands continue to gain overall smartphone share.  Apple and Samsung still have a 34.8% combined share of the overall smartphone market, but Chinese brands have a 31.9% combined share in 1Q 2017, and continue to challenge the leaders.
Year over year growth came in 3 of 5 price bands for smartphones in 1Q, with both the low-end and high-end seeing negative growth, while the mid-range saw positive growth.  The lack of new releases from Samsung and Apple likely contributed to the negative growth in the high-end price band, but the low-end ($100 - $199) category has been showing growth for the last few quarters as almost all brands offer ‘value’ phones to those that do not need full feature sets, and what we call ‘almost premium’ phones to those that want features but do not need the Apple or Samsung brand name.  Aside from China, the markets with the most growth potential for Chinese brands are India and Southeast Asia, where there is little local brand competition.

Flexible OLED displays are a significant step forward in the display space, as they can be used in a wide variety of applications that were not available to LCD technology, and the technology is being pursued by many panel producers from the large to the small.  Aside from moving the technology from the lab to the production floor, which is a monumental task, what keeps flexible OLED displays from moving forward quickly? There are no major issues with substrates, with flexible plastics, metals, and even ultra-thin glass being used or tested for flexible displays, and there is no issue with OLED materials, as alternatives to ITO, which is a more structurally rigid OLED anode, can be used in flexible OLED stacks, but what about equipment?
Canon-Tokki (7751.JP) is the primary supplier of flexible OLED deposition equipment for large scale OLED display production, and while the company has announced plans to expand it production capabilities, it remains severely constrained as to production of this key OLED tool.  We believe Canon is able to produce 7 high-volume tools this year, primarily Gen 6 size, but all of these are allocated to only three customers, with Samsung Display (pvt) receiving 5, and both LG Display (LPL) and BOE (200725.CH) each receiving one.  With at least 8 new flexible OLED lines planned for this year, and a similar number planned for 2018, it will be difficult for all participants to meet flexible production timelines without deposition equipment.  Of course, there are alternative manufacturers, but panel producers like to stay with what they know and what works, and the qualification process for such tools, given that they are the heart of the flexible OLED manufacturing process, is a long one, especially for those new to the space.  Sunic (pvt), ULVAC (6728.JP), SFA (056190.KS), SNU (080000.KS) and Applied Materials (AMAT) all have OLED deposition tools, and have supplied OLED producers, but none have reached the level of Canon-Tokki, particularly with Samsung Display, the largest producer of small panel OLED displays, in terms of production capabilities.  As they gain expertise and Canon-Tokki expands production, the deposition bottleneck will lessen, but we believe this is the biggest stumbling block to the progression of flexible OLED to the industry currently, and could last another year at least. 

Taiwan based Asustek (2357.TT), well known for its ZenFone smartphone line and Zenbook laptops, is said to be contemplating ending the production of its ZenWatch smartphone line, which it began in September 2014.  The smartwatch series, with its last entry the ZenWatch 3 (released 12/2016), have all had OLED based displays but somewhat limited features and functionality.  While Asus has been among the top PC and tablet vendors worldwide for a number of years, they have made it into the top 5 smartwatch lists only on occasion, usually after a new model was released, and we believe now have a share ~2% of the smartwatch market, with 5k to 6k units/month being produced according to supply chain vendors.
While wearable unit volumes rose 22.3% last year, the market for smart watches has been growing considerably faster, albeit from a much smaller base, with the US holding a near 50% share in the early years (2014/2015), but declining to a meager 17% this year[1], as competition from traditional watch companies heats up.  Brand recognition in the US is considerably oriented toward Apple (AAPL) and Samsung (005930.KS) with 50% and 29% brand recognition among US consumers.  Asus did show up with a 5% brand recognition in the US, but one would expect a higher showing in Asia.  We would expect the smartwatch category to continue to grow, but with an increasingly narrower group of vendors, and a more homogenous mix of CE companies and traditional watch companies that have added digital features to their analog offerings. 

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[1] Forecast - Statista

Universal Display (OLED) has funded the purchase of what is the headquarters of subsidiary, Adesis Inc, allowing the company to have access to the entire 47,500 ft2 building in New Castle, DE.  UDC purchased Adesis in August 2016 for $36m in order to capture a greater portion of the company’s contract research, of which UDC had been their largest customer.  The company will now have roughly 2x the R&D and manufacturing space, which we expect will be built-out to help support UDC’s material research programs. 
We note that the use of CROs[1] has become widespread in the OLED material space as new techniques for the rapid evaluation and selection of organic molecules through automated computer simulation and specification systems.  Being able to evaluate the prospects of hundreds of potential organic molecular combinations daily gives UDC and other OLED material suppliers a huge increment to their ability to design new OLED stack materials, which are essential for the growth of the OLED display market.  While UDC has its own in-house material R&D program, we believe it was at maximum physical capacity last year, and the acquisition of Adesis, with whom the company had been involved for years, was a way to expand that organization without adding a new physical facility.  With the acquisition of the Adesis building, they accomplish the same goal.
Competition for the development of a deep blue phosphorescent OLED emitter has become more intense over the last 18 months as competition from a number of TADF[2] developers and other alternative emissive materials, and the obvious expansion of the OLED industry itself, up the stakes relative to new OLED material development.  UDC has made IP related acquisitions to capture potential lines of ‘blue’ research, but high throughput molecular sorting has upped the game considerably.  While the development of a long lifetime blue emitter is not the only objective of this push toward automated molecular selection, it will help move the process along much faster than could be done with manual selection, and given the competition related to OLED material development, it is a way for OLED material companies to maintain the inevitable pricing pressure that comes from OLED display producer’s desire to lower cost.


[1] Contract Research Organizations

[2] Thermally Activated Delayed Fluorescence

Speculation over LG Display’s (LPL) potential OLED plans seems to have reached a fever pitch as the Korean and Chinese press argue over whether LG Display has decided to build a new OLED plant in Guangzhou China.  The Korean press hints that equipment suppliers have become more optimistic that LG Display will begin construction of a new OLED fab in China in 2Q, while Chinese press says LGD has denied such speculation but also hints that the company and the local government are still in negotiations, and documents have been filed to that end.
We note that LG Display indicated on their 1Q conference call that capex could expand from current levels but it was “too early to tell”, which is in keeping with our expectations that they will make a decision on additional capacity plans by the end of 2Q.  We believe that Guangzhou would be the likely location for such a new fab, as China is the biggest market for the company’s OLED TVs, but LG Display has a number of expansion and construction plans in progress currently, and the addition of a new large scale project in China could prove to be a burden as LGD is also evaluating plans for a Gen 10 LCD fab, to help it compete in the ultra-large format TV display space, and is building its OLED lighting line, along with the E4 expansion and the completion of its E5 flex line.
While the optimism of the Chinese regional press probably has some credibility behind it, as municipal governments in China have been actively pursuing display industry participants for years, and have offered some extremely lucrative incentives to make those deals happen, the South Korean government is quite wary of allowing technology such as flexible OLED to leave the country.  In fact, this has been a sore point between the two countries since 2013 when a Taiwanese company purchased BOE Hydis, a South Korean panel producer that had fallen on hard times and then closed the company after its IP (developed in Korea) was licensed by its new owner to other display producers.  We believe that LGD will eventually opt for a fab in China, however the real question would be whether such a fab will be LCD, OLED, or a bit of both, and to what length the South Korean government will try to regulate any ‘technology leakage’ as the Chinese press has labeled the issue.