Tablet shipments have been declining, certainly a well-known fact in the CE space.  Larger smartphones, notebooks with detachable screens (2-in-1s), and a lack of innovations have taken their toll on this segment, and with the addition of 1Q results, the trend continues.  According to Taiwan based Trendforce, the 31.95m units shipped in 1Q represent a decline of 34.5% q/q and a decline of 9.3% y/y.  After these dismal results, the industry is focusing on Apple’s (AAPL) new 9.7” iPad, with its all-time lowest price, and the Microsoft (MSFT) Surface Pro 5, whose release was pushed into 2Q, as a hope for better results.
While it is obvious that the tablet market is contracting, we note that share trends, while positive in the short run on a y/y basis (see Tab.1), have been trending down for the larger brands (Apple and Samsung Electronics (005930.KS), while the smaller brands have been picking up share (see Fig.1) since 2014, especially Amazon (AMZN), who could be the only brand to see positive y/y growth in 2017. 
Tablets remain a CE category, and even at declining volume levels will represent ~150m units this year, so the category will not disappear in 2017 or 2018, but the risk to vendors is whether it is profitable enough to stay viable relative to other mobile and emerging CE products.  Apple and Samsung, purely from a competitive point, will likely maintain positions regardless of a continued unit volume decline, but others, especially the white box brands (represented by ‘others’ in the charts), will have to contend with larger, low-priced smartphones that encroach on the tablet space, and the eventual foldable smartphone, which will open from smartphone size to tablet size and perform at least, if not more, functions than inexpensive static tablets.  Buy a nice new tablet and put it in a glass case next to your plasma and 3D TVs; it might be a collectable someday.

Rochester, NY based OLEDworks (pvt) has revealed their latest roadmap for OLED lighting. The company, who purchased IP and manufacturing capacity from Philips (PHG) in November 2015, which was added to their own OLED lighting production facilities, produces OLED lighting panels, with the most recent addition being the Brite 2 line which has a brightness of 300 lu and a 10,000 hour lifetime.

OLEDWorks is an OLED lighting development and production company with management background from Eastman Kodak (KODK), where OLED technology was originally developed.  The company, along with LG Display, Kaneka (4118.JP), Konica (4902.JP) and a few ‘almost ready for commercialization’ potential suppliers make up the forefront of the OLED lighting space, which is hoped to become an alternative to other solid state lighting modalities, such as LED. 
While the technology used for OLED lighting is somewhat similar to that used in OLED TVs, the need for mass production techniques that can bring the cost/m2 down to a level that can make it competitive to other lighting sources, which likely will be a roll-to-roll process or some adaptation of ink-jet printing.  The development of such manufacturing technology has been hampered by the typical chicken and egg issues surrounding new display and other technologies, with potential producers not wanting to spend significant capex on developing the technology unless they see a clear path toward large scale commercialization.  That said, aside from OLEDWorks’ obvious commitment to the technology, LG Display has slated the opening of an OLED facility specifically dedicated to OLED lighting.  This fab, and we believe LG Display has yet to finalize actual specs and dates, is said to be a Gen 5 OLED line, with both rigid and flexible capacity, that will have a capacity of 30,000 sheets (phase 1 & 2), with a preliminary start-up date of January 2018. 
We note that while we do expect that OLED lighting and LED lighting will co-exist, as they have very different lighting characteristics, OLED lighting does have the ability to be constructed on conformed or flexible substrates, allowing for an almost endless number of design possibilities, some of which are ‘fanciful’ and others practical.  The OLED lighting market itself, and numbers here change on an almost monthly basis, is currently ~$170m but is expected to be nearly $700m by 2020 and over $1.4b in 2021[1], with a long-term potential greater than that of the OLED display market, should the manufacturing issues be solved.


[1] Yole Development - 2016

IGZO, aka ‘oxide’, aka Indium Gallium Zinc Oxide, is a backplane technology that was developed by the Tokyo Institute of Technology as an alternative to amorphous silicon and low temperature poly silicon Thin Film Transistor substrates used primarily in LCD displays.  A patent application was filed in March of 2004, which incited R&D by the industry on IGZO, with demos appearing in 2009.  Samsung Electronics (005930.KS) signed a license agreement with JST in 2011, as did Sharp (6753.JP) in 2012, with Sharp producing IGZO based displays that year and continues to develop and champion the technology, and was one of the reasons Hon Hai (2317.TT)/Innolux (3481.TT) was interested in taking control of Sharp last year.
The reason why IGZO is so important to the display industry is that it has a number of characteristics that make it desirable for certain device types, particularly its electron mobility, i.e. the speed at which electrons move through the material, and its manufacturing cost relative to Low Temperature Polysilicon, which has more manufacturing steps and a higher overall cost.  That said, IGZO backplane manufacturing yields have been relatively low, limiting its adoption across the industry to a relatively small number of manufacturers relative to LTPS and a-Si.
Growth in IGZO production this year has been driven by Apple (AAPL), who has been using the technology for its popular 9.7” iPad Pro (and other iPads since 2015), and by LG Display (LPL) for its OLED TV production. While a number of producers (see Fig.1) have IGZO capacity, we believe that much is not being used for commercial production currently, with the main commercial IGZO suppliers being Sharp, Samsung Display (pvt) and LG Display.  What could change here is the speculation that Samsung Display will be closing its L6 Gen 5 fab later this year (see our note – 04/17/17), which would eliminate the only Samsung Display fab that produces IGZO backplanes.  Looking at a more realistic view of the three major commercial suppliers, the elimination of Samsung’s IGZO capacity would reduce overall commercial IGZO capacity by 8.8%.  With Apple being much of the demand this year, especially as they are expected to release a 10.5” IGZO-based iPad Pro, this would limit other brands from using the technology, particularly Microsoft (MSFT), who has used it for its Surface Pro 4 and is expected to use it for the upcoming Surface Pro 5 later this year.
We are still unsure whether the potential closing and conversion of Samsung Display’s L6 is a reality or just media speculation, but if true, the effect would be to tighten what is already a tight IGZO market, and could limit the commercial development of the technology, as brands are unable to get guaranteed capacity and look to LTPS as an alternative.  We do note that if Samsung Display were to convert the L6 fab to OLED, it still has the option to use IGZO as the backplane technology, especially if the conversion is being done with the idea of dedicating some or all of that capacity to Apple.

Yesterday, Asahi Glass (5201.JP) and China Star (pvt) (aka Huaxing Optoelectronics) broke ground on a Gen 11 (3370 x 2940) glass substrate production project in the same technology park as the China Star G11 fab.  The 1st phase of the project, which is slated to cost $855.5m in total, will be an investment of $435m and is expected to produce 180,000 sheets/month, with a starting date of 1Q 2019, which is in keeping with the expected start-up of phase 1 production at the China Star Gen 11 fab.
Asahi has been a supplier to China Star for their two Gen 8.5 lines and their Gen 6 line in Wuhan and the local display supply chain includes a variety of suppliers including color filters, backlights, polarizers, films and specialty chemical chemicals, while small display manufacturers and assemblers also take advantage of the park’s broad supplier base.  China Star’s Gen 11 fab is expected to be producing Oxide backplanes and potentially OLED displays in three phases, with the last phase coming on line in 2Q/3Q 2021 for a total capacity of 45,000 sheets/month, although details of such a large project can change rather quickly.  

IHS is expecting global panel shipments in 2Q to be up 7% in units to 646.7m units after a 9% q/q decline in 1Q.  Citing preparation for Chinese May Day sales, with monitors up 5%, tablets down 1% and notebook displays down 8%, while TV units are expected to be up 3%, with Apple’s PC related new product releases helping to potentially move the notebook needle at the end of the quarter. 
While unit volumes are important, and 2Q/1Q comparisons are typically positive, the bigger question is revenue, which has a spottier record on a 2Q/1Q basis.  Given that 2Q 2016 was up 7% sequentially, but down 20.4% from the previous year, the 2Q 2017 revenue comparisons should be relatively easy unless yesterday’s May Day celebration was not as strong as hoped, but the comparisons get progressively harder on a sequential basis starting in 3Q, when, in 2016, the industry began its recovery.  We expect less robust comparisons for the remainder of the year.

If you have the desire to enter the world of sapphire substrates, now is your chance.  Rubicon Technology (RBCN) is putting up for auction ~$350k of sapphire cutting and polishing tools formerly used by its Malaysian sapphire polishing facility.  Rubicon, at one time a force in the sapphire substrate business (4th largest worldwide producer in 2014), had fallen on hard times as sapphire substrate pricing fell from its 2010 peak to levels where few, if any, manufacturers are able to scrape out profitability, despite the use of the material as a substrate for LEDs, which have been successful in replacing incandescent and compact fluorescent lighting worldwide.
The company has recently changed both management and philosophy, no longer focusing on the LED sapphire substrate market but concentrating on the large sapphire ‘window’ market, used in aerospace and similar military and commercial applications.  Previous managements had set up the Malaysian polishing facility to process patterned sapphire substrates, but the facility was never used to any large degree.  Rubicon has also shuttered significant sapphire production capacity at its Franklin Park, Illinois facility and is considering the sale of other local facilities. 

Back in the middle of last December Hon Hai (2317.TT), the new owners of Sharp (6753.JP) directed the company to end its supply agreement with Samsung Electronics (005930.KS), which represented ~8% of Samsung’s panel demand for the year.  While Hon Hai indicated that they would be using the capacity to revive the Sharp TV brand, we believe the motivation was not quite as direct as mentioned, and has had the secondary effect of tightening supply in the large panel TV space, particularly in the 40” and 42” panel size categories.  That said, Samsung has been in negotiations with rival LG Display (LPL) to provide the lost capacity, and to that end signed a MOU with LGD.
According to the Korean trade press, the two companies were expected to finalize the negotiations by the end of March or early April, with the initial panels being delivered in July and total commitments between 700k and 1mil units.  However, thus far no specification changes have been made by Samsung for TVs to be based on the LGD panels, which is typical when a TV producer changes display suppliers, indicating that negotiations are still underway.  Samsung Electronics, and rightly so in our opinion, needs a formal contract before completing such a deal, while LGD is comfortable with an MOU, but the clock continues to tick toward the July timeframe, when panels must start being delivered or sets will not be able to be built and delivered before the holiday season begins, in particular Black Friday (November 24th).
Samsung does have other suppliers including Innolux (3481.TT), AU Optronics (AUO), BOE (200725.CH), and China Star (pvt) along with its subsidiary Samsung Display (pvt), but Innolux’s ownership by Hon Hai/Foxconn (2354.TT) makes that a hard sell, and while AU Optronics has supplied panels to Samsung in the past, we believe they are so capacity constrained that they would be unable to supply the quantities needed.  BOE has been a supplier and does have the capacity to make such a deal, but their expertise is in producing large volumes of a relatively limited number of TV panel sizes, particularly 55” and larger, which makes it more difficult for Samsung to feel comfortable that they will be able to meet the quality and quantities needed for Samsung’s panel demand.
We believe that the lack of a deal with LGD has kept certain TV panel prices a bit higher than they might have been should Samsung not be hunting for an alternative panel supplier, although other factors are primarily responsible for the overall price increases, but it is essential that Samsung Electronics nail down a supplier soon, or there will be a significant shortfall in the company’s TV sales this year.  If negotiations with LG Display fail to produce results, we would place bets on BOE, especially since their Fuzhou, China Gen 8.5 fab was lit toward the end of February, giving them the incremental capacity needed to help out a fellow CE brand, but from a reliability standpoint, LG Display would be the 1st choice, as they have the capability and experience to produce what Samsung needs.  Likely, the balance between LG Display’s desire to fill their fabs and charge a premium to rival Samsung Electronics and their commitment to other customers is a tough one to reconcile, as is Samsung’s necessity to deal with its biggest rival.  “Misery acquaints a man with strange bedfellows”[1]


[1] William Shakespere – “The Tempest” – Act 2, Scene 2, 33 - 41

Foxconn (2354.TT) Chairman Terry Gou returned to the US White House for a 2nd brief meeting with President Trump and announced (again) that the company is planning to significantly increase its investment in the US.  Foxconn, Apple’s (AAPL) largest assembly partner, indicated that “We plan to invest in a number of programs that will include capital - intensive and skilled labor - intensive, as well as high - tech investments… we will send a message from (sic) the White House after we have chosen the place.” And other company officials stated they were currently actively evaluating the conditions and possible locations for the establishment of manufacturing facilities in the US.
 
While Gou had only a brief meeting with President Trump, he met with While House Innovations Director and Presidential son-in-law, Jared Kushner and staff, and while no formal decisions have been made, Gou said, “I have not yet decided that I will tell you in the summer, maybe in a few weeks” and mentioned that it is not yet possible to disclose the timetable for investing in the United States, as it depends on a number of factors, such as progress in negotiating investment conditions with Federal and state levels (read, “what will you give us?”)

As the street covers Samsung’s (005930.KS) semiconductor business quite closely, we focus our attention on the display, mobile, and CE portions of Samsung’s business.  Here are our notes from the 1st quarter conference call, and while there were some questions concerning the company’s decision not to pursue the conversion to a holding company, we reserve comment on that issue to a later date.
General

• Revenue strength from memory & display – Higher ASP and premium products drove sales – As expected
• Overall revenue y/y up only slightly due to delayed S8 launch
• Gross margin up 5.3 bps – Op margin up by 6.2 bps - ASP improvement helped
• 2Q – Components up – DRAM, 10 nano processor, CMOS image sensor demand
• OLED – focus on flexible displays – No specifics
• Maintain LCD profitability by reducing costs – No specifics
• Mobile – Expect ASP and profit yoy improve – Galaxy S8
• TV – Earnings improvement from launch of QLED TV
• Appliances – Strong seasonal demand for A/C
• 2017 overall
  • Overall earnings up      
    • Driven by components and increased OLED supply – Assume A3
      • Watching 3D NAND supply in 2H
      • New model smartphone competition in 2H – Assume Apple
• Mid to Long Term Drivers
  • Demand for low power chipsets
  • Flexible OLED
  • TV sets – Focus on software & connectivity

 
Repurchase program
               

• Phase 1 complete ($2.15b US) – Cancelled 1m common shares & 225k preferred
• Phase 2 approved – Expect 900k common and 225k preferred over 3 months (4/28 – 7/31)

 
2Q Guide
 
                Semiconductor

• DRAM – Mid-single digit growth – bit growth high single digit
  • 1Q – bit growth declined low teens – ASP up low 20%
  • Year – DRAM bit growth high teens – in line w. mkt
• NAND – bit growth mid – single digit – grow in line w. mkt.

                                                1Q – bit growth - low teen decline – ASP up low teens
                                                Year – NAND bit growth ↑low 30% - above market growth (30%)
                Display

• Expect handset & tablet sales flat in 2Q – Consensus to slightly negative
• Expect blended ASP up – A bit optimistic based on recent prices
• Expect smartphone mix – High 80%
  • 1Q - OLED was low 60% of segment revenue
  • 1Q - Mobile – 93m units (handsets) & 6m tablets
  • 1Q - Blended mobile products ASP $170
  • 1Q - Smartphone mix – mid 80%

                TV/Appliance

• Expect TV shipments up low single digit - consensus
• 1Q – TV units – 10m

 
Capex

• 1Q spend - $4.4b (US) on Semi - $3.7b US on display
• 2017 not set yet but expect significant increase

 
Display details
 
                1Q

• OLED up q/q – Increased flex shipments – prep for S8
• LCD – supply down – Higher ASP and lower industry supply helped

                                                Large panel UHD – as expected
                2Q         

• Expect increased demand for LCD UHD -
• Continued size migration
• Supply demand still favorable
• Focus on cost reduction & yield improvement
• More ultra-large – Hi Res – Curved products – Same focus as everyone else

                2017

• OLED – Sales up y/y – Increased supply of flexible displays
• LCD – Intense competition in mid and low LTPS (small panel) - China
• Market for UHD and Ultra-Large will continue to grow
• Frameless and curved TV still a focus – Mostly China

 
Mobile Details
 
                1Q         

• Demand for smartphone & tablet decreased – seasonality
• Smartphone shipments increased slightly – Galaxy S8 helped
• Rev & profit down due to S7/Edge discounting – Likely more aggressive discounting to move older inventory

                2Q

• Demand for smartphone & Tablet flat – as expected
• Expect Revenue & Profit up – S8 sales
  • Expect record sales
• Overall smartphone shipments flat – weaker mid and low models

                2017

• Slight increase in smartphone demand (y/y) – as expected
  • Strong growth in mid to high end replacement
  • Competition w. new smartphone releases in 2H – assume Apple
• Expect to increase shipments & revenue y/y & profitability
  • Based on S8 and new flagship in 2H – Possible Note 8 although rumors say Note line will be cancelled
• Network – Will grow Revenue y/y
  • Based on IoT and LTE
  • Preping for 5G

TV Details
 
                1Q

• Demand down Q/Q – as expected
  • Europe and Latam weak
• Focus was on Curved and QD TV
• Increased panel price & currency lowered performance y/y – as expected
• Appliances – North American strength and Southwest Asia were strong
  • Overall sales growth up y/y
  • But costs also up
    • Flat earnings y/y

                2Q

• TV – Modest q/q growth on new products – nothing new
  • Market down on weak Europe
• Expect QLED, UHD, and curved to be focus – need this to show growth – success of new QLED line will be important
• Appliances – Peak season appliances (A/C)
  • Focus on new products
    • Family Hub 2.0
    • FlexWash

                2017

• Expect demand recovery in emerging markets – no details
• Shift to UHD
• Global TV market to see slight growth - consensus
  • Currency risk offset by expansion of premium products

 
Q&A

• Red Tint – Not a product defect – as expected
  • Software update allows consumer to adjust color
  • Additional software update to get more color detail
  • Display Expansion
  • Already converting L7-1 – as expected
  • A3 on schedule – as expected
• QLED
  • Still in introductory mode
  • Strong reviews in Europe
• Cash             
  • If cash balance over $61b – will entertain additional shareholder return
• S8
  • How will profitability be maintained for S8 if cost and marketing are higher?
    • Using highest quality components
  • Expect similar profitability – “We’ll make it up in volume?” – Hope this is not their philosophy -
  • Dual sourcing
• OLED TV
  • Developing ‘various’ technologies including QD – Indicates little