​Everydisplay (688538.CH) (aka EDO, aka Hehui Optronics) released 1Q preliminary results and an update on the expansion of its Gen 6 OLED production fab, along with some details on the effect of COVID lockdowns on the company’s financials.  Edo has an operating Gen 4.5 OLED fab and a Gen 6 OLED fab that is currently being expanded from 30,000 sheets/month to what will eventually be 45,000 sheets/month.  Equipment move-ins have been completed and tool optimization is continuing with trial production expected next year (our timeline is July ’23).  The project was financed by investments by the Shanghai IC Circuit Investment Fund (state-owned), the Shanghai Jinlian Investment Development Company (pvt?), a local investment company (unknown government connection), who together own 19.21% of EDO.  Those and 14 other institutional stockholders have been holding restricted shares, which are now free to trade, representing ~24.6% of outstanding shares.
While the company indicated that it had received an increasing number of contracts for its existing facilities, it reported $151.48m in sales and a $28.37m net loss for the first quarter of this year, and indicated that it was unsure if the company would be profitable this year.  While not specific as to how the losses might break down, both a utilization rate of 70% in recent months and the cost of the new line were given as potential reasons for the possible loss this year, although the company insists that the yield rate has improved by 40% over the 2020 rate.  While Edo has a 3.3% share of the small panel OLED display market (1Q ’22), most, if not all of those units are rigid OLED displays, with an orientation toward automotive applications, where the company seems to have established itself and partnered with SAIC Motors (state), China’s largest auto producer, with whom it has developed what it calls ‘the industry’s first 12.8” vehicle grade OLED display panel.’
The pressure on EDO’s net profits is typical of relatively small OLED producers that engage in large new fab construction projects as overall production cash costs rise as utilization is low when the fab first opens, and depreciation begins.  In this case it looks like EDO is expecting utilization to remain lower than normal for some time, although they did see some improvement in May, so we assume that on an overall basis the lower utilization is the key factor limiting profitability this year, unless the phase 3 line begins ‘official’ production before the end of the year.  We assume that either the production schedule for the display developed with SAIC has yet to enter production and will be somewhat limited this year, both due to scheduling and the economic effect of the lockdowns. 
Last year, and even earlier this year a number of LCD and OLED expansion projects were initiated, particularly those looking to capitalize on IT products which had been more resistant to the panel price decreases seen for TV panels.  With Chinese COVID lockdowns causing both component and logistics issues and global inflation slowing overall demand, some of those projects have seen the push toward completion slowed, particularly those in Taiwan, where the attitude toward capacity expansion is far more conservative than in China.  Capital in China is still available for such projects, particularly OLED display fabs, so there seems to be less concern from Chinese panel producers and more acceptance that ‘things will be better’ and industry growth will continue. 
Taiwanese panel producers have considerable ‘cycle’ experience, which leads to their more conservative attitude toward capacity expansion, which Chinese producers are still competing for a place on the world stage, and while the small panel OLED display business is still in growth mode, it is now large enough that the same cycles that affect LCD display pricing will have a similar effect on OLED panel pricing, and the continued expansion of OLED capacity by Chinese producers will only exacerbate that effect.  While a slowdown of such projects would certainly benefit the OLED space on a cyclical basis, we doubt the mindset would follow that path currently as the desire to unseat incumbent South Korean OLED producers is likely the current driver, especially when you know you can still receive construction and operational subsidies from the government.

​Tianma (000050.CH) has indicated that it will be undertaking a new construction project in Wuhu City, Anhui Province.  The new facility will be a module assembly plant that is expected to cost $1.2b US in total, with an initial funding of $720m, of which 52.08% will come from Tianma ($375m) and 47.9% will come from partners including the Wuhu Industrial Investment Fund (city –Owned), and the Wuhu Jiuchuang Investment Fund (pvt).  The focus is expected to be smartphone and IT modules up to ~40” and is expected to improve Tianma’s overall profitability when completed.  No completion date was specified although we would expect between 12 and 14 months once site work has begun.
Tianma is a relatively small player in the LCD space, holding a roughly 1% share of total LCD capacity and a 0.6% share of LCD display industry revenue, but has a larger presence in the OLED space when current share is ~3.9% in the small panel OLED space, but is expected to increase to almost 7% by the end of 2024, if capacity expansion plans remain on schedule.  The company is currently building a $5.16b LCD Gen 8.5 fab in Xiamen, which would be responsible for the capacity share increase.   While the module plant does not add LCD production capacity, it is an indication that management believes that the LCD display business has decades of continuing growth, a less than sure bet in our view.
As we have noted above, while we expect LCD technology to continue to the most prevalent display technology for the next few years, Chinese panel producers seem bent on expanding what is already a majority share of that business, even if it means creating an over-capacity situation for periods of time.  What makes the LCD space more vulnerable is not competition from other regional suppliers, such as Taiwan and Korea, as expansion plans for Taiwan are small, and Korea is proceeding in the other direction, closing large panel LCD fabs, but competition amongst Chinese LCD producers themselves. 
The desire (or necessity) to produce positive results after years of government funding push Chinese panel producers to maintain high production levels, even when the market is soft, exacerbating downward pressure on panel prices, and maintain an overly optimistic view of the industry’s cyclical nature.  Some have been expanding OLED capacity, where demand continues to grow but those without the experience and expertise to produce OLED displays remain convinced that LCD technology will see increasing demand almost ad infinitum.   Capacity competition was the watchword of LCD panel producers years ago, when Chinese producers were small or even non-existent, but extended periods of over-capacity reinforced the fact that ‘If you build it, they will come’ does not always work forever.  Government funding certainly has a place when a region is trying to build an industry, but it can bring on its own problems, which are usually not seen until years later, long after those who funded the operation have moved on, leaving future local and provincial officials, company managements, and in many cases individual investors holding the bag.

​There are lots of estimates for XR/VR/AR, and there have been for a number of years, however many of those estimates are prefaced with headlines like “Now VR is Here!” or “This is the VR Decade”, so we take such estimates lightly and focus more on what has occurred rather than what is expected.  This is contrary to our usual way of thinking but there have been so many false starts in the VR/AR world that extrapolating on small volumes, rapidly changing technology, and consumer surveys becomes a dart board exercise.
That said, the National Research Group (), an organization that provides focus groups, workshops, and ‘in-depth interviews’, along with meetings with influencers to brands to generate effective ad campaigns and product positioning, has done a survey entitled “Beyond Reality…Is the Long-awaited VR Revolution Finally On the Horizon?”, which was enough to draw our attention.  The study involved 2,500 respondents, aged 18 to 64 in the US and was conducted in March of this year, and focused on consumer attitudes toward VR systems and content.  Here is what we pulled out of the 13 page report:

• 37% of US consumers describe themselves as “excited” about spending time in virtual reality and an additional 43% say they are interested in the technology and willing to use it under the right circumstances, with 40% saying they have become more interested in VR as a result of the COVID-19 pandemic.
• Just under 40% of consumers say they have now had at least one VR experience, with 85% who have tried VR saying they would describe the experience as either ‘very’ or ‘somewhat’ positive, and 57% saying they ‘definitely’ plan to have more VR experiences in the future, while 28% say they will ‘probably’ do so again.
• 49% said they had the VR experience in their own home.  43% said it was in a friend or family member’s home.  33% said it was at a video game arcade.  21% said at a theme park, and 12% said it was at a museum or art gallery.

The survey went further to break down the ‘typical’ VR user.

• 71% describe themselves as people who are generally early adopters of new technologies
• 60% are male and 40% female.
• 47% were between the ages of 18 and 34, while 47% were between the ages of 35 and 54, while 6% were between 55 and 64 years old.
• 86% play video games on a regular basis
• 61% were white, 20% Hispanic, 11% Black, and 8% other.

In terms of US households that own VR headsets (13% according to the survey), which would equate to 16.59m households, of which 68% (11.27m) have one VR headset, 23% have two (7.64m) and 10% have three or more (5m).  Note: This totals 23.9m units of an estimated global installed base of 26m at the end of last year.

• 88% of consumers who have a VR headset say they use it multiple times each month while 60% say they use it more than once per week.
• 54% of those who own a VR headset say they use it for less than 2 hours/week, and 66% say they tend to use the device for a maximum of 45 minutes and 37% say they use it for less than 30 minute each time.
• 72% say they use the headset to play games, 42% say to watch TV or films, 35% they use it to workout, 29% use it to browse the internet, and 22% say to create music, videos, or art.
• 63% of consumers who own a VR headset say they bought it to play games, 32% said they wanted to see what all the hype was about, 32% said they wanted to keep up with new technology, 28% said a friend or family member recommended they buy it, and 27% received it as a gift.

Feature sets on VR headsets are an important part of the user experience, with the bulky and heavy VR headsets of past years giving way to more ‘stylish’ models with higher resolution displays, expanded field-of-view, and faster response times, along with more recent adds like eye-tracking and spatial audio, so we were interested in what the survey said consumers were looking for in a perfect VR system.  Here’s what they said the key features should be:

• 52% said good image resolution
• 44% said comfortable headset and controllers.
• 39% said high quality audio.
• 35% said easy and intuitive to set up.
• 34% said compatible with a wide range of video games
• 33% said it should not require a connection to a PC or game console.
• 29% said it must be compatible with my existing devices.
• 28% said it should have eye-tracking.

The biggest complaints VR device owners had concerning their headsets and controllers were:

• 17% said the headset gives me serious nausea or motion sickness.
• 17% said there is not a wide enough selection of VR games.
• 16% said the headset is uncomfortable.
• 14% said there is not enough of a selection of films or media to watch.

…and the most common reasons not to buy a VR headset were:

• 46% said VR devices are too expensive.
• 25% said they don’t use it enough to justify the purchase.
• 16% said they did not see the appeal of the VR experience.
• 15% said they don’t know where to get started buying one.
• 12% they were worried about motion sickness.
• 12% said they were waiting for VR quality to improve.
• 12% said they were worried about the effect it will have on their eyesight.

As with all surveys, most participants have at least some interest or connection with the general subject or they would likely not participate (unless compensated), so it is hard to establish the credibility of the respondent base, and question content can drive certain results unless carefully worded, so we are somewhat suspect that 80% of respondents said they were ‘excited’ or willing to use the technology under the right circumstances when paired with the responses about concerns that keep potential VR buyers from purchasing headsets.  However, if we look at the survey results more as coming from a less randomized sample, many of the responses make sense, particularly those on what the ideal VR system should contain.
The most telling response were those concerning usage, which would indicate that fatigue is a major factor for almost all users, and that the quantity and quality of available games and video content does little to push users to engage more often.  Would better and more games be enough to create a new VR paradigm or will hardware control the ball until fatigue issues are resolved?  We would guess both, with hardware a bit ahead of content, although they tend to be a bit closely tied.
While new and less expensive VR headsets will draw in additional users, the hype surrounding the Metaverse is more likely to be a tease followed by disappointment for both those consumers who expected to spend hours each day in wondrous lands tailored to their likes and dislikes, and retailers who expected to be deluged with orders for both real and virtual products.  Creating a true Metaverse requires VR to advance quickly and for the supporting industry to temper consumer and business expectations to a more realistic timeline, which is rarely done in the CE world.  Maybe ‘exciting’ is a better description than ‘VR is Here’, but headline writers are writing to sell product so most likely the hype will continue until the next cyclical ‘disappointment’ cycle begins and the process will begin again.  Such is the ‘Circle of Life’ in the CE space…
 

Its a few years in the future and you are sitting on your couch after a long day at work at your virtual office watching “Goodfellas” (R.I.P. Ray) for the eleventh time on your video wall, while picking at a Hostess cupcake that you have been hiding in the back of the hydrator for weeks.  A few crumbs fall to the highly polished composite floor, which could be just the evidence that the wife needs to search the kitchen for cupcake contraband, but you gesture left toward the video wall which opens a set of virtual controls and you point to the button marked “C”.  Within seconds those crumbs that could have exposed you to a litany of negative references to your health and the threat of an actual visit to a doctor for a check-up, are gone and all evidence of the hidden cupcakes are gone.  Life is good again.
So how did those cupcake crumbs disappear?  You don’t have a dog so we can rule out absorption by a canis lupus familiaris, and Roomba went out of business years ago, so where did the crumbs go and who took them?  The answer is ‘the robots got ‘em’.  Does it sound a bit like science fiction or even science fantasy?  It’s not based on developments by a group of engineers at Northwestern University who have developed the smallest remote-controlled walking robots ever built, roughly 1/3 the size of a typical ant, and the idea that in the future a pack of such little scavengers would sit in a box under the couch waiting to be called on to clean, polish or perform other functions for you, is not science fiction but merely a practical application of that research.
These little crab-like creatures are not battery powered or driven by complex electronics, but are constructed of alloys that when heated conform into a ‘memory’ shape and are coated with a thin layer of elastic glass that pulls them back to their original shape as they cool.  Currently these miniscule robots are controlled by a remote controlled laser that starts the ‘walking’ process by heating the ‘legs’ of the bots, and by having the laser scan the legs in a particular direction, the bots will ‘walk’ that same way, and as these structures are so small they cool quickly, which allows them to walk or swim more quickly as their size decreases.
The same team at Northwestern devised a process to fabricate these bots by bonding the flat alloy materials to a stretched rubber substrate.  When the rubber is relaxed it buckles and the alloy ‘pops’ into a pre-defined 3 dimensional shape, allowing them to create robots of any size or 3D shape.  Movement of shapes can take the form of bending, twisting, and expanding, which allows the devices to crawl, walk, turn, and jump.  Of course, these experiments are only the basis for the creation of commercial devices, although the team previously developed a winged microchip last September, the smallest man-made flying structure ever built, about the size of a grain of sand, so it would seem the possibilities are not limited to ground work. 
In order to commercialize such devices other methods for ‘stimulating’ them would have to be developed, but nano-fabrication, an outgrowth of semiconductor process technology, is a rapidly developing field, and the application of nano-scale power sources and processors to such devices is a possibility, although the cost of production will be the major consideration for commercialization.  That said, at least the process for creating the structures has been simplified and uses common semiconductor materials and processes, such as Si wafers, sputtering, annealing, photoresist patterning, and tape transfer, and while we are still some time away from these bots helping you to keep your Hostess cupcake habit from the wife, its not really science fiction anymore.  For now, use a paper plate.

​Citation: (Yonggang Huang & Yihui Zhang, 2022)

​In December 2013 LG Display (LPL) and Sharp (6753.JP) entered into a cross-licensing contract concerning the use of display IP, however LG Display recently found that Sharp had violated the contract in a specific area (undefined) and requested the case go to arbitration, using the Singapore International Arbitration Center for a ruling in December of 2019.  According to a release by Sharp, the arbitration panel has decided that Sharp was in violation of the agreement and must pay ~$95m to LG Display as compensation for damages, although the details of the infringement remain confidential under arbitration rules.
There has been no date set for the payment, although Sharp has indicated that it will revise its full year 2022 (March year) consolidated financial results to reflect the payment.  While the agreed upon arbitration settlement is far below LG Display’s original claim for $840m in damages, it represents almost 3x LGD’s operating profit last quarter, and while having little to do with LG Display’s actual operating profit or loss in 2Q, it will certainly be a factor in the reported net metrics.

​disenfranchised but to its residents to ‘incentivize’ them to purchase certain items that the city government deems important to the economic health of its population.  This is in addition to the many subsidy and tax-advantaged programs that the city sponsors to attract businesses, as it competes with other cities and regions in China, including a very public one announced last June that promised up to 40% of total investment cost paid (max. $47m/project) for any company willing to build out a satellite development project in the city, which came as a result of competitive offerings from Hong Kong, Macau, and other cities in Guangdong province that had positive results.
Such subsidies are well-known across China for businesses,  but Shenzhen has also offered incentives and rebates to consumers for direct purchases, particularly  a June 2020 program that paid each purchaser of an all-electric vehicle the sum of $2,974 (50% of that for hybrids), and that included 1 hour of free on-street parking for all electric vehicles purchased under the program.  The program allowed non-residents to participate if they had a valid current resident permit including Chinese citizens living overseas and foreigners with valid visas.
Now Shenzhen is at it again, this time offering subsidies of up to 15% (maximum $300) on purchases of electronic products including smartphones, laptops, drones, wearables, fitness equipment, robots, and smart home appliances.  That said, the list of eligible items does not include any foreign brands, with over 40% of the 8,249 items (multiple models) being from Shenzhen-based Huawei (pvt), and while that might only make a small dent in the CE product weakness seen across China, it is going to make some Shenzhen residents happy.

As we have noted previously the India smartphone market is the 2nd largest globally and represents a large opportunity for smartphone vendors who are able to understand the nuances of this vast country.  That said, India’s GNI (2020) was $1,900/capita, which compares with $64,140 in the US, $10,550 in China, $116,440 in Liechtenstein (the highest), $230 in Burundi (the lowest), and $11,077 for the world combined.  In order to cater to the entire Indian population, aside from flagship models, smartphone brands must pack many features into low and mid-priced phones, something Chinese brands are quite good at, and if we look at the top 10 best-selling smartphones in the country, as shown in Table 1, we can see that all but one are under $300 and two of the lowest priced models are among the top 3 sellers.

​We have mentioned Samsung’s continuing foray in commercializing Micro-LED TVs, with the most recent innovation being the impending release of their 110” Micro-LED based TV to Chinese residents.  The promotion is being done through JD.com (JD) with the device officially offered on June 18.  Despite the price of $156,145 US (1,049,999 yuan) more than 1,500 folks have signed up for an appointment to see the set, which has 4K UHD resolution, a 120Hz refresh rate, supports HDR10+ and has a peak brightness of 2,000 nits (more likely ~1,600), which is about twice that of other types of high-end TVs and far brighter than typical sets which are ~300 nits.  

Samsung Display (pvt), an affiliate of Samsung Electronics, was once the large producer of LCD display panels[1], then competing with South Korean rival LG Display (LPL) for supremacy in that market.  While much of SDC’s revenue came from its parent, Samsung Display was a major global large panel LCD supplier to the industry. But as can be seen in Figure 1, SDC’s focus moved away from large panel LCD display production and more toward higher value small panel OLED displays, where the company still dominates.
  In 2020 the company made a formal decision to end its large panel LCD production business by the end of that year, and sold its Gen 8.5 fab in Suzhou, China to Chinastar (pvt), while taking a 12% stake in the company, but postponed the closing of large panel LCD production facilities in South Korea at the behest of parent Samsung Electronics.  While sustaining a single large panel LCD fab during 2021as panel prices increased, SDC maintained it goal of exits the large panel LCD display business but used existing fab infrastructure to add small panel  OLED capacity or to develop a production line for its proprietary QD/OLED panel process, which has begun production.
As large panel LCD prices began to decline last July, it became inevitable that SDC would finalize its plans and close that fab, although the moratorium was extended into this year.  As large panel LCD prices continue to decline it becomes more critical for SDC to close their last large panel fab as panel prices approach cash costs, which is the case currently, and sales for SDC’s large panel LCD segment declined to only $7m in April, down from $65m in January and a peak of 2.13b in March of 2012.   Given the declining panel price and the reduced production assumed, we would expect the fab to be closed by the end of 2Q.
According to local Korean press, Samsung Display employees (at least those 37 years old or less) can apply to be transferred to the chip packaging business of parent Samsung Electronics, which operates under a different division.  300 such positions are being offered to the ~1,000 SDC employees still working at the L8 LCD fab, which will take some time to wind down.  Staff will be needed to secure the equipment, which could be sold to smaller producers, with some potentially held until SDC decides what it will do with the idle space. 
SDC has been developing plans to produce Gen 8 OLED panels using a vertical deposition process that would allow for RGB patterning rather than the WOLED process used by LG Display, or the fab can be converted to additional capacity for the QD/OLED process, which currently stands at 30,000 Gen 8.5 sheets/year, a relatively small production volume level, but we expect plans to be finalized for the fab in July if it goes toward QD/OLED, as that conversion would likely take 9 to 12 months, giving SDC enough time to increase QD/OLED production for the 2023 holiday season, although that is a bit speculative on our part.  All in, SDC should be out of the large panel LCD business within the next 30 to 45 days.


[1] By Sales

​Lastweek we noted March and 1Q smartphone shipments in China.  In that note was the line, “5G smartphone shipments in April in China were 16.19m units, up 42.3% m/m but down 41.1% y/y against a very strong March in 2021 (+82.5% m/m & +342.5% y/y) after the 2021 New Year holiday”, which should have read ‘March’ rather than April.  Please excuse the error.  That said, we also noted that typically April smartphone shipments in China have been up 21.8% m/m (5 year average) although down last year, while we noted such a gain might be a bit more difficult this year given the macro circumstances and Chinese COVID lockdowns. 
Our very early data from China indicates that April smartphone shipments were only 17.6m units, which is down 18.0% m/m and down 36.0% y/y far worse than expected.  As these are unofficial and unconfirmed shipment metrics we cannot definitively say how bad April smartphone shipments were in China, but we expect to reduce our full year expectations for Chinese smartphone shipments once we can confirm the April numbers.  With the first four months of this year seeing substantial y/y Chinese smartphone shipment declines, it is getting progressively harder to see a scenario where a recovery could balance out that early weakness.  We believe Apple saw only a slight decline in Chinese smartphone shipments in April and China’s Honor (pvt) brand saw a large y/y gain as it saw only modest sales in April last year, while other major Chinese brands saw shipment decline between 32.0% and 42.7% on a y/y basis, should the April preliminary data prove correct.  The effects of recent COVID lockdowns in Shanghai, Zhengzhou, Shenzhen, and Beijing are being blamed for the poor results, with consumers unable to shop and manufacturers unable to ship.