Universal Display (OLED) reported 1Q results of $150.47m, up 2.9% q/q and up 12.3% y/y (typical 1Q is down 11.3% q/q on a 5 year average), which was above consensus of $144.5m and our $123.7m base expectation.  Material sales grew 1.1% q/q and 8.6% y/y while royalty/license revenue grew 6.8% q/q and 17.5% y/y, with overall margins flat q/q at 78.0% but down from 82.6% one year ago, although consistent with the last three quarters.  EPS was $1.05, ahead of $0.98 consensus, up 7.2% q/q but down 3.6% y/y.  UDC finished the quarter with $17.67 in cash, ST and LT investments ($17.36 in 4Q 2021)..
While this was a relatively uneventful quarter for UDC, primarily reflecting continued adoption of OLED across a wide variety of CE display based products, the company indicated that while they have not seen the effects of Chinese COVID lockdowns, continuing inflation, or similar economic headwinds from their customer base, they do acknowledge that such issues are affecting the CE space and could change customer plans.  That said, they reiterated previous full-year guidance of $625m to $650m.  One point of note in recent quarters has been the decline in emitter material gross margins, which while relative stable in 1Q, have declined from 72.8% in 2019 to 67.2% last year.  Contributing to that decline has been a need to carry higher inventory levels and increasing raw material costs, a portion of which is iridium a key part of phosphorescent emitters, which saw a five-fold price increase last year.   While iridium has come off its peak in 3Q last year ($6,100+) and reached as low as $3,850 in 4Q ’21, it is now back up to ~$5,000/oz., indicating that volatility in UDC’s material margins will likely continue.  While this seems to be a concern to others, we believe the general stability of material margins (63% - 67%) is more important than returning to levels seen in pre-pandemic days until global inflation is brought under control, especially as material sales continue to grow, which will give UDC more leverage toward iridium purchases as the material returns to less lofty levels over time.

On a regional basis South Korea continues to hold the largest share of UDC’s revenue at 60%, essentially flat during 2020 and 2021, while China has grown from 32% to 35% since 2019.  Sales to South Korea were $90m and UDC’s ‘Customer A’ and ‘Customer B’ represented ~$100m in sales so we can assume that A & B were Samsung Display (pvt) and LG Display (LPL).  China represented ~$55m in UDC sales and ‘Customer C’ and ‘Customer D’ represented $33m, likely representing BOE (200725.CH) and Visionox (002387.CH).  UDC’s top four customers represented 89% of material and royalty/license sales in 1Q which is consistent with the last two years, along with the ratio of material sales to license/royalty revenue, which was 1.45, in line with last year’s average of 1.47.

Material sales are the key to UDC’s business, and since the adoption of ASC 606 material sales ‘regulate’ the recognition of license/royalty revenue, but that aside, we look closely at the long-term growth of both red and green emitter sales to gauge the growth in overall OLED device area.  While there are subtle changes in material efficiency, formulations, and quarterly buying patterns, red emitter and green emitter is used in every RGB display and yellow/green is used in most[1] OLED TV displays so they are certainly data points in understanding the growth of OLED in the display space, with both having remained above trend line for the last 5 quarters.
There are a number of potential OLED fab projects under consideration that will likely have an impact on UDC’s long-term material sales should they become actual production lines.  Samsung Display, LG Display, and BOE are also considering building Gen 8.5 OLED fabs to better serve the newest OLED application, IT products, and while these will likely not be in production until late 2023 at the earliest, even in their phase one states they will represent a significant boost to overall OLED capacity, and given UDC’s lock on phosphorescent OLED emitter materials and its existing relationships with all OLED producers, we expect there will be another leg to the OLED growth story as OLED IT product demand begins to grow over the next few years..  There will be competition from other display technologies but OLED has established itself as a viable display prpduction process and with the infrastructure already in production will likely have the same staying power as LCD has had over the last twenty+ years.


[1] Samsung’s QD/OLED display does not use yellow/green emitter.

​Much of the Q&A was related to the company’s previous statements concerning the development of a blue phosphorescent emitter and host system, which the company reiterated this quarter.  There is considerable significance to such a development, although UDC is not alone in its efforts toward such a material.  Some additional color on the project was given in that the company expects to meet technical targets[1] by the end of this year and might see some revenue from such a product at the end of 2023, although real revenue generation from a blue emitter system will be in 2024. 
As we would expect there is considerable interest in the development of a phosphorescent blue emitter as it would improve OLED stack characteristics and increase power efficiency, but more toward UDC’s interests would be the addition of a 3rd material revenue stream for RGB displays.  We note also that the license agreement and material supply contract UDC has with its first and sometimes largest customer, Samsung Display (pvt), does not include blue emitter material, which would imply an additional or supplemental agreement between the parties when blue emitter material becomes commercially available.  As UDC is working directly with its customers on the development of a blue phosphorescent emitter, since they will ultimately decide whether it is ready for commercial use, we expect early revenue would likely be in the form of ‘developmental’ emitter sales, as management noted might show in 2023, with full scale commercial product in 2024.
UDC’s Organic Vapor Jet Deposition development project is also progressing with 23 employees at the end of 1Q working toward putting together the key subsystems necessary for an alpha system that will serve to verify the technology’s ability to scale.  An actual commercial product is still a few years away (we would expect a pilot system in 2024 and a gen 6 commercial product in late 2025 or early 2026) although competition from a number of different deposition technologies continues to pressure the development of such a tool.  In the interim we would expect a cost burden between $1.2m and $1.6m per year.
All in, 1Q 2022 was a good quarter for Universal Display, both from a financial standpoint and an emotional one.  There was little to explain on the conference call, as the issues facing UDC’s customers are well known to investors.  More to the point is whether the growth in OLED display penetration can offset the weakness that is expected to continue in CE product demand.  While the LCD display business has been on the positive side of the scale during the COVID-19 pandemic, we are slowly moving back to a more normalized demand cycle in the CE space, where competition for consumer dollars will no longer be related to how fast a producer can get a product on shelves, but more does it provide enough incentive for the consumer to shell out dollars with less buying power than two years ago.  While LCD manufacturers extol the progress made in their space over the last few years, OLED displays are still considered the best technically, and while there will be issues with every display technology, OLED has become embraced by CE brands as a way to raise the quality of CE products.  Given that UDC is in the unusual position of being a ‘window’ into the OLED space, the company should be a focus for any technology investor.  Of course, valuation is absolutely up to the individual…


[1] Typically those targets are material efficiency, color point, and lifetime.  While UDC likely has a good idea what minimums are necessary for a commercial blue emitter/host system, each customer has its own targets, which makes the adoption timeline particular to each customer.

Notebook panel pricing, while certainly down from its peak in September of last year (↓14.6%), has held up better than other panel categories, with aggregate notebook panel prices still up 14.5% from the lows seen in January 2020.  Notebook shipments have only recently begun to slow as both demand from remote education programs wanes and the effect of component shortages, COVID lockdowns in China, and inflationary malaise take their toll.  While notebook shipments themselves have been a bit lumpy it is easier to see a pattern when looking at notebook panel shipments, which peaked in 4Q last year and have begun to decline after fairly steady increases since the pandemic began.

We do note that over the last two years many notebook brands maintained higher than normal inventory levels of components in order to guarantee their ability to fill demand during shortages, and while demand was certain present, this added a bit of ‘anticipatory’ ordering to secure sufficient safety stock.  In the panel space it has been most recognizable, as shown in Figure 2, but is now showing signs of weakness, with 2Q notebook pricing already down 9.2% from the end of 1Q if our forecast for May holds true, and while panel production reductions might not follow immediately, panel prices are a direct reflection of demand, which would already be foreshadowing a reduction in demand.  It can be seen in Figure 1 that the mismatch between panel production and notebook sales narrowed considerably in 1Q ’22 as notebook brands began to lighten inventory levels, but given the component shortages and lockdowns seen recently, it would be hard for notebook brands to return to pre-COVID component and finished product levels.

All in, we do not expect notebook panel demand or pricing to see the same rapid downward spiral that occurred with TV panels, but we do expect the price declines to continue and could be sustained into the holiday build period in 3Q, which leads us to expect it will be difficult for both notebook brands and notebook panel suppliers to show anything but lower y/y returns this year.  1Q shipments for the top brands already reflect a 4.9% y/y decline in notebook shipments, with only Asus (2357.TT) and Apple (AAPL) up y/y, although combined they garner only a 16.1% share of the market, which is less than each of the top three brands, all of whom were down y/y.

​Under the “Holding Foreign Companies Accountable Act” passed in December of 2020, the SEC is required to identify public companies that are located in a foreign country by requesting an audit report issued by a registered public accounting company to allow the US Public Company Accounting Oversight Board to inspect or investigate companies despite ‘a position taken by an authority in the foreign jurisdiction’.  In other words, if foreign US listed companies do not fully disclose all information, in particular ownership structure, they are notified by the SEC of such a request and have roughly three weeks to provide complete information.  If they don’t, they are subject to delisting in the US.  The SEC has added an additional 80 names to its list of provisional delisting, including some of the most prominent Chinese technology companies, and including those already delisted, the list now represents roughly half of all Chinese companies listed on US stock markets.   Here are some of the ‘new’ names added this week:
Bilibili (BILI)
Pinduoduo (PDD)
Tencent Music (TME)
JD.com (JD)
Netease (NTES)
We expect that anyone at the institutional level that has or is investing in Chinese companies listed on US exchanges has done considerable due diligence before making such investments.  Understanding Chinese company ownership takes an inordinate amount of time as layers upon layers of organizations are deciphered, only to find that behind the organization names lies a state or city controlled agency.    We do this regularly for what are smaller companies compared to those on the list above and many times we hit a wall where there is no public information to define ownership further.  The companies on the list should at the very least be able to quantify ownership publicly and if they cannot do so, for any reason, they should not be able to  trade on US exchanges.  We are usually less favorable toward government regulations toward Chinese companies, but ownership is definable and should be presented in a way that is relatively easy to understand and allows the investor to understand who benefits from the success of such companies.

Samsung Display (pvt) made its decision to exit the large panel LCD TV production business quite some time ago, selling its last fab in China, and converting much of its LCD capacity to OLED, leaving only one fab still producing LCD TV panels at the request of parent Samsung Electronics (005930.KS).  LG Display has reduced its large panel exposure over the last two years but has maintained a larger LCD panel presence than SDC, which until the middle of last year, served them well.  Since then LCD TV prices have declined 51.5% from their peak only 9 months ago and are expected to decline again this month, putting marginal producers worrying whether they can sell such panels above cash costs.
The Korean Economic Daily is stating that LG Display (LPL) has made the decision to reduce its LCD TV panel production in Korea and China, as competition from Chinese panel producers continues to intensify.  LGD is said to be cutting LCD TV panel production by 10% relative to the first half of this year, which is a surprisingly smaller cut than we had already built into our LGD capacity model.  As has been the case for a number of years, expectations are that the soon to be shuttered capacity will be converted to large panel OLED TV panel production, although much depends on the global economic environment and a potential deal with Samsung Electronics that would establish them as a new customer.

​We are surprised that LG Display is not being more aggressive in closing large panel LCD capacity, although we expect if large panel prices continue to decline they will hasten their retreat form the LCD TV panel business, but we expect that they feel that they can run the remaining LCD TV fabs at least at break-even until they are able to justify the expense of converting same to new large panel OLED capacity, where they dominate the industry.  That said, building a large panel OLED fab is an expensive and time consuming project, and typically produces less in terms of capacity than the LCD production facilities that it replaces, so it is not an easy decision for LGD to make, but there is a point at which the Band-Aid needs to be ripped off and a full decision needs to be made.  We believe the company has already made such a decision but executing such a major upheaval is a daunting task.  All in, if they do make even the 10% reduction this year at least it is a step in the right direction, but China is certainly not going away and will inevitably drive higher cost producers out of the LCD TV panel market unless they are so specialized that they can survive.

​It is a well-known fact inside and outside technology circles that the semiconductor industry is capacity constrained and despite significant plans to increase capacity, the industry remains constrained.  One point of contention for such expansion is semiconductor production and test equipment, where lead times have increased from 3 to 6 months in 2020 to 10 months in 1Q 2021 and to 14 months by July of last year, so while plans for semiconductor capacity expansion have been made and site construction has begun, the ability of semiconductor companies to actually begin production is getting pushed back by such equipment delivery issues, much of which is being caused by semiconductors themselves.
Producing semiconductor manufacturing and testing equipment requires a relatively small number of chips that represent ‘far less than 1% of the global semiconductor market’ according to Semi.org, however these chips are essential for the production of said equipment and must compete with higher volume semiconductors for existing fab capacity, with a similar problem facing the production of equipment used to produce raw wafers, without which capacity would remain constrained.  Among these absolutely necessary components of SME tools are FPGA (Field programmable gate arrays), sensors, power management ICs, A to D converters, and microcontrollers, but without such chips even the tools needed to produce them cannot be built, creating what is called the multiplier effect.
Examples given by SEMI.org are:

• A typical FPGA test tool requires approximately 80 FPGAs to build. However, that tester can then test about 320,000 FPGAs per year – a multiplier effect of ~4,000x.
• Process tools require about 100 FPGAs to build and can process 120 or more wafers per hour. Wafers make many passes through each tool during the manufacturing flow but the share of most tools’ contribution to overall production equates to at least 2 million devices per year – a ~20,000x multiplier.
• Optical wafer inspection tools require roughly 100 high performance computing (HPC) server chips to manufacture. Their multiplier effect can be ~30,000x and much higher.
• A typical MCU Tester needs approximately 100 FPGAs to be manufactured, but that tool can then test nearly 10 million MCUs in a year, a multiplier effect of ~100,000x.
• The U.S. Commerce Department has noted that MCUs are among the chips facing the most acute shortages.[4]  They are used in many key downstream industries including automotive. If we consider an example using a 100,000x multiplier effect for a tester and extend it to the automotive supply chain, assuming the number of MCUs required for auto manufacturing is ~100 per car, every tool/tester enables enough MCUs to build 100,000 cars

Fabs have to make choices as to how they allocate capacity and are under pressure to balance allocations across a number of essential industries, but for the semiconductor industry to expand and meet the supply challenges it is currently facing there has to be some system for prioritizing those chips that are necessary for the production of semiconductor and wafer production and testing equipment or all the capacity spending being allocated (86 new fabs slated begin production between 2020 and 2024) will be for naught and will remain idle.  While likely less profitable for fabs the multiplier effect shown above makes it essential that they recognize that allocating resources to these smaller, more specific products has an immense payback, despite the minor short-term effect.  Without that shift, the semiconductor shortage and its effect on the global economy will continue to drag on and limit the global growth characteristics that power the semiconductor industry long-term.

NFTs (Non-Fungible Tokens) are esoteric enough themselves, with most average folks having little understanding of what they are, what they represent, or what value (intrinsic or otherwise) they might have, and while Bitcoin has been around since 2008, NFTs became ‘a thing’ in 2017[1] when Larva Labs (pvt) released “Cyberpunks”, a collection of “unique collectible characters” on Ethereum, which became the basis for standard used today for most digital art and collectibles.  Billions of dollars (actual currency) have been spent on NFTs since then for a wide variety of items no longer limited to relatively primitive digital artwork, with music, game items, sports items, fashion, and real estate, but how do collectors know whether the items they are buying are ‘real’? (Real here does not mean physical but real in the sense that they are unique and owned by the seller)
A new start-up (2022) has just raised $1m in a pre-seed round including a number of VCs and Angel investors that can help NFT collectors better value potential NFT purchases by evaluating a variety of metrics and giving the particular item a “Mint Grade”, similar to the Numismatic Guaranty Corporation that has been grading collectible coins since 1987, or in the vernacular, a ‘CarFax (SPG)’, or Zillow (Z) ‘Zestimate’ for NFTs.  FungyProof (pvt) gives the collector the ability to check a potential purchase or existing asset through the company’s software that evaluates blockchain and image metrics such as “Does the Metadata conform to applicable schema standards?” or “Does the Contract contain no permissions/backdoors and has ownership been relinquished?”
While we are relatively technology savvy, some of the metrics involved are so particular to the blockchain that they become almost meaningless (‘energy of token transfers’, ‘Metadata storage does not cause bloat to underlying blockchain’, etc.), but they all contribute to the items ‘score’ as shown in the Figure 3 demo.  A number of the metrics involved are shown, and whether they meet the FungyProof rubric scorecard requirements, even though we expect the weighting of those characteristics will remain hidden, although the basic characteristics for an “A” or an “F” grade are as indicated below:

“A” Grade

Highly interoperable contract
No back-doors or security vulnerabilities in contract
Assets and metadata are formatted well
Asset gateways have redundancy, low latency, browser compatibility
Distributed storage used for assets and metadata
Low minting and deployment energy use (kWH)
 
“F” Grade

Non-standard or not supported contract
Vulnerabilities exist
Asset and/or metadata missing
Gateways are broken
Broken storage
High minting and deployment energy use (kWH)
 
While this is a very new company that evaluates another relatively new asset class, it is indicative of the new world that is developing behind the often hyped Metaverse and Cryptocurrency products that have captured the minds and dollars of millennials across the globe.  Whether this turns out to be just another form of ‘beanie babies’ (1986), ‘Furbies’ (1998), or ‘lava lamps’ (1963) is certainly open to speculation, but there is no doubt that there is money to be made supporting NFTs as shown above, and we have trouble keeping track of the funding that is going toward NFT support companies which seem to be popping up on a daily basis.. 
​
With company goals as simple as ‘…aiming to launch multimillion dollar NFT projects…” closing seed rounds in days, anyone who has marketing or blockchain coding experience is suddenly becoming the CEO of a new NFT related start-up and celebrities are helping to fuel the fire under these potential companies by lending their names and images to promotional efforts, usually for a fee or a share of the company.  We don’t judge whether this is a good or bad thing, but we certainly understand that NFT valuation is not only emotional but also subject to little or no regulation and therefore become a wellspring for abuse and fraud.  It is a positive that companies like FungyProof are making their services available to NFT collectors, but until there is an agreed upon basis for evaluation, all evaluations are subjective. 


[1] Disputed by some who believe Kevin McCoy & Anil Dash created the first NFT in 2014.

Before we go further we note that ‘could’ shows up a large number of times in the source material, which leaves open the idea that much of this information is unverified and open to interpretation, so we present it here with that understanding.
According to a South Korean trade press source, Chinese OLED panel supplier BOE (200725.CH) has seen significant reduction in its small panel OLED panel shipments to Apple (AAPL) since February with speculation that the displays it has been producing for the iPhone 13 have been suspended by Apple after it was allegedly discovered that BOE had changed the display’s design without Apple’s approval.  Originally the reduced production was thought to be the result of display driver shortages that we noted in our 02/17/22 note, “BOE Behind the Eight Ball”, caused by the prioritization of drivers to LG Display (LPL) by LX Semiconductor (108320.KS) rather than BOE, given LXS’s ownership by LG Group (pvt), the holding company for LG Electronics (006570.KS), LPL’s parent.
While the above theory was both logical and not uncommon during periods when complete orders are unable to be filled, the source speculates that the reduced production was the result of Apple discovering that BOE had made changes to the layout of the TFT (Thin-film transistor) circuitry that triggers each sub-pixel in the display.  Apple has very strict rules about making sure that displays meet company standards and designs, which has been a problem for BOE in the past.  BOE was unable to qualify for Apple’s ‘new model’ display supply chain a number of times, although we believe much of that issue was based on yield rather than design, however BOE’s full iPhone qualification this year seemed to indicate a more reassured Apple toward the company’s production processes.
The speculation does note that there is no expectation that Apple will limit BOE’s iPhone 14 display production based on the possibility of BOE’s possible misstep under the notion that Apple needs BOE for leverage toward iPhone 14 panel pricing with Samsung Display (pvt) and LG Display and cites continued production at BOE’s B11 fab, where the iPhone displays have been produced, but some wonder whether Apple might have given BOE a warning and expects BOE to find a way to fix the issue going forward.  Again, while we consider much of the above supposition, it is certainly not out of the realm of possibility, especially given Apple’s tight control over its supply chain and product quality. 
Both Samsung Display and LG Display have faced quality issues relative to Apple products in the past, and while Apple had little choice to remain with Samsung Display, given they have been the only volume source of Apple’s non-standard small panel OLED displays at times, LG Display has faced significant volume cutbacks that took many quarters to completely rectify, which puts BOE’s possible entry into the penalty box a real possibility, but until production for the iPhone 14 begins during the summer, the possible impact will not be known.  BOE has been expected to supply the majority of the displays for the iPhone 14, while Samsung Display and LG Display supply displays for the iPhone 14 Pro and Pro Max.  BOE was said to have been using a 40m unit target for iPhone displays this year, but it would seem that not only will that fall short of expectations due to the above issues, but also as Apple is expected to have already reduced its overall build projections for the iPhone, as we noted on Monday.  While Chinese trade press is still extoling BOE’s virtues as the iPhone display provider that will replace SDC and LGD, it might prove a bit harder than BOE might have expected. 

​Xiaomi’s (1810.HK) Redmi 9 Power was the top selling smartphone in India in 2021 and the brand was the best-selling smartphone brand in India based on unit volume (Apple has the highest revenue in 4Q) and was for most of 2020.  That said, there has been considerable friction between the Indian government and Chinese smartphone brands, a result of border disputes between the two countries that have created an adversarial relationship.  India’s anti-money laundering agency recently took over bank accounts held by Xiaomi Technology India, under the Foreign Exchange Management Act and has initiated an investigation of what Xiaomi called royalty payments that were transferred from India to the company’s Chinese parent in February.  The Indian government stated that “such huge amounts in the name of royalties to three foreign based entities when Xiaomi India had not availed any services from the three foreign entities…” which they believe violates the country’s foreign exchange statutes.
According the India’s release Xiaomi has been making such payments to these foreign entities since 2015, totaling $726m, which is the amount the Indian government has seized and is also considering that Xiaomi gave misleading information to the banks involved in the transfers and has called a number of former and current Ziomi employees to testify to the committee.  Xiaomi stated that it abides by all Indian laws and was fully compliant with all regulations, and is cooperating with authorities. 

​While unconfirmed by the Chinese government (longer than usual delay) we expect March smartphone shipments were ~24m units, below the 29m units we had expected.  This would put 1Q smartphone shipments in China at 71.9m units if confirmed.  While this is a 61.5% increase on a m/m basis, it represents a 33.5% decline y/y and is the 8th quarter in a row of declining y/y smartphone shipments in China.  We will publish charts when the data is confirmed by the Chinese government.  2Q, based on potential COVID-19 lockdowns, is expected to be down 5% to 6% y/y, although there is little that these estimates are based on given the stringent restrictions China places on COVID-19 breakout cities.