Lava International (pvt) is coming back.  The company, officially based in Noida, India, has been moving its operations back to its home country from China and other locations, and is soon to list its shares on one of the two principal exchanges in its home country.  Lava was a name to be reckoned with in the Indian smartphone market back in 2013, releasing 12 models that ranged from $207 to $49 in their home market and rising to a peak of 34 models in 2016, but competition from Chinese brands and Samsung (005930.KS) began to take its toll on the company, who moved its R&D, Design, and manufacturing operations overseas to more effectively compete.
Lava is now reviving its smartphone business and in January released its “MyZ” series of smartphones, which according to the company, is the world’s first fully customizable smartphone line, allowing the user to choose the front camera  rear camera, RAM, ROM, and color, and have the phone produced ‘just for you’..  That said, on an overall basis, the new line sports LCD displays from 7” down to 5”, running Mediatek’s (2454.TT) Helios G35 or A20 OS, and costing between $135 and $75 US, which is a bit below the 2020 average smartphone price in India of $156. 
While Lava has not seen its share of the Indian smartphone market above 1% over the last few years, the company expects to see a 5% share by the end of this year, likely more realistically possible after the IPO, which is expected to raise between $1.9b and $2b US.  The Indian government is also pushing to help local smartphone brands regain status, with government funding, and the bad border blood between India and China has helped Indian brands regain some relevance in the market over the last few quarters.  That said Fig. 2 shows 1Q composite brand share, which  includes only Chinese brands and Samsung and qualifying for government subsidies (Production Linked Incentives) means Lava must meet certain requirements to receive the benefits (3% to 6% of sales incentive for 5 years), which was the likely stimulus for the filing.
While the shares in Lava are unlisted, with the IPO filing set for June, there is a small unlisted share market for Lava which has seen the share price rise from ~₹200 (~$2.75) to ~₹400 ($5.50) since the company’s plans for the IPO began to be known.  Net profit margin for Lava (March year) has ranged from 3.68% to 1.43% (2019), but increased to 2.03% last year, although not surprisingly the promoters of the unlisted market consider the share undervalued on a market cap to revenue basis.

​COVID-19 has been devastating to the global economy and has put pressure on economies large and small.  With the implementation of a US vaccine plan, the impact of the virus is lessening, but in other countries that were not as fortunate to be able to vaccinate a large percentage of the population or are now facing mutated strains, the impact is quite severe.  In particular, Vietnam is facing such challenges, and as the country has become a hub for CE companies, the effects are presenting challenges to those companies that have moved facilities out of China over the last few years.
On May 29, the county’s Minister of Health confirmed that a new variant of COVID-19 had been identified in the country, mixing strains from India and the UK, and is more easily spread through the air.  On May 31, Ho Chi Min City instituted social distancing and other than in hospitals, schools, and factories, no more than 5 people are allowed to gather.  Four industrial parks in Bac Giang Province have been temporarily closed, where three Foxconn (2354.TT) factories that produced for Apple (AAPL) were located.  With a two week shutdown, most local analysts feel that production can be made up, however a longer shutdown could affect Apple’s AirPod Max supply chain. 
Samsung has the largest investment in Vietnam and has seen part of its plant in Bac Giang City closed since 40 employees were diagnosed with COVID-19 on the 25th, its largest smartphone assembly operation, and is also facing issues in India, where the new outbreak is worse.  Foxconn is also suffering issues in India where (unverified) production of the iPhone 12 has been reduced by 50% and Chinese brands Oppo (pvt) and Vivo (pvt) are also seeing OEM production issues in India.  While other countries like Malaysia are also facing new lockdowns, the effects will take some time to trickle through the CE supply chain once again and while Japan used to be the global IC capital of the world, Malaysia is now the leader in IC exports and with over 50 large semiconductor companies located there, and the government only allowing a small percentage of workers to maintain factory operations, the next two to three weeks will be key toward understanding whether semiconductor shortages will increase.  Its nice to be able to walk around outside without a mask in the US, but much of the rest of the world is not so lucky.
  

Predicting panel pricing has been a fools game for the last year as the number of extraneous events and influences has increased to the point where typical metrics and basic logic do not seem to hold.  Everything from the COVID-19 pandemic to the Trump administration trade restrictions and now a lack of semiconductor capacity, power outages, and an unprecedented number of fires and similar issues at various fab, have all contributed to what has become the most volatile period for panel pricing that we can remember.  There have been volatile times before, but they tended to fit the mold of what would be called normal cyclicality, so in order to illustrate the unusual period that we are currently in, we put together three charts that show month over month aggregate panel price changes for the three main large panel categories.
Monitor and notebook (considered IT products) have generally been the least volatile panels, while TV panel prices are more so, and the overall trend for monitors during the last 3 and a half years has been for relatively small negative incremental changes in m/m pricing until last year.  Using the same data the yearly metrics look like this:

The last 17 months, and particularly the last 5 months have been so far out of the averages as to make them questionable, but the data is what it is.  That said, given the increasing number of variables that go into building estimates for monthly panel pricing, we will fall back on an old tried and true method of using averages for a month or so to see if results are more accurate.  Based on what has occurred this year, monitor pricing should increase by 5.7% in June, and while our gut tells us this is probably too high, our gut has been wrong a fair number of times over the last 17 months.  Following the same metric, Notebook pricing should see an increase of 3.7% in June, which seems a bit more reasonable, and TV panel pricing should see a 5.2% increase.  While these projections are based on averages which gives them a close proximity to trend lines, when things change, which they eventually will, averages will become worthless for a period until there is enough new data to reduce the influence of what has been the norm for the last few months.  We do expect that a return to ‘normality’ will occur, but are less sure of the rate of change than when it might occur.  We fear a steep curve, but hope for a more gradual one as we head into the 2nd half.
One quick note – Aggregating panel data has an inherent problem in that panel sizes and characteristics change over time, and when new models are added and old models are removed from data sources, it can change averages at odd times and skew the data.  In the charts below, we took current panel models and prices and ran them back to the beginning of 2018.  If there was no data for some models we took the first available price point and filled in earlier blanks using that price.  While this might reduce the volatility a bit, it gives a more accurate account of how the category pricing actually moved over the period.

​Samsung Display (pvt) has been making foldable displays since mid-2019 and last year produced ~2.7m units, which in terms of smartphones is a very small share, however while they are not the only producer of foldable smartphone displays, we believe they accounted for close to 90% of foldable display production last year, with their only commercial customer being parent Samsung Electronics (005930.KS).  That will no longer be the case as of October, when SDC is expected to begin producing foldables for Google and seems to have snagged at least two more Chinese smartphone brands that are looking for device releases this year.
Sources in Korea are indicating that SDC will also be providing the primary foldable displays for anticipated smartphones from Xiaomi (1810.HK) and Vivo (pvt) along with Google (GOOG), on top of the expected August announcement from Samsung itself.  The Xiaomi device is expected to have a secondary screen produced by Chinastar (pvt) and the Vivo phone’s 2nd screen from BOE (200725.CH).   Oppo (pvt) technically owned by the same parent as Vivo, was also expected to release a foldable device this year, which now seems to have been pushed to 2022, but also seems to be focused on SDC’s displays despite collaboration with BOE and Visionox (002387.CH).
What makes this a bit unusual is that SDC has managed to supplant a number of prototypes that these smartphone brands have shown in the past, with primary foldable displays from Chinese panel producers.  It does not seem that when it comes down to final production, that any of the other potential foldable display producers can match SDC’s expertise, which in the case of foldable is far more important than price.  SDC’s ability to produce enough volume to satisfy both its parent and new customers gives them a significant lead over other foldable panel producers who are just beginning to mater the panel category but are likely far below SDC’s yield levels.  At some point in the future, there will be price competition in the foldable space, but currently we expect both the ability to meet unit volume levels and the quality of the display are the key factors in the decision as to whose displays to buy, especially for those who are releasing initial foldable product.

As we have noted in the past, China’s outlook on the CE space tends to be positive regardless of the surrounding circumstances.  This positive cast is quite pervasive, especially when reading local Chinese articles about various aspects of CE products and the industry in general.  While we have come to assign ‘enlightened self-interest’ to this ethical challenge, there are times when it either makes no sense or bypasses some obvious questions.
In an article by a contributor to a local Chinese rag, the contributor defined a set of data concerning the price of TV sets in China.  Citing the decrease in share of the two lowest priced segments, and the increased share in segments between 2,000 yuan and 40,000 yuan, the conclusion was that consumers’ price sensitivity had decreased over the last year and were more accepting of higher quality TV sets, essentially high-end TVs.  While the high-end TV market is certainly a focus of TV brands, especially in China where margins are thin, the article does not mention the fact that TV panel prices have been rising and set prices have been doing the same for the last year, reducing the number of units available in low priced categories and increasing the number in higher priced categories.  Yes, we would like to be optimistic as to  the Chinese consumers’ ability to shrug off higher TV set prices but that tends not to be the way economics works, making a direct correlation between price tier share and customer buying plans more promotion than reality..

​Asustek (2357.TT) is among the top 10 monitor producers globally, and as such has benefited from the strong demand for same as the COVID-19 pandemic forced a massive portion of the global population to remain indoors.  This can be seen in y/y increases the company has seen over the last few months in their sales figures.  The company is expecting to ship 7m monitors this year up 12.9% y/y and in that mix they expect to increase the number of gaming monitors from 2m last year to 3m this year, and expects global monitor shipments to increase from 139m, last year to 150m this year, an increase of 7.9% y/y, with gaming monitor shipments increasing 33.3% from 15m to 20m.
There was a qualifier on those estimates which was “barring the shortages of IC chips”, and a 2nd qualifier on 2nd quarter results which stated that, “due to the shortage of some key materials”, shipments of traditional and gaming monitors will stay flat in the quarter.  Given that the company reported 36.5m in April Sales, a flat quarter would entail the next two months being $35.8m each, and while these are still very positive results, it would imply that June could be a down month y/y.  This is an issue that plagues many companies in the CE space who are now facing shortages and much harder y/y comparisons, and while we emphasize that results such as these are still quite strong, unless component shortages go away in the 2nd half, the comparisons will continue to get harder, and even more so in 1Q of next year. 
Make what you will with the data, but even with continued demand strength, it seems that the high growth rates seen over the last year or so will be much harder to achieve in 2H, and given that there is little additional available semiconductor capacity coming on line in the next few months, the only way component shortages will ease would be against lower demand.  We expect stockpiling components has been part of the demand picture, which could slow and ease some demand related shortages, but if that stocking was actually ‘phantom demand’, the real growth rates in CE would become apparent, and they would likely lead to the weak comparisons mentioned above.  While we expect a less extreme scenario, we have to consider what we see on a day-to-day basis, and without seeming all ‘doom and gloom’ are a bit more cautious toward the CE space than  a quarter ago, despite the strong 1Q numbers.  JOHO.

Ring (AMZN) rules the roost when it comes to home security cameras, with the largest share of the over 42m units that were sold last year.  While not all were doorbell cameras, this increasingly popular device, wired or wireless, has been a popular item for many, with the ability to see who is at your door on your smartphone, regardless of whether you are home or not.  This added safety is both a boon to the homeowner and to law enforcement, who can request doorbell camera footage during investigations.  Ring itself has a ‘Neighbors by Ring’ network where the company has partnered with law enforcement to share videos, pictures, and texts about security and safety, however these relationships have also come under criticism from social justice groups citing an unfair targeting of communities of color.
A number of such groups have pushed for an end to partnerships with law enforcement, as when an agency makes a request for assistance, ring users within a certain distance of a particular incident are notified that law enforcement would like to receive footage from them.  As before, users can opt out of all notifications or select which they would like to see or respond to, however under Ring’s new rules, the agency requests are limited to a certain number of requests over a specific time period, and must have a case number for an active investigation, the contact number for the case officer, and a timeframe between 15 minutes and 12 hours. Agencies are limited to two requests per incident and the requests are now limited to within 0.25 and 0.5 mi2 of the incident, and cannot be used to gather information about protests or other legal activities, and all of the posts must be shown on the agency’s profile in the Ring system.
If you decide to share your footage or photos with an agency, once it is downloaded agencies can keep it for as long as local laws allow, and your e-mail and home address are also shared with law enforcement, but as long as you don’t put your photos or footage on the Ring network or download to law enforcement, the only way law enforcement can access your footage would be with a warrant..  Roughly 10% of video doorbell users have stated that they have shared video with law enforcement and an additional  12% have indicated while they did not, but they had reason to do so, and according to Consumer Reports (non-profit), during the 4th quarter of last year Ring’s law enforcement partners made over 5,700 requests for video.
As noted many citizen’s rights groups do not feel that Ring has gone far enough to maintain reasonable security and avoid targeting certain user locations, but at least Ring has taken some steps to give consumers a bit more choice when it comes to their doorbell footage.  As agencies are no longer allowed to send a request to a particular e-mail or street address, which many found intimidating, opting out of the program now not only ends individual requests, but ends all notifications.  No numbers on how many have done so  have been reported yet, but we expect the balance between communities to even out a bit even though you could always opt out of the whole program.

​Samsung Display (pvt), the display production arm of Samsung Electronics, undertook a major step in 2019 when it decided to end production of large LCD panels.  The decision was predicated on the price of large panels, which had been falling precipitously, and competition from Chinese LCD producers, who were both gaining production expertise and were undercutting SDC’s panel pricing in order to capture market share, which was enabled by government subsidies.  While some of those plans were implemented, with both the sale of the company’s Suzhou, China fab to TCL (000100.CH) through its Chinastar (pvt) subsidiary, and as we have noted, has converted some of its former LCD large panel capacity to OLED, with only one Gen 8.5 fab still producing panels in Korea.
SDC is the leader in small panel OLED production but without a large panel LCD product, the company had no way to capitalize on the popularity of large panel TVs, so it embarked on a project to develop a new technology that is based on a combination of both OLED and quantum dots, a technology that parent Samsung Electronics has championed for years.  The path toward developing a new display technology has not been an easy one, and as SDC closes more LCD capacity and converts to OLED, the pressure to be successful in developing a new large panel TV oriented display technology has increased and parent Samsung Electronics has not always been in complete support of the project.
That said, Samsung LSI, the foundry arm of Samsung Electronics, is said to have begun to produce timing controllers designed specifically for QD/OLED displays, which will give SDC TCON engineering samples that can be used to produce prototypes of actual QD/OLED TVs and monitors.  The TCON samples are for 4K and 8K TVs and a QD/OLED monitor product, which SDC is planning to send to potential customers this month.  SDC had previously sent QD/OLED samples to potential customers, but they were raw panels which were to be evaluated for quality and were not meant to be tested as complete modules.  If these module samples are approved, the TCONs will be modified to remove any issues that were discovered during customer testing and final production TCONs would be delivered to SDC, who can then begin to build out mass production.
Of course, there are a lot of hurdles that must be met, both from an engineering standpoint and from a customer perspective as potential customers parent Samsung Electronics and Sony (SNE) have to give final approval, which is not only hinged on the quality of the device, but also SDC’s ability to produce them in quantity and at a reasonable price.   SDC’s QD/OLED line has a potential capacity for 30,000 sheets/month but yield will be the determining factor.  Such a new process will likely begin with very low yields, which will generate a high product cost.  SDC has the option to absorb much of the high cost and price the units at a point at which they become attractive to customers, but that also generates significant operating losses.  SDC must make a decision as to whether to begin full production based on their expectations for improving yields, which for a new process technology is very hard to predict, and that decision is predicated on whether potential customers are willing to purchase the new displays altogether.
While SDC is part of Samsung Electronics overall, Samsung’s TV division makes its own decisions and has the option of passing on the entire QD/OLED project, so while the fact that Samsung LSI is willing to use some of its capacity to develop and produce timing controllers specifically designed for the QD/OLED project is a positive, it does not ensure that the project will be a success, something that will not likely be decided until the end of this year.  Sony is certainly a viable customer but also faces the same pricing issues that the Samsung TV division faces.  That said, if SDC gets the final OK from its parent, at full capacity, it could produce just over 1m 65” TV panels/year at 100% yield, which would obviously not be the case.  An optimistic projection would be closer to 570,000 units in the first year of production, using only 65” panels.  A mix including smaller monitor panels would increase that number and a mix including larger (70”+), would lower the unit count.

​President Biden expanded the scope of companies that were covered under Executive Order 13974 (1/13/21) which was an amendment to the original Trump EO 13959 which prohibited the trading of securities in a number of Chinese companies alleged to have ties with the Chinese military.  The extension increased the number of entities on the list from 31 to 59 and included two Huawei entities that had not been in the original or updated EO.  These companies (Proven Glory Capital & Proven Honour Capital) have been used by Huawei to raise capital in the past.  While the expanded list and its official move to administration under the US Department of the Treasury gives it more legal power, it does not take effect until August 2, leaving time for additional lawsuits to be filed.  As we noted recently, smartphone producer Xiaomi (1810.HK) was able to sue the US government and have itself removed from the list, although such successful court challenges have been few, and will likely become even more difficult in the future.
Despite the ongoing trade negotiations between the US and China, the new administration has continued to take a hard stance toward Chinese companies that it believes either work with or sell to the Chinese military, and US securities exchanges have gone from questioning the ban on legal grounds to potentially implementing the rules.  Whether the newly added companies or the entire list itself is a pawn in the trade chess game between the two countries remains to be seen, but it will certainly have an effect on the ability of the companies on the list to access US capital.

IoT devices vary considerably, and in many cases, particularly consumer facing applications are the heart of ‘smart’ devices, however one of the biggest stumbling block to the use of smart devices is their proprietary nature, that is they tend to operate under the domain of a particular brand and can be limited in what they communicate to devices that are not associated with that brand.  The IEEE (Institute of Electrical & Electronics Engineers), the ‘world’s largest technical professional organization’ has issued standards for an IoT ‘framework’, and one for the ‘harmonizing of interoperability’, but as anyone who has smart devices in their home, interoperability is not usually a word associated with those products.
At the end of 2019 a group of CE companies got together to form an organization called “Matter” (formerly Connected Home Over IP or CHIP) that provides ‘a seal of approval that devices will work seamlessly together, today and tomorrow’.   Under the guidance of the Connectivity Standards Alliance (formerly known as The Zigbee Alliance), the idea is to get competitors to work out open standards through collaboration and dialog, creating a library of protocols that enable ‘ a method for data sharing, interoperability, and security of messages over a network, where sensors, actuators and other devices can interoperate, regardless of underlying communication technology’, in other words the ability for any “Matter” certified product to communicate (with the permission of the user) with any other certified device.
While the architecture of the development model is overlaid on TCP, UDP, IPv6 and other protocols, the top-of the pyramid, aka the application layer, is the most important, and while unimportant to the outside world, is the focus of the collaboration between brands and represents those key areas where devices need commonality in order to work together.  While they are all of importance, we single out three that we believe are key to understand the issues surrounding interoperability.

• Application – High order business logic of a device.  For example, an application that is focused on lighting might contain logic to handle turning on/off the bulb as well as its color characteristics.
• Interaction Model - Represents a set of actions that can be performed on the devices to interact with it. For example, reading or writing attributes on a device would correspond to interactions with the devices. 
• Security - An encoded action frame is then sent down to the Security Layer to encrypt and sign the payload to ensure that data is secured and authenticated by both sender and receiver of a packet.

Those are the basics of “Matter”, but in a real world sense the applications it will be applied to, such devices as smart lighting, TVs, motion sensors, thermostats and a wide variety of other devices, and will allow a ‘Google (GOOG) Home’ device, such as a speaker, to work with Amazon (AMZN) Alexa, or Apple’s (AAPL) Homepod.  Rather than the consumer having to make the brand decision, and then being forced to remain with that brand, the consumer can look to see if products are “Matter” certified, indicating they can interoperate and choose the device by its function rather than its brand.
Aside from the relatively high price of smart devices, we believe interoperability has been the biggest stumbling block to consumer acceptance or even understanding of smart devices.  Yes, there are many applications that do not need to be ‘smart’, but then we could have said the same thing when cell phones were invented (“Who needs to speak to people when you are walking down the street or in your car?”), so we accept the fact that consumers get used to the convenience of smart devices over time is a given.  However the frustration of having lots of smart devices that do not work together limits the ability of consumers to see the benefits of intelligently designed smart devices and that is what “Matter” is trying to solve.
That said, the CE space is one that must have momentum, and momentum in this case means participation by a large number of brands.  The original founders of what is now “Matter” are Amazon, Apple, Comcast (CMCSA), and Google, but key CE brands like Samsung (005930.KS) and Huawei (pvt) are key players in the project, along with retailers like IKEA (pvt) and Kroger (KR), and semi suppliers such as Texas Instruments (TXN) and ST Micro (STM) and 150+ others.  Now that the specifications have been completed (May 21), the certification will begin with new products throughout the remainder of the year and previously released products can become certified by updating firmware.  As the standards are free (there is a fee to join the Alliance) there should be little resistance to join the alliance and as the public becomes aware of the potential benefits of “Matter” certified IoT products, momentum should build and help to legitimize smart devices a bit further.