Since July of last year the revenue generated by large panel display producers has been on the decline, tracking closely to the decline in large panel display prices, however the spread between the two, which we plot as an arbitrary value in Figure 2, shows that the spread between the two has yet to reach pre-pandemic levels (avg. 2019 spread = 233), which would seemingly forecast a contraction in the spread going forward.  Taking it one step further, we plot three key large panel display metrics for the same period, Price, Shipments, and sales, adjusting vales to a common starting point, and projecting out three months to see the result, which is shown in Figure 3, which indicates that by the end of August shipments will decline but sales will decline more rapidly as prices continue to decline, which would follow the utilization cuts at major LCD large panel suppliers that have been rumored in the trade press.
Making the scenario a bit more difficult is the fact that panel producers waited until June to make such utilization cuts, and the data for shipments in June will not be available for a few weeks, and with Chinese producers representing ~50% of industry large panel sales, the utilization reductions at BOE (200725.CH), Chinastar (pvt) and HKC (248.HK), who together represent 45.4% of total industry large panel display sales, and May large panel industry sales were down 5.4% m/m and 32.8% y/y, shipments were down less at -3.9% m/m and -11.5% y/y.  Some producers have done better than others during this year, as shown in the table below, which shows only those producers that are primarily large panel suppliers.  We note that Samsung Display (pvt) has been winding down its remaining LCD large panel production which accounts for the large swings shown below.
While orders from customers can make a substantial difference to m/m data for individual producers, we expect much of the negative growth for large panel LCD producers seen this year is a function of declining large panel prices, however in June we expect both large panel prices to decline and to also see the effects of utilization cut backs that have been rumored across much of the industry.  If the cuts are substantial enough, they will have some effect on high inventory levels over the next two months, but if they are less than expected, and seasonal builds begin in August, we expect panel producers will face a very rocky 3rd and possibly 4th quarter this year.  If that turns out to be the case, we would expect January/February ’23 to be especially week, as many fabs will essentially shut down for the latter part of January during the Chinese New Year holiday, which occurs on January 22

​In our 02/17/22 note we indicated that Taiwan-based PlayNitride (pvt) was expected to apply for listing on the Taiwan Innovation Board, a subset of the Taiwan Stock Exchange that is designed to help small companies or start-ups obtain capital.  With investors such as Samsung, Lite-On (2301.TT), Applied Materials (AMAT), and AU Optronics (2409.TT), the company gets considerable press concerning its focus on Micro-LED and its participation in Apple’s (AAPL) ‘secret’ Mini/Micro-LED lab in Taiwan.  In order to be listed on the Innovation Board a company must have sales of NT$150m ($5.0m US), the bord must have 5 or more members, and the company and major investors are subject to a 25% progressive share sale restriction every 6 months following the initial listing. Since the restrictions also includes 6 months of ‘advisory guidance’ from the underwriters, we would expect the listing in August or September, which is ahead of original expectations of before the end of the year.
At a recent investor conference PlayNitride management indicated that they expect to break even on a monthly basis by the end of 2023 and generate ‘handsom’ operating profit in 2024.  This will be accomplished by reducing production costs for Micro-LED elements by 95% by 2025, based on 2020 production costs.  While PlayNitride produces much of its own production equipment, and has its own 6” production line (1,000 6” units/month), there has been talk that the company might outsource some parts of the Micro-LED production process to reduce investment costs as it scales up production to 1,500 and eventually 3,000 units/ month.  This is particularly relevant as the company admits there are as many as ten different methods used to transfer Micro-LEDs to final substrates, with the decision on which to use based on the requirements of each customer.
PlayNitride has raised ~$52m from corporate investors and VCs, but is expected to issue 6.305m new shares upon listing (price unknown) and will license its 683 patents to outside parties in order to generate additional revenue going forward.  While we have not seen the paperwork concerning the IPO financials yet, the company shows an operating revenue of $1.328m for May of this year and $271,000 for the month last year with a share capital of $57.1m based on the potential success of the IPO.  PlayNitride generates 63% of its revenue from Micro-LED TV applications, 17% from wearables, 12% from automotive displays, and 8% from Ar devices.  It will be interesting to see how the company progresses, particularly given Taiwan’s more detailed reporting requirements, although we expect with the red chip investors the company already has, we expect the IPO will fare well if pricing remains reasonable.

​The concept of Micro-LED TVs is an exciting one, using ultra-small LEDs as emitting devices, especially as LED technology has been in large scale mass production for many years and production techniques are standardized and mature.  That said, moving from LEDs that are currently being used for TV backlights, which are about 1mm (1,000 um) to Mini-LEDs, ~200um, and then to Micro-LEDs (~2um to 20um) carries some production issues that complicate the transition.  LEDs in standard LCD TVs are used as a backlight, which generates the light that is controlled by the liquid crystal (the LC in LCD), which then passes the light to a color filter which creates the individual color dots that make up an LCD display.  In a 4K TV there are 24.883m of these colored dots, all of which need to be illuminated by the LED backlight.
Since there are typically a few hundred LEDs in such backlights, designers came up with a way to dim groups of LEDs to reduce the light leakage across those dots that are supposed to be turned off, although leakage does occur causing what are called halos and other artifacts that reduce contrast.  In order to compensate designers continue to reduce the size of backlight LEDs and add more, to give more precise control over what areas are light and dark at any given moments, with Mini-LEDs and extension of this process, using thousands of LEDs that can be controlled in small groups or individually.  Taking the backlight concept further however means that LEDs must continue to shrink, allowing more LEDs to be packed behind LCD displays, and at a point that becomes some burdensome that display engineers decided to use the LEDs themselves as the light source, rather than liquid crystal, and Micro-LED displays became a concept.
Such displays are targeted to contain the 24m individual Micro-LEDs indicated above, which is the reason for their even smaller size, but there are many current constraints limiting the production of such displays, particularly the large number of very small LEDs that need to be moved from a die to a substrate and the necessity to test and replace any of these very small LEDS before finishing the display.  Currently, most Micro—LED displays are large, which allows for the LEDs to be a bit larger and less densely packed, and gives designers the ability to create Micro-LED modules that can be connected together to form such large displays.  In most cases these modules are based on PCB boards which make them bulky and relatively expensive, but Samsung is trying to reduce at least one cost point issue by moving from PCB backplanes to TFT (Thin-film transistor) based substrates, which are similar to those used in LCD displays currently.  In fact Samsung is working toward using LTPS (Low-temperature Polysilicon) backplane technology, similar to that used in most smartphones.
By shifting away from expensive PCB boards and ‘returning’ to what would be standard LCD production techniques, Samsung (005930.KS) is hoping to further reduce the cost of its Micro-LED TV line starting with an 89” model and moving the technology up to 101” and 114” models, with the 89” model expected to be released sometime this year.  That said, the cost is still expected to be over $75,000, making it more of a one-of-a-kind item than a residential consumer product, but shifting to LTPS will certainly help to move the technology closer to a price that is commercially viable.  Au Optronics (2409.TT) is expected to produce the first LTPS TFT glass substrate iteration, although Samsung itself will likely become its own supplier if there is a necessity for volume production in the future and the Micro-LED chip itself is produced by PlayNitride (see above) for the TFT models, while Sanan (600703.CH) produces the Micro-LED chips for the PCB based models.  There is still a long way to go before Micro-LED can find its way into the competitive display market, but with each step that becomes a bit closer to reality.  Time brings all things to pass – Aeschylus.
 

​While we down note all of the changes in forecasts that have been occurring as a result of the inflationary macro environment and the lingering effects of COVID-19, especially in China, we do mention those we think are unusual and in the case of Asustek (2357.TT), a Taiwan based laptop producer among the top 10 globally.  Last month the company reported a 14% sequential decline in net profits last quarter and predicted a 10% drop in PC shipments this over last, but continued to affirm its target that its revenue would increase by 10% y/y, despite the industry slowdown and its quarterly weakness.
It seems that now, roughly six weeks later, the company is revising its target from up 10% y/y to flat y/y, although stating that it will, still outperform the industry by 10%, leaving its ‘cautious optimism’ about the 2nd half, where it was counting on back-to-school, holiday shopping, and pent-up demand to help it meet its former targets.  The company gets ~66% of its revenue from PCs with the remainder from components such as motherboards and graphics cards, which it expects to decline 10% to 15%,  against the 10% decline for PCs in 2Q.

Smartphone shipments have been weak and estimates for full year mobile shipments have been slowly declining as expectations for 2Q smartphone shipments, particularly in China, are not expected to see much of a recovery, other than modest seasonal improvement from the low in February.  As can be seen in Figure 1, in years prior to COVID-19, there was a steady build toward the 4th quarter shipment peak, which was interrupted in 2020 with the onset of the virus, and boosted in 1Q ’21 as some COVID restrictions were lifted as vaccination programs began to take hold.  This year however, there has been no return to a more normalized pattern, assuming 2Q estimates are correct, as the COVID lockdowns in China and the war in Ukraine, coupled with global inflation pressure consumer spending power. 
While Chinese smartphone shipments seem to be settling into a new, lower level, 5G has resumed its growth path and reached 85.1% of smartphone shipments in May, the highest level ever recorded, and 5G unit volume has returned to more normalized levels after a weak February, even as the number of new 5G models released in May declined.  We expect 5G share in China to remain above 80% for the remainder of the year.
In the past OLED displays were reserved for high-end or flagship smartphone models, given their high contrast, response time, and color stability, but as RGB OLED process technology became more adapted to mass production, OLED displays have been made available to a wider variety of smartphone models, with 43.8% of smartphone models released this year (YTD) with OLED displays, ahead of 2021’s 40.1%, and 2020’s 34.1%.  The premium status garnered by OLED displays in smartphones has made shipments less vulnerable to the ups and downs of shipments in the broad smartphone market, but as that share increases OLED displays are beginning to exhibit the same supply/demand characteristics as the mobile LCD display market.
A portion of that increased volatility comes from the inclusion of Chinese small panel OLED producers, with much being said, particularly in the Chinese trade press, about how Chinese small panel OLED producers are challenging South Korea’s dominance in the small panel OLED space.  Of course, Chinese small panel OLED producers have made inroads, particularly as smartphone brands look to find ways to gain leverage over Samsung Display (pvt), who is the absolute leader, and local Chinese smartphone brands look to local suppliers whenever possible, but as seen in Figure 4, South Korea’s regional share in the small panel OLED display market remains above 75% and defined further in Figure 5.  We are certainly not saying that Chinese small panel OLED producers are not making headway, but while on a percentage basis y/y shipment growth by Chinese small panel OLED producers has been impressive, the overall shipments are still small relative to Samsung, and if the last few quarters are any indication of what is to come, Chinese small panel OLED producers face the same seasonality and customer issues that South Korean producers face.
China’s BOE (200725.CH) has been expanding its small panel OLED capacity over the last two years and has become part of the Apple (AAPL) OLED display supply chain, which has been exclusive to Samsung Display and LG Display (LPL) in the past.  The path has not been an easy one for BOE, as we have outlined in a number of notes, but they have made it to the Apple iPhone platform, which is an accomplishment in itself, while other Chinese small panel OLED producers remain closely tied to local smartphone brands.  We expect Apple to utilize BOE as a tertiary supplier through 2023 as BOE must prove itself to be both reliable in terms of volume and in terms of panel consistency, issues that both SDC and LGD have faced at times.
All in, we expect growth to continue at Chinese OLED suppliers, and with BOE’s potential feed into the iPhone 14 build, the overall Chinese share will increase, but both South Korean small panel OLED suppliers, particularly SDC, have continued to invest in technology over capacity in the OLED space and that has been the one factor that keeps them from the rapid share loss that some predicted.  As the small, panel OLED display space matures further, we believe that Chinese small panel OLED producers will need to spend more on technology development in order to compete on the same level as SDC and LGD, while still increasing capacity, which will push the need for financial support higher, without the ‘automatic’ growth OLED has seen in the past.  The strong customer base that South Korean OLED producers have developed over the years, while certainly not immune to seasonality and macro factors, will allow them to hold onto premium product oriented customers, while we expect Chinese OLED producers will take the same path as they did in the LCD business, that of more generic suppliers, and while that will likely lead to more share gains over time, we expect it will prove hard for Chinese small panel  OLED producers to unseat the incumbents.

On a general basis, displays tend to be a palette for images, video, text, and live action but a subset of displays does something different, they allow you to not only see the image on the display but also to see what is behind the display.  These transparent displays have been around for over a dozen years, based on a number of technologies, primarily LCD and OLED, and have a number of uses, primarily in the retail genre as digital signage that allows the user to see through the display to the products behind it.  While the transparency of the display is a function of how the pixel structure is arranged, transparent displays tend to be a trade off against display quality, which makes them less than perfect for applications where image quality is of the essence.
Applications for transparent displays outside of retail are few, and while HUD (Heads Up Displays) are often mentioned, projectors are often used as an alternative to physically transparent displays.  As OLED displays are made of extremely thin layers of materials, some of which are transparent, much has been said as to their ability to be used to produce transparent displays, particularly large transparent displays, and LG Display , the only commercial producer of large panel OLED displays, has been promoting the idea of transparent OLED displays for a number of years and recently they have tried to exemplify the concept by installing 38 55” transparent OLED displays at what is called a ‘futuristic’ new bakery in South Korea.
With displays at the entrance to the store, on the walls, and between the baking areas, the installation is said to be the largest use of transparent OLED displays to date and creates a ‘futuristic’ look while allowing customers a view of new products.  We are not sure how necessary it is to customers to see videos and messages about the products being produced while looking directly at the bakers producing them, or why it is necessary to use a transparent display when it is mounted against a wall, but we understand that the promotional value of the store is more likely the goal, rather than the practicality of the system.
There are a number of uses for transparent displays, such as AR, where a small transparent display could act as the ‘glasses’ in a headset while images are added to the user’s visual field, but we see the sacrifice in quality from the transparency a stumbling block to such a use, especially when micro-projectors are able to put a video image directly on the eye of the user.  However the ideal application for transparency would be for lighting, where not only would a large transparent window panel would allow light to enter a room during daylight hours but could become a source of light during the night.  In such an application cost would be the mitigating factor, but such an application strikes us as far more practical as the transparent TV screens we have seen demoed, which seem to be a technology looking for an application.
All in, the idea of transparent displays certainly has technical merit, but we see little value in such splashy displays to promote the concept.  There are certainly public display applications where a transparent display would be less obtrusive than a non-transparent one, but installations such as the one in the images below, or those we have seen as a replacement for subway car windows seem to be a major stretch and just overkill in a world where overkill in advertising is a way of life. 

​According to local Taiwan media, an earthquake of 6.0 on the Richter scale occurred at 9:50am local time in Taiwan.  The epicenter was 37.7 km south by southwest of the Hualien County Government headquarters in Guangfu Township.  Thus far both Taiwan Semiconductor (TSM) and United Micro (UMC) have stated that production at the fabs continues and was not affected by the quake and panel producer Innolux (3481.TT) stated that while equipment was automatically shut down by the quake, there was no damage and the lines are operating normally.  AU Optronics (2409.TT) has yet to make a comment on the effects of the quake, but likely only saw a 2.0 at that distance.

​China’s internet watchdog, the Cyberspace Administration of China, issued a document that proposes to modify the rules currently in effect concerning the public use of social media.  The proposed rules tighten the censorship that already limits Chinese social media platforms as to the type of commentary that users are allowed to post.  Under the new rules, social media platforms would be the responsible party for reviewing all comments and messages posted during live streaming, regardless of whether they have been tagged by censors, and such reviews would have to be done before they are posted, which would include far more posts than are currently reviewed by such platform moderators.  This would force platforms to vastly increase staff in order to review all posts, comments, and discussions.
The rules would also force social media platforms to establish a system that ‘protects each user’s personal information’, essentially a list of actual user names and information that would identify all on-line posters, which would be used by the platform to report any ‘unlawful and negative information’ to the government, and in many cases be able to delete or modify posts or a user account based on existing rules.  User’s would be required to sign an agreement that holds them responsible for not only their own comments, but those of others that respond to their posts, both text and video. 
While the new rules are still in a proposal form, and no date was given for their implementation, it is expected that they will be instituted this year, putting even more of a burden on social media platforms and instilling fear of government retribution at the user level.  That said, much will depend on how strictly those rules are enforced, despite the threat of spot checks and examinations of how the social media platforms will be reviewing such a massive amount of information on a real-time basis.  It is hard to imagine how social media platforms will respond to these potential mandates given the cost of building out the necessary infrastructure needed to make such changes, but it will certainly have a dampening effect on what gets posted on Chinese social media regardless of what the platforms do.

​As we have noted previously, Samsung Electronics (005930.KS) has recently begun offering its 110” Micro-LED TV in China, and while we noted that the pre-order excitement was high enough to have sold out what ever number of units were being offered (you now have to contact on-line customer service to place an order), we were not sure if any had actually been delivered.  In fact word has come down that the first 110” Micro-LED TV set offered has been delivered to a customer in Jining City, Shandong Province (free delivery we assume) for the price of 1.05m yuan, or $156,997 US.  The system is a 4K device with a 120Hz refresh rate and a maximum brightness of 2,000 nits.  It is equipped to handle HDR10+ and covers 100% of both Adobe (ADBE) RGB and DCI-P3 color standards and is able to display 4 separate video feeds on the massive screen.  To get some understanding of what this unit looks like, image a single TV set the size of four 55” TVs.  Currently you can get a house brand 55” LCD TV at Best Buy (BBY) for just a bit over $300; perhaps not as high quality as a Micro-LED TV with all the bells and whistles, but for the price of the 110” model, you could get 506 55” TVs.  You could give one to everyone in the neighborhood and still have lots left over…

Just weeks ago, the sentiment in the CE space was positive, with headlines about a better 2H or 3Q and an optimistic view of the massive 6/18 shopping holiday in China, the 2nd largest behind Single’s Day (11/11).  However little has been said about the holiday, which ended last week, even though sales were up 10.3% y/y at JD.com (JD), the originator of the shopping holiday, as since 2018, the JD.com 6/18 holiday sales gains on a y/y basis have consistently been between 25% and 35%, which puts this year’s results well below typical.  Recent easing of travel restrictions in Beijing have already triggered a new outbreak with restrictions expected to be reinstated, while the country is facing Nucleic Acid COVID testing within 48 hours for all entering public spaces, offices and schools, so there is much to be said about the effect of those and other COVID restrictions on in-store purchases. 
That said, ~24.5% of total retail sales in China in 2021 were made on-line, down only a bit from the 24.9% in 2020, so on an overall basis COVID this year seems to have had roughly the same effect on brick and mortar sales as in 2021.  This leaves the effects of inflation as the major cause of the weakness, yet INF data suggests that China’s inflation rate will be 2.08%, only slightly above the 5 year average of 1.96%.  Of course, there is the possibility that the Chinese government is not reporting accurate inflation data to the IMF, but at least the data for this year has been fairly consistent, rising from 0.9% in January and February, to 1.5% in March, and 2.1% in both April and May.
While the data suggests that macro issues in China have been relatively minor, especially when compared to the annual rate in the US in May of 8.6%, so we have trouble understanding the weakness from a consumer perspective, but the malaise seems to be a general depressive state that has settled over many of China’s largest cities, a result of the on-again-off-again lockdowns that have kept the population in lockdown on and off for months, but we also see that the aggressive discounting normally done in the weeks before the official holiday being less than during last year.  We expect this is a function of both the increasing cost of raw materials and components that have not been fully passed on to consumers by CE manufacturers, leaving little room for aggressive pricing, and the fact that a portion of the demand seen in 2021 included demand not sated in 2020.
In some CE products it is easy to see, such as notebooks, where government sponsored purchases drove outsized demand that ended as early COVID restrictions ended globally, while TV set sales where consumers stuck at home wanted to upgrade relatively early in the COVID pandemic cycle,  saw only a modest change from the norm.  But while here in the US and in Europe, where we faced the most severe restrictions earlier in the COVID pandemic, the Chinese population, at least in its big cities, is facing the prospects of the how the restrictive policies of the Chinese government, good or bad, will make normal life almost impossible, and that seems to have paled thoughts of spending especially without massive discounting to attract on-line flow and created a weariness toward spending on consumer electronics that seems to have taken hold on the Mainland.
We expect this will continue until China’s COVID-19 policies become more amenable to the population and the economy, which we would expect (in a tacit way) at the end of Q3 or in early 4Q, at which point much of the excess CE inventory will have been worked down and the holiday season is upon us.  That said, we expect Chinese consumers will still need to see some incentives by way of loss-leaders or discounts, which will be a bit tricky for brands still carrying high-cost product, and much will depend on how long CE companies continue to hold back orders, a problem for those companies whose CE brands are considered leaders in China and want to continue to show profitable results.  But growth is the key for the Chinese government and while the mandates associated with COVID are one way to protect the Chinese economy from the scourge of a massive COVID outbreak across the country, the Chinese government must still find a way to break the lassitude that we believe has gripped the Chinese population.