After 33 years in the printer business, Samsung Electronics (005930.KS) will end its foray in the printer business by selling the division to HP (HPE).   Once the transaction is approved, which entails HP getting approval in each country that Samsung sold its branded printers, the Samsung printer brand will cease, except in South Korea, where Samsung will sell HP printers under the Samsung brand name. 

Under the terms of the deal, HP will pay Samsung $1.05b for the assets, which include over 6,000 employees (who are guaranteed 5 years of employment) and will gain the 4.2% share of the worldwide printer market held by Samsung.  This will bring HP’s share of the worldwide printer market to 41.1% when the deal closes, essentially back to where it was in 2015, when a number of smaller printer companies entered the market.  While none individually have significant share, they were able to gain some traction at the cost of HP’s share.
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Samsung continues to divest itself of businesses or segments that are either unprofitable or are in highly competitive markets that are growing slowly, and this goes for Samsung affiliates also.  Samsung Display (pvt) has closed a number of inefficient LCD fabs over the last few quarters, and is converting them into far more profitable OLED small panel production lines.  This underlying drive to gain incremental profitability by eliminating marginal businesses continues to be the focus across the Samsung organization, and the sale of the printer business to HP is a perfect example.

Hon Hai (2317.TT), who had already decided to make the $5b investment, seems to have accelerated its timetable just after the imposition of a 10% import tariff imposed by the Indian government.  The investment, which is to be made over five years, is focused on the construction of a global manufacturing hub that is centered on a production facility for ‘electronic products’, which are components for smartphones destined for the European and local markets, with a maximum capacity of 10m phones/month.

The Indian government decided to impose a 10% tariff (BSD – Basic Customs Duty) starting on July 1, after the country shifted to a GST (Goods and Services Tax) system that eliminated the differential between locally made and imported phone pricing.  The tax is specific to “Cellular mobile phones and specified parts of cellular phones like chargers, battery, wire headsets, Microphones and Receiver, Key Pad, USB Cable, etc”.  The country also increased the local VAT tax on similar imported goods from 6% to between 35% and 40%, pushing hard on those who wish to do business in India to produce locally. There are some exceptions, such as PCBs, connectors, and display modules that are not produced by local Indian manufacturers, but the bulk of items needed for smartphone production will be tariffed.
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Recent investments by Wistron (3231.TT), who produces the Apple (AAPL) iPhone SE in Bengaluru and Hon Hai’s Foxconn (2354.TT), with five assembly plants in Andhra Pradesh, have stimulated (and the tariff) Samsung to announce that it will double its investment in its mobile phone manufacturing by 2020.  An estimated 175m handsets are expected to be produced locally in India, up from 110m in the previous year.  In 1996, India signed the Information Technology Agreement in 1996, which gave zero duty status to a number of CE category products, but as smartphones did not exist when the agreement was signed, the government looked to legal opinions that gave them the right to impose the tariffs.  Imported phones cost 11.5% more than local equivalents under the old tax system, but the GST conversion’s 12% local tax seems to wipe this out, to the detriment of local producers, however the IT ministry ensures local manufacturers that they will continue to have a distinct cost advantage over those made elsewhere.

Jia Yueting, the founder of LeEco (pvt) has found that his assets have been frozen by a Shanghai court, at the request of China Merchant Bank (600036.CH), one of the creditors owed $1.5b by the company.  At a recent shareholders meeting, Jia explained that the company had been trying to pay back the loans since last year, but gave no timeframe as to when and how it would be completed.

The asset freeze, which encompassed $183m of Mr. Yueting’s and his wife’s assets, along with three affiliated companies, is a small portion of his total net worth, which is estimated at $3.6b, but the company had recently been forced to abandon an attempt to purchase US based TV brand Vizio (pvt) (see our note 04/11/17) when it was approved by the US government but not the Chinese government.  The $2b deal was officially cancelled in April, after LeEco brought in Hong Kong based Sunac China Holdings (1918.HK) as an investor in LeEco (8.6% stake in subsidiary LeTV, 16% stake in LeVision Pictures and a 33.5% stake in an LETV sub), along with another $2.44b investment from another group of Chinese investors to reduce the financial burden of the Vizio acquisition.
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The final end to the acquisition came yesterday when the companies jointly announced that the deal had been cancelled due to ‘regulatory headwinds’, which would likely be the understanding that Chinese authorities would not allow the deal to be made.  The Chinese government, through the State Administration of Foreign Exchange, began scrutinizing deals over $5m (formerly $50m) where capital would be leaving the country late last year, as outbound capital investments soared ($530.9b in the 1st 9 months of 2016) after the 6% depreciation in Chinese currency last year, but others cited the stretched finances of LeEco and its subsidiaries.  Jia slashed his salary to 1 yuan (~$0.15) but was said to have also cut hundreds of jobs.  This follows the company’s rapid growth through acquisitions, some of which were far afield of LeEco’s main businesses, such as the acquisition of US based electric car company Faraday Furture (pvt).  LeEco, which gained traction through its video streaming business was once called the ‘Netflix of China’, but has been under pressure from its creditors.  The banks have indicated that the risks involved in the loans “are still under control at this stage, and friendly negotiations will be considered”, but the personal asset freeze is definitely a step away from “friendly”.

Dongxu Photoelectric (pvt), a subsidiary of Dongxu Group (000413.CH) has indicated that it has begun operation of two polarizer lines in Fuqing City, China.  The facility, which is said to have been put into operation just 105 days from its start (we have trouble with either the official dates here or the translation), is a JV with Sumitomo Chemical (4005.JP), Dongwu Fine Chemical Co (pvt), Asahi Electronic Materials (2502.JP) and another private Hong Kong based chemical company, who formed the Fuzhou Xu Friends of Electronic Materials Technology Co., Ltd, to develop the project.  While China’s share of the polarizer market is still small, it has grown from 4.3% in 2012 to 8.8% in 2015 and the new lines are expected to produce 10m m2 per year, or just under 1%.  While the gap will be hard to fill, we don’t doubt that the Chinese government will ‘encourage’ other companies to build out polarizer production.

Back in December 2016, we noted that Dongxu Group had teamed with Japanese supplier NEG (5214.JP) to build a Gen 8.5 furnace in Fuzhou, China, where BOE (200725.CH) is building out its B10 Gen 8.5 LCD fab.  The company had pointedly said it was going after glass substrate business from BOE, and while no timeframe was given at that time, we noted last month that the new line has begun operation and a second line is being built.  Dongxu has invested in a number of other Chinese supply chain projects, including color filters, polarizers, sapphire production, and cover glass in order to coordinate its ability to be a broad-based supplier to the Chinese display space.  Dongxu reported 2016 net income of ~$180m compared to Corning’s (GLW) $935m from its display glass division (excludes cover glass), but Dongxu expects the new Gen 8.5 production line to generate an additional $131m in net income when completed, on $382m in additional sales.

Polarizers are a key component of LCD displays, and two are necessary to make an LCD device show a normal display.  The polarizers are set 90” apart from each other, and when the liquid crystal, which is sandwiched between the polarizers is activated electrically which ‘twists’ the light, the polarized light from the LED backlight passes through the front polarizer and the image can be seen, and when the liquid crystal is not activated the front polarizer blocks the light.  While polarizers are a bit esoteric to the average investor, what is apparent is that China continues its quest to become self-sufficient in the display space.
The Chinese central and provincial governments continue to build out display supply chain capacity to gain control over their display production, and while China is expanding display capacity faster than any other region, they remain concerned that much of the supply chain is controlled by foreign companies, encouraging both short and long-term programs to reduce that dependence.  Subsidies have been the main tool used to help Chinese display supply chain participants gain traction in both the local and world markets, and we expect that to continue until display market saturation is reached, in similar fashion to how China developed its LED market, and then went through a period of rationalization where hundreds of small suppliers closed and a few large firms remained. 
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We don’t expect this saturation to happen soon, and by soon we mean in the next 2 to 3 years, but the entire display industry is betting that a continuation of screen size increases will offset the slower unit growth seen in the display space and premiums will remain intact for those products.  Chinese panel producers are building ever larger panel production facilities and as these come on line over the next few years, the balance between capacity growth and demand for ever-larger products will become the most important metric.  There is a finite limit to panel size growth in almost all categories, as smartphones must be able to be carried in pockets, laptops have to remain portable, and TVs have to fit on available wall space, so the rapid expansion of large panel display capacity helps China gain ‘internal’ share, but also feeds world markets that will eventually become saturated with ever larger displays, and we do not expect China to see this as a reason to curtail construction until it is a bit too late.