​In May we noted that there was a controversy concerning accusations made about Chinese OLED panel, producer Visionox (002387.CH) alleging that certain disclosures about actual share ownership and control had not been disclosed by the company.  While the company asked the Shenzhen Stock Exchange for more time to gather relevant data, there seems to really be a question about whether shares were transferred from one entity to another at a substantial (~40%) discount to net asset value, which has pressured the stock and left questions as to management’s motivation for such an exchange.
That said, Visionox announced an order from Huawei spin-off Honor (pvt) and has seen shipments begin in 2Q from their OLED fab in Gu’an, however Visionox just announced expected results for the 1st half of this year and despite the order and overall strong demand for OLED products, the company is expected to show an operating loss for the period, against a profit last year.  The announcement indicated that operating income for the 1st half will be between 1.35b ($208.7m US) and 1.55b yuan ($239.6m US), of which between $200m and $216m will be from OLED production, but net profit will be negative, showing a loss between $111m and $131m US.
The announcement, which is citing unaudited estimates, indicated that while the order from Honor was being executed, the company faced increased R&D and labor costs relating to the production of the displays requested by Honor, licensing revenue that it derived from an affiliate last year would not be repeated this year, and lastly, while no details were given, changes in government subsidies were also a factor contributing to the loss, which we take to mean the subsidies were less than last year.    Visionox is running two 15K fabs (Gen 5.5 and Gen 6) and is ramping up a 30K Gen 6 fab in Hefei, but reference to ‘continuing to improve’ in other comments by the company when referring to the two operating fabs gives us a reason to suspect that yield is what has been a stumbling block for the company, while others in the industry are seeing some of the best results in the last few years on rising panel prices.
There has been speculation that Visionox is working toward the development of a foldable display for the Honor Magic device expected later this year, which would certainly account for a substantial increase in R&D, and at the same time Visionox is upgrading its under-screen camera project, for which it claims global leadership, with an earlier version adopted by ZTE (000063.CH) for its Axon 20 5G released last September.  While Visionox showed a profit in 1H last year, without as much government help and the demands of a large customer, the operation of LCD or OLED fabs is not a guarantee of profitability, and such a struggle by Visionox justifies the many comments made by panel producers outside of China who have little financial help from their governments and in many cases continuing pressure to perform from shareholders.  Such producers have a completely different view of capex and regulating operating expenses than those who are subsidized, particularly when initiating new construction, and while the eyes of the government are certainly on Chinese display producers, those eyes change every few years and jobs created help to justify weak operating results.  Hopefully Visionox gets the message before the cycle changes.

Handset shipments in China improved in June at 25.64m units, a bit ahead of our 25.25m unit estimate, although the y/y comparison was still down 10.3%.  The 2nd quarter saw shipments of 76.14m units, down 22.3% q/q and down 26.9% y/y, against the COVID-19 snapback seen in last year’s 2Q.  The 1st half saw shipments of 174.14m units, up 13.8%, with the 1H y/y improvement coming primarily from the very weak 1Q in 2020 when COVID-19 caused significant lockdowns.
The Chinese smartphone market is also feeling the effects of the US government trade ban on Huawei (pvt), who had been selling phones with components stockpiled earlier in 1Q, but was unable to secure additional components in 2Q.  On the positive side, 5G smartphone shipments continue to increase, seeing an 18.2% increase m/m to 19.79m units, and while 5G shipments in 2Q were down 17% q/q, they were up 17% y/y, again with the q/q weakness likely coming from Huawei.  5G shipments in 1H were 127.8m units, up 101% y/y.  5G smartphone shipments represented 77.2% of the total in June, slightly below the peak of 77.9% seen in April, but remains on an increasing trend line.  As 5G antenna and modem costs are reduced, we expect the 5G share trend to continue to increase but we expect the y/y ROC to level off until 5G connectivity becomes more meaningful in low-end phones, likely in concert with the next round of integrated modems that we expect relatively early next year.  We note that 2G and 3G phone shipments in China have now fallen to ~1% and are already meaningless relative to 4G and 5G.
On an overall basis, if Huawei had not been facing such stringent US trade sanctions, we would have expected to still see a decline in Chinese smartphone shipments this year.  Chinese brands have been working hard to capture the Huawei smartphone customer base but while they will likely capture much of that share, Apple (AAPL) remains a contender, but one that will show up primarily in 2H.  Overall component shortages could also cut into total 2021 smartphone shipments in China, but we see less of an impact from component shortages in 2H and less of an overall impact on demand from increasing component prices for smartphones than with other CE devices.

While Mini-LEDs are just beginning to establish a foothold in the display space, Samsung Electronics (005930.KS) seems to be pushing ahead with its micro-LED plans, but before we go further, we want to make sure readers understand that the two LED types mentioned thus far, mini-LEDs and micro-LEDs are very different, despite the fact that both based on light-emitting diodes (LED).  Mini-LEDs are small LEDs that are used as a backlight for LCD displays.  As liquid crystal material acts as a ‘gate’, allowing light to pass or not pass to the color filter, without a backlight, LCD displays cannot operate.  Mini-LEDs are smaller than typical backlights and provide more regional control over where the light is coming from, but they only operate in the sphere of LCD displays.
Micro-LEDs, while they are even smaller versions of typical LEDs, do not operate as part of an LCD display.  In fact they are more like OLEDs in that they are self-emitting, producing light that you see directly.  They are not ‘gated’ but turn on and off individually.  Further, while mini-LEDs might number in the thousands in an LCD display, the number of micro-LEDs is in the millions, with three for each pixel.  That comes to 24.75m micro-LEDs for a 4K display and 99.53m LEDs for an 8K display, and logic says that as the display gets smaller, all of those small LEDs are packed more closely, so producing a micro-LED TV gets ‘easier’ as the display gets larger. 
We note also that in mini-LED backlights while there are a few thousand LEDs, they are usually configured in ‘strings’, with a ‘string’ being a number of LEDs that operate as one, meaning they go on and off together creating a ‘zone’.  Each zone needs driver circuitry to operate, so the complexity of the backlight circuitry is dependent on the number of zones rather than the number of LEDs.  In micro-LED displays, each sub-pixel has its own control circuitry, so the TFT (thin-film transistor) complexity is far greater for micro-LEDs (many millions vs. a few hundred) than for mini-LEDs, vastly increasing the chance for bad components, increasing power consumption, and increasing heat, all of which are issues facing micro-LED display development, and we didn’t even mention the elephant in the room.
The elephant in the room here is logistics.  Moving hundreds of LED dies from a wafer to a substrate for mini-LED backlights presents some issues and tools have been developed to handle such a task, such as the Pixalux™ from Kulicke & Soffa (KLIC), but going from moving a few thousand small LEDs to moving many millions of LEDs that can be as small as 20um (0.000787”) is a completely different ballgame.  As an aside, assuming a 0.99999% transfer success rate for a 4K micro-LED screen still presents 248 bad micro-LEDs on average, each of which has to be removed and replaced, aside from testing each micro-LED for quality.
So who would spend billions of dollars to develop such a difficult display technology?  Almost everyone, because LCD technology has some very limiting restrictions and while LCD displays will be around for many more years, self-emitting light sources are the ‘way of the future’.  OLED displays (self-emitting) have become an integral part of the display industry and display manufacturers are always looking for technologies that will allow them to reduce the complexity of display production, and self-emitting materials eliminate the need for a backlight and in some cases the need for a color filter.  While the challenges facing micro-LED production seem quite daunting, the challenges facing OLED display production were also formidable but have been overcome and eventually micro-LED displays will become a part of the display infrastructure.
Of course timing is everything in the CE space, so there are a few companies that have been pushing ahead in the development of micro-LED technology, led, not surprisingly by Samsung Electronics, who has the capabilities to produce both semiconductors and displays, and is expanding its plans for micro-LED commercialization.  Samsung originally came out with a modular product called ‘The Wall’, which is a relatively low (960 x 540) resolution RGB Micro-LED system that has a pixel pitch (distance between LEDs, center to center) of 0.84mm and has no visible border around each module or cabinet, as a configuration of 12 modules is called.  This allows the cabinets to be stacked in almost any configuration, but we note this is a big system, with the cabinets about 3” deep and generating the equivalent heat to ~six 60W incandescent light bulbs, so the potential customer tends to be a commercial venue .

Samsung promotes a number of ‘typical’ configurations for ‘The Wall’, ranging from 110” (2.4m x 1.4m) with 2K resolution, to an astounding 583” (12.9m x 7.3m) 8K system, but even given its relatively low resolution it is a bit expensive (Samsung does not quote prices) and all systems require installation by a Samsung engineer, but estimates for even the smaller configurations are in the hundreds of thousands of dollars. 

​That said, in late 2019 Samsung decided to move micro-LED technology to the retail level and announced ‘The Wall’ for consumers.  Current models for consumers are thinner and pre-configured to allow for simple installation but are limited to only one size for mass production.  Samsung currently produces a 110” version at its production facility in Vietnam, which sells for ~170mwon, or ~$150,000 but Samsung has plans to expand that facility this quarter and will be developing smaller models between 76” and 99”, that will move the micro-LED product from a limited market to what will likely be the top end of the premium TV market.
In order to develop such products for mass production, Samsung has been building a supply chain specific to micro-LEDs and will be using China’s Sanan Optoelectronics (600703.CH) as a micro-LED supplier for the 110” and 99” versions, but will shift to PlayNitride (pvt) for the 88” and 76” micro-LEDs. In 2018 Samsung signed a long-term micro-LED development agreement with Sanan, who recently completed a $1.8b mini/micro-LED production plant in Hubei and is an investor in PlayNitride.  Sanan has also been a mini-LED supplier to both Apple (AAPL) and TCL (000100.CH).  AU Optronics (AUOTY) is said to be the supplier of the control circuitry for the line, and has been working with Apple to develop its own micro-LED technology, although with LED supplier Ennostar (3714.TT) primarily.
While we expect Samsung’s micro-LED TVs will remain in the rarified atmosphere of TVs that cost five figures for some time, Samsung’s commitment to the technology is telling, and reflects, to a degree, the general Samsung philosophy that LCD technology is heading into its twilight.  Samsung affiliate Samsung Display (pvt) has been reducing its exposure to LCD large panel production, and if it were not for the massive price increases seen over the last year in large panel LCD prices, would likely have been out of that business at the end of last year, leaving parent Samsung Electronics to procure large panel LCD displays on the open market and focusing itself further on developing small panel OLED and a new large panel OLED/QD technology. 
In the case of micro-LEDs, Samsung Electronics can choose to directly build or control as much of this relatively new supply chain as it wants, and with a potentially very large customer in the wings (Apple), they seem willing to step up their commitment to at least this early stage of the technology.  There are many hurdles that must be met to make micro-LEDs a viable commercial display technology and there is no guarantee that such efforts will be successful, but Samsung has made such ‘blind’ commitments before that have proved ultimately successful and it looks like they are heading in the same direction now.  Whether this will ultimately wind up generating a new technology and supply chain remains to be seen, but having Samsung pushing the technology and commercialization envelope is certainly a plus, and having another CE behemoth watching those moves, gives those in the new supply chain a bit of encouragement.

There has been much said this year about foldable smartphones, particularly recently as Samsung is expected to announce at least two new foldables at an event next month, and at lower prices than the previous models (see our note from yesterday.  While Samsung is certainly the leader with the largest number of foldable devices, there are expected to be a number of new players entering the foldable smartphone market this year, although dates are still tentative for most and we expect at least one to fall into 2022.
While the supply chain for foldables is similar to that of flexible or rigid display smartphones, it is still developing, with OLED display suppliers vying for representation, hinge suppliers developing new systems to help reduce folding stress, and cover material suppliers looking for better display protection without sacrificing bendability.  Samsung Display is the leader in foldable display production, supplying parent Samsung Electronics with all of its foldable displays, but China’s BOE (200725.CH) and Chinastar (pvt) continue to challenge SDC’s domination of the foldable display space. 
That said, each new model opens a new round of competition between the players and there is no guarantee that the same display supplier will maintain its place as new models appear.  Further, the challenges facing other component suppliers, particularly cover materials, also continues, with a growing desire to move from polyimide film to glass.  Glass for foldables needs to be extremely thin, below 60um (0.00236”, 0.001mm, or the thickness of very thin magazine paper) in order to bend without breaking, and must be shatter-resistant at the least, as polyimide film has lower bend radius limitations but is not 100% optically clear and can crease if bent too many times. 
Chinese foldable smartphone brands have been using polyimide as had Samsung until recently when it switched from polyimide, supplied by Sumitomo Chemical (4005.JP) to UTG (Ultra-thin glass) produced by Schott (AFX.GR) and thinned by Dowoo Insys (pvt) a small firm in Korea.  Samsung has also been working with long-time cover glass supplier Corning (GLW) to develop UTG and is expected to use Corning’s UTG on the upcoming Galaxy Z Fold3 to be announced next month.  What complicates this situation is that the new Galaxy Z Fold 3 is expected to have pen capabilities which both increases the thickness of the display and increases the need to protect the display from pen pressure.  With Corning’s UTG at 50um and Schott’s at 30um the thinner UTG represents a way for Samsung to keep display thickness under control but provides less protection from the stylus pressure, which is likely to give Corning the edge for the Galaxy Fold3, while Schott will continue to provide UTG for the Galaxy Flip 3.  That said, Corning is said to be working with its own Korean glass processor, eCONY (pvt) in terms of cutting while Samsung is said to be looking for a local processor to thin Corning’s UTG further.
As Chinese brands roll out additional or first-time foldables later this year, they are expected to also make the shift to UTG, but it is unclear who they will choose as a cover glass supplier.  Corning is the exclusive supplier of large panel substrate glass to BOE so they have a solid relationship already existing, giving them a strong negotiating position, but the necessity for a thicker UTG is not an issue for most other foldable brand, so there will be a model by model battle for each of the new devices between current suppliers.  The table below shows existing and new models expected for this year.

Samsung Electronics (005930.KS) has tentatively set the price of its upcoming Galaxy Z Fold 3 and its Galaxy Z Flip 3 and as expected they are lower than previous models.  That said, they are lower than we had expected, coming at $1,736 and $1,090 in South Korea.  This compares against $2,092 and $1,439 for the previous models released last year and represents a decrease of 17% and 24.2% respectively.  Looking at US prices, which are typically lower than those in South Korea, we note that Samsung has already reduced the price of last year’s Galaxy Fold 2 and Galaxy Flip from their original prices so there are two possible price points for where new prices could be calculated.

​We note that these estimates make the assumption that Samsung would be consistent with the relative price on a global basis, which is a broad assumption, so we point out that these estimates are only to show one set of possibilities in terms of US pricing.  While it would be exciting to see Samsung price a foldable phone below $1,000, we keep our expectations low, and while it would likely give Samsung a stronger chance of meeting its goal of selling between 6m and 7m foldable smartphones this year, the price would have to incorporate both lower production costs and the higher component prices we have seen over the last few months. 
We believe Samsung affiliate Samsung Display (pvt) has been able to increase yield for its foldable products but we would expect with the rising cost of components, Samsung will face some difficulty in trying to fill the gap left by the poor selling Galaxy Note line, but by offering at least some discount to last year’s models they can stimulate expanded consumer interest in the foldable line, which we expect will eventually replace the Note.  Whether they are able to maintain margins similar to the Note line under the above scenario is questionable, which is why we are expecting US pricing to be a bit higher than the above when announced in the US.

In June the number of 5G devices grew 7.6% m/m and 175.4% y/y and continues to remain above trend line, as it has for the previous three months.  5G device growth rose 7.6% m/m in June and continues at ~7.7% m/m on average this year, while 5G smartphone growth was 3.6% m/m and 219% y/y, under the 2021 monthly average of 7.6%.  While Chinese smartphone growth has slowed, which might influence overall 5G smartphone unit growth, the summer months are typically slow growth months, with September, back-to-school being the beginning of the holiday season and the period when the most new models are released.
Areas of most growth were both routers (↑17.8% m/m) and CPE (Customer Premise Equipment) (↑9.7% m/m) as FWA (Fixed Wireless Access) becomes more commonplace.  According to data concerning the 20 most popular smartphones released this year, 11 are able to receive 5G signals, but only one of the 11 was able to use mmWave frequency bands, which is an indication to us that despite the US auctions concerning mmWave spectrum, mobile deployment has been slow due to the technology’s short range and potential for signal blockage.  Verizon (VZ) has been the US leader in mmWave and has the fastest mmWave download speed of any major carrier in the US according to OpenSignal, announcing in April that it is adding mmWave 5G service to ‘parts of’ New Orleans, Fresno & Riverside CA, and San Antonio.  Under the assumption that Apple (AAPL) sticks with mmWave on the iPhone 13 out later this year, we expect mmWave sites to continue to increase under all three major carriers, however at a far slower rate than sub6 given its slower speed but wider coverage.
As a side note, while 5G is just beginning to become a global technology, there are some in the communication industry that are already focusing on 5G’s ‘limited bandwidth’ when referring to IoT or other data sources that are expected to continue to expand rapidly over the next decade.  To that end, the road to 6G is starting to be planned, encompassing networks where mmWave spectrum is the low-end of the new spectrum range and what is now typical cell structure (Phased Arrays) becomes IRS (Intelligent Reflective Surfaces), which are theoretically simple and require less power to operate than phased arrays.
That said, there are a number of very significant challenges that would have to be met before such a network system would be possible and other potential systems are also be researched, some that use CF MaMi (Cell-free Massive MIMO) access points that are distributed over an area and create a vast coverage network that eliminates the need for cell coverage and has no dead zones.  Some are focused on much higher frequencies, up to 1+ THz., which offer much higher speeds than 5G but would require special components that have very stringent requirements that have yet to be designed, so despite the increasing number of papers on the subject of 6G, we are still many years away from implementation and still have a long way to go with 5G, which presents its own problems that are still being worked on.
 
 

​While 8K TVs are already part of the CE landscape, we have not been big fans.  Not because we don’t like the idea of higher resolution TV but because the average consumer is buying something that will cost more but have relatively little incremental value.  8K set producers will explain how your 8K TV will have 33.18m pixels while your 4K set has a mere 8.29m but they don’t mention that you will not see much of an advantage with an 8K unless you are sitting relatively close to the screen, which in most cases is uncomfortably close.  There is ‘upscaling’, the process by which your TV takes lower resolution content and scales it to utilize those extra pixels., so, according to salesmen, your ‘up-scaled’ content will look better on your 8K TV.  Unfortunately this is not true, as it is impossible to increase the resolution of content to a point higher than what it was shot in, so up-scalers find ways to take the content and just spread it out among more pixels, and as above, those extra pixels are only going to make a difference if you are close to the TV, so the idea that upscaling low resolution content to 8K is going to make it look better is technically incorrect.
So what are 8K TV sets really good for?  Displaying 8K content.  Any 8K content will look  sharper on an 8K TV set, although much of the difference will be lost if you sit a normal distance from the TV, but when it comes to native 8K content, there will be nothing better than an 8K TV.  That said, the gist of our view on 8K TVs is that 8K content is still quite rare, with the few sources, primarily OTT streaming services, with only one broadcast network, the BS8K system in Japan, which is run by NHK (state) and shares its channel with the channels 4K service.  The 8K service is available in Japan and will be the source for 8K programming from the upcoming Olympics, but is relatively limited in its offerings, which tend to be travelogues and a few movies (West Side Story just added) that were shot in native 8K.  Other than that, the rest are OTT services with YouTube (GOOG) being the biggest, offering a variety of travel and exploration 8K content and a few movies, NASA’s 8K channel, France’s The Explorers Channel (VSAT), and an 8K channel from Rakuten (4755.JP), and while some game consoles sort of offer 8K resolution output, there are only a handful of games that support 8K rendering.
All in, things are only slightly different for 8K than last year, and that is mostly the fact that some smartphones can actually record in 8K, but in most cases those are able to record relatively short (3min – 5min) clips and there is little 8K editing software that would allow you to make any changes, but what about Blu-ray?  If we are talking about raw 8K footage, meaning uncompressed, it takes 121.5 Gb/minute of capacity, so a 1 hour movie would take up 7.3 terabytes of disc space, and since  a Blu-ray 3.0 disc only has the capacity for 100Gb, raw 8K is currently impossible.  This means that some form of compression would be needed, and likely quite a bit to fit into that space requirement, so you are then losing the high resolution of 8K even before it gets to your TV set.  The good news is that many movies are shot in 8K even though the release is at best 4K, which allows the producer and editor the option of blowing up a portion of a scene without losing too much detail, so when 8K storage and streaming issues are finally resolved, many films will be able to be released in 8K format, but by then 8K TV technology will have also improved, so the issue is why buy one today?  The answer is the same as it was the last time we reviewed the status of 8K…wait.

About a year ago we noted that a collaboration between Corning (GLW) and LG Innotek (011070.KS) had been working toward the development of liquid lenses, a technology that operates without the moving parts that are needed to operate current smartphone camera lenses.  By filling a flexible pouch with various fluids, the application of an electrical current to a transparent conducting material on one side of the lens can change the ‘shape’ of the lens, causing it to also change its focus.  The original technology however was found to be susceptible to freezing and a material reset was necessary to lower the freezing temperature of the lens liquids.
Since our last note, it seems both companies have been working even more closely with the unusual practice of sharing IP between the two.  In a recent filing Corning has shared ownership of six of its patents with LG Innotek and LFI has shared stakes in three of its liquid lens patents with Corning for a total of nine shared US patents in the most recent filing and a total of 16 co-owned.  The patents range from liquid lens systems to control systems that change the curvature of the liquid lens. 
All in, such a collaboration, or at least the sharing of IP is an indication that the pair has faith that they will be able to use the liquid lens technology down the road to reduce the size and complexity of current smartphone and similar camera systems that use a series of stacked lens to perform necessary on-the-fly focus adjustments.  By reducing the size, power consumption and complexity of some of that stack, they should be able to replace mechanical systems which wear out more quickly.
That said, even with the adaptation of new materials to avoid the freezing problem, a recent test showed that if the lenses are used in environments where are pressure is different from sea level, it can affect the curvature of the lens, so work toward solving such problems will, continue  before commercialization.  As a Samsung affiliate owns  a large portfolio of patents relating to ‘folded zoom’ which uses prisms to conform the light, LG is likely looking for a way around that issue that will allow it to find an alternative that will not require paying a royalty.  We were likely a bit too optimistic, expecting some liquid lens devices to appear this year, but it seems that Corning and LG Innotek are still working toward that goal.
Below is an explanation as to what makes liquid lenses work from our note last year:
Liquid lens technology is a relatively simple one with amazingly no moving parts, eliminating the MEMs motors and other paraphernalia that are part of high-end smartphone lens technology, however, a liquid lens itself is not enough to provide the camera with the necessary adjustments needed.  In conjunction with more standard imaging lens the combination can increase the ability of system to almost instantaneously adjust the camera’s focal length. Rather than using more typical lens mechanics, a liquid lens system can keep the physical lens static, using the liquid lens to do the focus adjustments. 
This is particularly important in imaging systems, which must scan a variety of items of different sizes, while identifying marks or text.  In such systems without liquid lenses, the focal length of the inspection camera is fixed and hopefully the items being scanned are all the same thickness.  If two items are somehow on top of each other, the additional height will produce an image that is out of focus and would possibly be mis-identified.  This can eliminate systems that must verify images with multiple cameras with different focal lengths to make sure the item is correctly identified 
​

What makes liquid lenses unique is they are made of water, or actually a combination of oil and water that is placed between glass or plastic.  As these liquids are immiscible, the oil covers the water and fills any space between the encapsulation materials.  A transparent conducting material is added to one side and by varying the voltage of the conductive material the water droplet can be made to change shape, and since there are no moving parts, the changes take place in milliseconds with no waiting for motors to adjust with the additional benefit of being almost infinitely adjustable, and unlike industrial cameras that start to wear out in weeks, they can cycle hundreds of millions of times before breaking down.  They are extremely energy efficient, can be focused at very short distances and are smaller than traditional mechanical adjustable lens systems, but they have one flaw, because they are water based they can freeze, which would cause damage.  Adding materials that can lower the freezing temperature of water can improve this fault, but devices that are used in below zero environments would likely be ruled out.
 

MLCCs (Multi-layer Ceramic Capacitors) are not sexy devices like processors or GPUs, but these little passive components are an increasingly larger part of the digital world, with 5G smartphones and electric vehicles driving the expansion, and comments from MLCC share leaders have been more positive than expected during what should be a seasonally slower period for passive components, with orders at Taiwan based  Yageo (2327.TT) remaining strong entering 3Q and MLCC material supplier Prosperity Dielectric (6173.TT) seeing order visibility into 4Q.  Industry leader Murata (6981.JP) now expects the growth rate for MLCCs to remain above 10% for the next three years, normally less than half of that, and while the company admits that prices for MLCCs have risen as customers build higher than normal inventory levels, the longer term prospects for MLCCs are excellent. 
But there is a downside to this growth, at least in the near-term and that is COVID-19, which has been a plus for passive component demand over the last year.  As Malaysia is a major production base for passive component production, the recent new outbreak of COVID-19 in the country has forced the shutdown of a number of component production facilities and the Malaysian government’s extension of the country’s lockdown to ‘indefinite’ have caused concern among component buyers as Murata, Taiyo Yuden (6976.TT) , AVX (6971.JP) and other suppliers have significant capacity in the country.  The outbreaks do seem to be regional, so shutdowns might not affect all suppliers at the same time, but the recent daily new cases spikes have reset the country’s focus on slowing the spread of the virus.  In most regions factories are exempted from the restrictions, but as has been the case in other countries, factory workers are not always in sync with government mandates, nor are all company managements, who, while not wanting to close factories at all, understand that a short-term closure is better than what could become a long-term one.
Some orders for MLCC’s and similar passive components can be shifted to other production locations, but the production of MLCCs is particularly specialized and capacity remains tight.  While Murata management does expect some pricing weakness as inventory building is completed, the possibility exists that tighter capacity conditions could keep any price pressure to a minimum.  It is harder for us in the US to get the perspective that other countries might have given the vast vaccine resources we have in the US, but to smaller or less privileged countries the prospects for slowing the rate of new COVID-19 infections is far more daunting than we might perceive.

All three primary Taiwan panel producers have released June preliminary results, which finalizes 2Q sales and shipments.  For the two Taiwanese panel producers that have broad offerings in large panel products (AU Optronics (AUOTY)) and Innolux (3481.TT)), total sales were up 5.7% and 0.4% m/m, while still showing strong y/y results in June, up 57.1% and 30.3% respectively.  Hannstar (6116.TT), which is primarily a small panel producer, saw its sales for June decline by 11.1% m/m but are up 81.6% y/y.  For 2Q AU Optronics and Innolux saw q/q gains of 15.3% and 11.2% while Hannstar saw a smaller gain of 2.3%.  All three saw substantial 2Q y/y gains of 50.6%, 39.5% and 120.6% respectively.

Panel prices, particularly large panel prices continued to rise through June and for the entire quarter giving panel producers sales momentum regardless of unit volumes, and as the quarter progressed, panel producers continued to shift production toward the categories seeing the most rapid increases and the highest demand.  Given that capacity at the three panel, producers in Taiwan did not change appreciably during 2Q, price increases and mix were the two significant variables.  That said we calculated weighted averages using industry mix norms to calculate the average price increases seen for those with more typical mix, which would exclude Hannstar in this case, given its focus on small panel production.  Based on the weighted averages for 2Q, sales should have increased by 13.2% q/q, which indicates that AU Optronics outperformed what would be our ‘industry norm’ while Innolux was a bit shy.

As panel producers head into the 3rd quarter however, there are questions as to how panel demand and panel pricing will play out for the remainder of the year.  As we believe large panel sales make up over 85% of total industry panel sales, the real focus is on panels for monitors, notebooks, and TVs, which have seen very significant price increases over the last year as noted above.  As June large panel total panel industry data is not yet available, we make an estimate of $7.72b for June, which would put 1H at $42.894b.  Based on share of total sales averages for 1H and 2H, 1H sales should represent 47.6% of full year sales, leaving 2H to generate 52.4% of total yearly large panel sales.  This would imply 2H large panel sales of $47.22b, and put the year at $90.113b, and almost 42% increase over last year. While this is certainly not an impossible scenario, especially given the compounded effect of large panel price increase over the last 6 months, it would entail a continuation of those price increases throughout the year and that is a bit more of a problematic assumption. 
While demand on an overall basis is certainly better than last year’s 1H, when COVID-19 lockdowns were in full effect, we expect overall CE demand will slow in the 2nd half.  The basis for this supposition comes from an improving global COVID-19 contagion rate due to vaccines, leading to less onerous social practices, the higher prices of CE devices generated by rising panel and component costs, the demand pull-in that has been driving increased volume, and some inventory over-stocking that has inflated demand.  This is offset by component shortages, which can allow panel producers to maintain progressively higher panel prices, but in the face of slower or no demand growth, we expect some of those shortages to lessen as the year progresses. 
As we have noted previously, we are beginning to see anecdotal evidence of slowing CE demand and perhaps a less frantic inventory management philosophy from brands and while we expect this will take some time to filter through the CE space, we note that even assuming typical seasonality, y/y comparisons will become progressively more difficult and we expect investors to look more closely at individual CE companies, rather than make assumptions that a rising tide lifts all boats.  Of course timing is everything and COVID-19 is still a significant variable, but the CE space looks more like shades of gray rather than black and white today.