​Corning (GLW) reported sales of $3.615B down 1.8% q/q but up 3.3% y/y and core sales of $3.762b up 2.2% q/q and up 7.4% y/y but slightly below consensus of $3.78b, while EPS was $0.57 against expectations of $0.56.  Broadly the display segment was weak, along with automotive and specialty materials, although specialty materials performed better than the weak smartphone market it serves.  Optical was strong and is expected to continue to be so and display, which was affected by the utilization cuts in June, is expected to continue to be weak through the 3rd quarter.  Corning continues to see the uncertainty coming from Chinese COVID-19 lockdowns as a key point toward how the full year will play out, with all three weak segments being held captive to the region’s policies.
Given our focus on CE, we note that display sales were down 8.4% q/q and down 6.5% y/y as utilization rates were cut by panel makers in June to give the industry time to absorb excess inventory and (hopefully) stem large panel price declines.  Glass pricing was up slightly in 2Q but Corning expects display glass pricing to remain flat in 3Q despite the lower volumes as a seemingly rational approach by the major display glass producers to take capacity off line is the basis for those expectations.  We do note that until recently display glass producers have been running capacity near full utilization and tank cleaning, repair, and modernization has been postponed.  Now that demand has slowed such work can be done as warranted, but the question of whether that capacity will be returned to production or held in reserve is still an unknown.
We expect the three major display glass producers, Corning, AGC (5201.JP) and NEG (5214.JP) to maintain reduced capacity through 3Q and likely into 4Q, but our concern is more from Chinese glass producers who have yet to prove themselves as other than price competitors.  Given the opportunity to capture share, particularly on the Mainland, price is their leverage as they are subsidized by the government.  As the year will likely generate losses for Chinese glass producers, share gains would serve to bolster their standing with the local and provincial governments so there is a chance that pricing pressure could be seen before the end of the year however we believe that the more rational behavior of the majors will be able to maintain relatively stable glass pricing through the end of this year, with early 2023 being a more opaque pricing environment.
With optical growth offsetting the weakness in display and the specialty materials end market (smartphones), we would expect to focus more on how carrier build-outs are being affected by the current inflationary environment in 3Q and 4Q to gauge how long optical growth will be able to offset display weakness.  While TV set shipments typically improve in 2H, we expect this year will see a weaker 2H than 1H unless prices deteriorate so quickly that consumers feel obligated to take advantage of such discounted pricing.  However, as we have previously noted, there is still high-cost TV panel, component and set inventory to be worked down before the impact of lower panel prices can be felt at the consumer level and while we have seen some component and raw material price declines, they will take some time to work through the supply chain.  Price elasticity remains but the effect of inflation on consumer buying power coupled with IT demand pull-ins earlier this year make for a teeter-totter situation that shows no clear cut direction yet and Corning’s full year grow is quite dependent on the balance between its product categories.  A shift in one direction or another could be the swing factor between the 6% to 8% predicted for the year or adjusted guidance in 3Q.  

In November 2018 the Chinese State run news agency, Xinhua (state), unveiled it 1st AI generated news anchor based on an actual Chinese newscaster named Zhang Zhow.  The artificially generated newscaster is able to mimic the actual broadcaster’s movements and speech, allowing him to be available to the news desk on a 24 hour basis, with a female AI broadcaster developed about a year later, based on another well-known Xinhua broadcaster.  These clone reporters are able to mimic complex facial and body movements that are derived from the AI being trained on the specific person’s video images and fill in for the broadcaster when an event happens quickly or the actual person is unavailable or on assignment.

In April 2016 a Japanese Advertising agency pitted a human creative director against an AI system to compete for program ideas for Chlorettes’s Mint Gum, with the AI ‘creative director’ developed by the Japanese arm of McCann (IPG).  While the human CD won the contest, although the vote was close (54% to 46%) and similar contests for two other advertising programs went to the AI.  Taking the AI concept a bit further in the advertising world are a number of Ai companies that specialized in the creation of digital models that can be used for advertising without the time and expense consumer photoshoots that are typically used.  The models shown below were generated by Rosebud.ai (pvt), a company backed by a ‘Who’s Who’ of Silicon Valley cognoscenti, and now seemingly focused on helping users generate NFT’s, with companies like DataGrid (pvt) https://youtu.be/8siezzLXbNo and NEON (pvt) https://youtu.be/2UlBFiL6noU creating even more life-like models that are more expressive than those mentioned earlier.

In 2017 Japanese advertising agency Dentsu (4324.JP) introduced AICO, short for AI Copywriter, a system that is able to generate advertising copy that could generate vast amounts of copy after researching (being trained on) specific topics and given a bit of context on the target idea.  Since then many AI based copywriting tools have been developed, a number of which are easily accessible on line.  Here’s a demo from Anyword (pvt) on “Coffee-Making Software” generated by their AI system:
“Everybody needs coffee.  Our state-of-the-art machine does not discriminate.
No matter the type of coffee you enjoy, there is a setting for it on our coffee maker.  We priced ourselves on being able to offer options for everyone, making our machine versatile enough to be used by anyone.
The process couldn’t be easier!  Choose your favorite roast from our custom selection, then choose which brew method fits your lifestyle best.  From there the AI will take care of the rest, using precision technology that won’t burn your coffee beans or brew too fast so your grounds can properly steep to release their flavor before being round.
Give us a try today!”
The ultimate (for the time being) escalation of the use of AI in the advertising world is Rozy, an incarnation of Korea’s Sidus Studio X (035420.KS), who is a ‘virtual influencer and model’ who earned close to $1m last year.  While the 22 year old influencer looks and acts like more typical influencers or pop stars that sign deals to hawk various items to those who are predisposed to follow whatever trend is current, she is not a real person and is therefore available 24 hours/day  and does not need to be flown (along with a retinue of make-up artists, wardrobe specialists, hair designers, and aides) to exotic locations for a few hour shoot, with only the background footage being necessary, which can be shot by local videographers.  She does not age, nor does she get negative publicity after heavy partying with other celebs, and she has picked up endorsements from over 100 sponsorships since her ‘creation’ in 2020, but the ultimate in AI based ‘advertising’ is expected to be MAVE, a virtual only all girl group devised by Kakao Entertainment (103260.KS) that will follow in the footsteps of ‘aespa’, the SM Entertainment (SMCE) actual girl group that has a virtual equivalent.

​All in, the use of AI in broadcast and advertising continues to increase and as the technology improves it will get increasingly more difficult for consumers to know whether they are being served by a human or a virtual copywriter, newscaster, product influencer, or even a friend, as some of the AI imaging products can be used to ‘prank your friends’ by creating virtual images of on-line videos and changing dialogue or actions.  While advertisers extol the use of AI to ‘personalize’ the advertising experience by having the systems write ‘better’ and higher volumes of copy and targeting that copy to the collected data for individuals, and news networks justify their Ai use as a cost-saving measure, we wonder how much humanity gets lost when an AI does the interpretation of an image or a headline and whether the Ai has even the smallest bit of conscience when it comes to advertising (not to say more advertisers have much).  In 1937 radio journalist Herb Morrison’s onsite broadcast about the crash of the airship Hindenburg, which killed 35 people in a fiery explosion might have been this:
“The airship is combusting and falling down with flames and smoke as it nears the mooring mast.  There are passengers screaming and the air is filled with acrid smoke”
Instead of the historic rendition that expressed a bit more emotion:
“It’s fire and it crashing! . . . This is the worst of the worst catastrophes in the world! Oh, it’s crashing . . . oh, four or five hundred feet into the sky, and it’s a terrific crash, ladies and gentlemen. There’s smoke, and there’s flames, now, and the frame is crashing to the ground, not quite to the mooring mast. Oh, the humanity, and all the passengers screaming around here!
. . . I can’t talk, ladies and gentlemen. Honest, it’s just laying there, a mass of smoking wreckage, and everybody can hardly breathe and talk . . . Honest, I can hardly breathe. I’m going to step inside where I cannot see it. . . .”

As we have previously noted Apple (AAPL) iPhone assembler Foxconn (2354.TT) has faced a bit of difficulty this year when it comes to seasonal hiring as while the crowds of potential workers brought to the company by recruitment agencies were still coming, they were fewer than last year, assumedly due to fear of the potential spread of COVID-19 in such close quarters.  Even with bigger sign-on bonuses, some potential workers that might typically sign on during this the busy season for iPhone assembly, Foxconn is having trouble filling the necessary quotas to keep the lines up to speed and has reportedly increased signing bonuses by another 20% to fill the gap.  The hiring bonus in at the Longhua factory was $782.23 on July 19 and is currently (yesterday) $960.01 and it seems that it is even higher at the Foxconn factory in Zhengzhou, where it was recently $1481.50, as long as employment conditions are met, while competitor Pegatron (4938.TT) is offering a $2,074.10 monthly salary to fill its ranks.
Unfortunately for those hired it seems that only hours ago the city of Shenzhen has ordered over 100 companies in the city, Foxconn included, into a ‘closed loop’ lockdown, to contain COVID-19 infection breakouts.   Other firms, including Chinese companies, BYD (002594.CH), ZTE (000063.CH), and Huawei (pvt) have been included in the company list,  The process means that only employees that live on site, meaning in company or company-sponsored campus housing, will be allowed to work, and no new employees may enter and no existing employees may leave.   All of this comes after the government of Shanghai held over 20 meetings with a variety of foreign firms that have representation in the city in June to try to mend fences after the 60 day lockdown that blemished the city’s reputation as a hub for foreign businesses.  Shenzhen itself is not locked down officially but is trying to seal off those residential and commercial areas where it sees the highest risk, a bit less onerous than the March lockdown, which forced residents to be tested multiple times and allowed only one individual in each household to leave to buy necessities every few days.
 

2021 was a difficult year for TV brands.  Panel prices continued to rise through the 1st half of the year, and while they began to fall in July other component costs, including transportation and logistics, continued to rise along with the overall rate of inflation, slowing consumer demand.  This has continued through the first half of this year making y/y comparisons difficult, despite declining TV panel prices, which tend to be the largest part of BOM.  On a comparative basis Chinese TV set unit volumes declined by 6.12 y/y in 1H ’22 but more importantly TV set sales declined 10.6% to $7.87b against last year’s $8.8b, reflecting lower set prices and the lower volumes.
Much has been said about how the increase in TV set size portends continuing growth in TV set sales under the theory that larger sets carry a higher margin, but that growth, at least in terms of units was muted this year, with share growth of only 2.1% in the 65” and larger category, while units declined by 4.1%.  As we expect at least some 2H half/half growth for TV sets in China for this year on a seasonal basis, there should be a bit of additional unit growth in the 65” and over category, but with the continuing decline in panel prices we expect the value of those sales to decline again h/h.

CE brands have been reducing orders as demand slows across many product lines as they try to work off the excess inventory that was accumulated earlier this year when a more optimistic view of demand still reigned.  Panel producers have in turn, lowered utilization rates but at least in July those reductions were not enough to take pressure off panel prices, which declined substantially in July and are expected to decline again in August (see table below).  As we have noted previously we believe that the utilization cuts made by panel producers in June were minimal and the continued decline in July large panel prices bares that out.  Monitor and TV panel pricing was worse than our forecasts, with TV, which had seemed to be seeing a slowing rate of decline, fell 8.7% for the month, far above our -2.9% to -3.5% estimate, and the overall IT segment coming in worse than our range and our August forecasts call for similar declines in almost all product categories.
Based on July large panel pricing all display categories are at or below their 3 year lows which brings up the question of at what point will such low panel prices begin to stimulate demand.  Declining panel prices boosted notebook (+9.7% m/m) and tablet (+15.7% m/m) shipments in June and the overall large panel display space saw a 0.8% m/m increase in sales, and while that could begin to paint a picture of a bottom, we expect July sales to decline as brands cut targets further and panel producers get more aggressive toward discounts in order to maintain current utilization levels.  With large panel prices expected to fall again in August, it would be hard to be optimistic in the near-term, although display sales should see a modest seasonal pick-up in September, but even with some improvements in logistical costs, we would expect more of a bounce along the bottom rather than an easily definable recovery.
While there are many mitigating factors that could change over the next few months, we are a bit more optimistic about 2023 in the display space, although we temper that feeling with the inherent overcapacity in large panel production and a careful definition of what a ‘better year’ might look like.  We expect a return to a more normalized 1st/2nd half split but do not expect more than a modest y/y sales recovery in 2023, with most of the profit leverage coming from reductions in raw material and component prices and less from improving demand.  We expect panel prices to begin to stabilize in late 1Q or early 2Q, but to remain at pre-pandemic levels.  The timing will depend on how aggressive brands will be during the holidays, essentially how willing they are to sacrifice margin to return inventory levels to pre-pandemic norms, and inflation/recession fears at the consumer level.
Calling the bottom of the display cycle here seems premature as there is a considerable likelihood that the industry will see sales declines in the near-term and while some might consider our modestly optimistic view of 2023 a recovery, we see it more as a return to what existed before COVID-19, warts and all and more a return to the industry status quo than a recovery.  Maybe our perspective is a bit biased toward the glass half empty here, but at this juncture it is hard to see what would fill the glass.

In June smartphone shipments in China increased 34.6% m/m and 9.2% y/y to 28m units, the first positive y/y comparison since December of last year with 98.2% of those phones being smartphones.  5G shipments were 23m or 82.1% of the total, up 29.9% m/m and 16.2% y/y.  34 new models were released in June, with 28 being smartphones and 25 being equip for 5G (73.5% of new models).  Domestic brands shipped ~24.5m units or 87.5% of the total, up 47.6% m/m but down 0.4% y/y.
The increase in June shipments is certainly a step toward at least some recovery from the dismal shipment metrics seen in China since January, which we believe reflects both the Chinese New Year holiday period and the aggressive lockdowns that were initiated by state and local governments.  We expect there was considerable pent-up demand at the consumer level and for brands whose production was limited during the quarantines.  We expect smartphone shipments to level off for the remainder of the year, albeit at a lower average level than last year, as can be seen in the charts below. 
While certainly a recovery from the last few months, it is difficult to see a demand based recovery in the Chinese smartphone market as there is little new in the way of features and new form factors (foldables) are still a very small portion of unit volumes.  The driver for any smartphone sales on the Mainland has certainly been 5G as China continues to push forward with base station installations outside of COVID hot zones and with 5G smartphones represented 3:1 in new models, all brands are making sure they have at least a number of offerings for potential new customers or 4G converters.  All in it was certainly the best month in the quarter, but the long-term chart tells the story of consumers unwilling to spend for upgrades that don’t appreciably move the needle and higher brand costs make the steep discounts needed to get Chinese consumers to open their wallets are hard to come by this year.
Chinese smartphone producers, both OEMs and assemblers have been facing volume challenges for a number of years as the Chinese smartphone market peaked in 2016 and has been on the decline since.  As volumes were reduced manufacturers searched for products that could help them fill lines that were now running at low utilization rates.  Due to the attraction of the smartphone market, which has among the highest unit volumes of all major CE product categories, phone manufacturers were not willing to give up on the smartphone market, despite the slowdowns and were willing to take smaller and lower profit margin orders over the last few years than they would have in the 2017’s and 2018’s, but competition, even for these smaller orders became so intense that manufacturers began to look for other CE products that could help them maintain high levels of utilization.
While volumes for such ‘non-phone’ products (tablets, laptops, etc.) were not as high, the initial margins were enough to be profitable and fill the lines, however over the last year the competition for these products has become so intense that unit pricing wars have begun to push smaller producers and assemblers out of the ‘non-phone’ market, leaving them without alternatives to fill production gaps.  We make the assumption that this will cause some to finally give up the ghost and the market will tighten a bit, but until then it seems that smaller Chinese smartphone producers are going to be fighting a losing battle amongst themselves.

​Samsung Electronics’ (005930.KS) S2 semiconductor fab in Austin, Texas and its sister fab in Taylor (under construction) could have other siblings as Samsung has submitted paperwork for 11 potential semiconductor fabs that it could build in Texas over the next two decades.  The paperwork, which is required when applying for tax subsidies, noted the potential for a total of $192b in spending  for the 11 fabs, which would cost between $12b and $23b and provide ~900 jobs each, although the Austin fab employs ~10,000 total.  Samsung indicated that it had no specific construction plans for these potential fabs and is spending $17b on the Taylor project, but indicated a target of 2034 and extending out until 2042 for the last two projects. 
The tax breaks on the real estate are estimated to be as high as $4.8b and usually last for 10 years.  As the US Chips Act winds its way through Congress it would seem an appropriate time to allude to a desire to build semiconductor capacity in the US, although these plans do not commit Samsung to anything more than the Taylor project, but it certainly won’t hurt to see if it stirs up some excitement from other potential fab locations in and outside of the US.  Samsung has two fabs in China and three in South Korea but none in Europe.

Investing in Chinese companies can be a harrowing experience, with listing requirements varying between exchanges and financial oversight a challenge for both investors and regulators who can find themselves up against corporate structures that make parsing financials a Columbo-like endeavor rather than a numbers oriented session.  But there is one aspect of investing in Chinese companies that opens up a new venue for investors that is not available in the US and that is the Q&A platforms sponsored by the exchanges that allow investors or potential investors to directly ask questions of company managements on a daily basis.  Based on the companies we follow on the Shenzhen and similar exchanges, company responses vary considerably in response time and depth, and many are just platitudes with little substance, but where face-to-face questions asked of managements might be indirect and circuitous, on-line questions tend to be quite direct, and while the answers can dance around a simple answer, the simple answer is usually obvious.
China’s BOE (200725.CH), the world’s largest LCD panel producer, is one of the more responsive companies on the Q&A platforms, and while they do the ‘dance’ like many others, they at least attempt to answer questions where others do not.  A recent very simple question prompted a rather lengthy response, which could have easily be summarized in a few words.  Here’s the question and answer, and our summary…
Question
“Hello, is the OLED screen company losing money?  Is it possible to increase the selling price to reduce losses?”
Answer
“Hello! At present, the company's three flexible AMOLED production lines are still in the climbing period, and the newly added depreciation is under pressure in the short term. In the long run, the flexible AMOLED business is one of the company's important growth points in the future. The company has given full play to its advantages in technology and production capacity, and has established extensive and close customer cooperation relationships, and has made important breakthroughs in the development of flexible AMOLED business. According to consulting agency data, in the first quarter of 2022, the company's flexible AMOLED product shipments increased by nearly 50% year-on-year. With the continuous increase in shipments, the operation of the flexible AMOLED business will continue to improve. In the field of smartphones, the company's flexible AMOLED products have basically completed the introduction of global mainstream brand customers in 2021. In the future, it will mainly focus on achieving more product series coverage for customers and continuously increasing the proportion of customers of the company's products. At the same time, continue to promote the application of flexible AMOLED in new fields such as IT and automotive, and enhance the value and performance contribution of flexible AMOLED products. Thanks!”
Summary
“No, not yet.  Not sure when”
In similar fashion, another Chinese panel producer Visionox (002387.CH) was recently queried in a similar fashion also about their OLED display business, although with a bit more detail as follows…
Question
“Thank you very much for the performance forecast.  The estimated loss in the first half of 2022 is about 1.1 billion.  After deducting more than 500 million depreciation from Gu’an in the first half of the year, the loss is basically the same as the same period last year.  Then, while the operating income has increased by about 20%, why has the loss reduction still not achieved except for the solidification.  At present, it is indeed as the majority of investors have said, the more you sell, the more you lose.  Please give a reasonable explanation for the increase in revenue but not profit after deduction of depreciation, thank you!”
Answer
“Thanks for attention.  At present, the AMOLED field is still in a period of rapid development dominated by technology. Due to the ramping production capacity, the continuous improvement of utilization rate, the continuous investment in research and development and the gradual expansion of market demand, the gross profit margin of OLED products is still in the stage of continuous improvement. In 2021, the company's OLED product gross profit margin will increase by 6.6 percentage points year-on-year. In the future, the increase in gross profit will come from economies of scale and industrial synergy. First, the yield rate and utilization rate will be further improved, especially if a relatively sustained high utilization rate can be achieved, the scale advantage of the production line will appear, and various costs and expenses will be Obtain a more reasonable and effective allocation; the second is to continue to build an industrial ecology and strengthen technical coordination. Relying on solid technology accumulation, the company provides a product verification platform, and actively promotes the localization and introduction of upstream supply chains to reduce costs and increase efficiency. Thanks!”
Summary
“No, not yet. Not sure when”
To point, we commend the Chinese exchanges for their push to open public communication between companies and investors, something far more guarded in the US, but we all know companies are going to try to paint the best possible picture, regardless of the actual answer.  While the dance is inevitable, at least there is a sort of a forum, which is a positive step, and on occasion there is some glimmer of useful information given or at least hinted at.  Of course disclosure rules differ from country to country and open Q&A platforms like these can be a minefield for legal counsel, but at least the average investor does not have to wait 90 days to ask a question, if they are able to find a way into the quarterly queue, and the answer, regardless of how obfuscated, is public record.
 

​In the past we have noted the excitement behind what is expected to be a way for the smart home industry to lose the shackles of interoperability issues with a new industry standard known as ‘Matter’, essentially a communication layer that acts as an interface between smart devices, systems, and users.  For years the smart home industry has been ripe with dedicated systems and devices that required the user to perform relatively difficult procedures to attach devices to networks and to maintain separate applications to control the devices of each manufacturer.  Not only did this make it burdensome and expensive for the consumer, but is also expensive for the manufacturer who was tasked with designing, adapting, maintaining and improving their hardware and software, along with developing interfaces, if any, with other branded products.
The Connectivity Standards Alliance that maintains ‘Matter’ has over 400 member that support the project, with ‘Promoter’ level members Amazon (AMZN), Apple (AAPL), Google (GOOG), Huawei (pvt), Infineon (INTC), LG (066570.KS), Texas Instruments (TXN), and a variety of other silicon, CE brands, and retailers, and that list expands across a list of ‘participants’ and adopters that pretty much covers the CE world’s gamut.  The idea is to allow all of these smart home devices to interoperate, giving the consumer the choice as to which branded device they wish to use to control all of the various branded devices they have in their homes.  Not only will this make the consumer happy but it will allow brands to focus on developing higher quality and more useful products without having to maintain proprietary network silicon or interfaces that don’t relate to current products.
Of course this sounds great and if successful would be a significant boost to the ‘smart’ device world, which includes IoT as the standard can be applied down to the individual sensor level.  And would enhance the development of a variety of wireless protocols that could be chosen to provide the best connectivity in different situations, all with the common ‘Matter’ overlay, making the type of connectivity essentially transparent to the user.  Chip producers have already begun developing silicon for Wi-Fi, Zigbee, Thread,  and Bluetooth Low Energy networks with the idea that they can combine these wireless types on a single chip, with ‘Matter’ being the standard that allows them all to interoperate and (in theory) be ‘paired’ with any other device with the push of a button.
There is still much to be done to develop ‘Matter’ as it will take the full participation of an entire industry made up of many companies in many countries, all of whom assume that they will benefit from the upheaval we expect will occur when the standard gains device traction.   There will certainly be winners and losers, but at the least ‘Matter’ will allow each company to focus on the areas in which they have expertise, rather than have to develop or maintain ancillary products.  A company that has developed a sensor that can measure the amount of visible and UV light entering a window would not have to develop interfaces to all the systems (lighting, automated shades, etc.) that might use its sensors and can concentrate resources on improving the sensors, while those that might have expertise in user interfaces would now be able to create more useful controlling devices rather than developing interfaces to all of the most popular smart home products.
‘Matter’’s official launch will come this fall and there will be many announcements regarding products and applications that will take advantage of the new standard, but the effects will develop over time as these new products are put into circulation and consumers begin to understand that the smart home world has changed and is no longer forcing them to buy dedicated hardware for each application.  It will take time but if the industry supports the standard it will matter.