Despite the fact that smartphone prices, at least at the high-end, peaked out last year, smartphones are still expensive and even more expensive for smartphone brands to get rid of when they are traded in for new models.  In the US ~350,000 smartphones are disposed of EACH DAY of which only 15% are recycled.  Since 100% of all smartphones are repairable or recyclable, this leads to an enormous amount of waste being added to the planet, and these numbers are only for the US.  Looking at just a few of the recoverable materials in smartphones, we put together a table showing the value of four such materials based on the recycling of 1m smartphones.  Here’s what it looks like:

So making the case for recycling smartphones is an easy one to make, but most smartphones that are traded in can be repaired or refurbished, and that has become a big business for smartphone brands, particularly Apple (AAPL) who has a 44% share of the refurbished market and Samsung (005930.KS) who has a 20% share.  In fact Samsung has selling refurbished phones in the US and Europe on a limited basis since 2018, but has now undertaken a plan to expand its refurbished smartphone business by branding such phones as ‘Certified Used Phone’ and putting each potential certified phone through a battery of over 100 tests and inspections, along with a new battery and packaging, along with a 1 year warranty.
Samsung has set up a separate section on its US website for ‘Certified Re-Newed’ product and is selling over a dozen such models at substantial discounts, with some being offered as replacements for new units of the same model that are out of stock.  Here are a few examples:

​While we believe some of the motivation associated with refurbished smartphones is for the good of the planet, it also serves as a profit center for phones that have been turned in as part of smartphone brand upgrade discount programs.  Rather than recycle a phone, which has a holistic benefit, a refurbished phone generates a return, and brands capitalize on that holistic view on social media, while still making a profit on returned phones, and those who are willing to work with a 1 year warranty, which is not much different from many new phones, the discounts are quite appealing, especially if you are one of those who lose phones or tend to shorten their lives by not purchasing a protective case. 

​China’s largest panel producer BOE (200725.CH) has decided to fund the construction of a 12” semiconductor line by making a $155m investment in Beijing Yandong Microelectronics (state) through its venture arm for a 9.14% share, making it the 2nd largest shareholder behind Beijing Electronics Holding (state), a large state-owned entity that is involved in display, semiconductors, new energy, and information services. The project, which has a total cost of $696m is expected to be a 65nm node line that will be added to Yandong’s 6” and recently completed 8” line.  BOE has been expanding its abilities in the IoT space and has a need for a local foundry that has experience (BYM has been in production for almost 30 years) but is not hampered by the restrictions on the use of US sourced EDA tools that could jeopardize BOE’s ability to capture business without a US trade license.  The design tools used in the project will be locally sourced, avoiding any conflict with US trade restrictions.  No dates were given as to the timeline for the new line.

​The art of estimating panel prices is not an easy one.  Data can come from a wide variety of places including panel producers themselves, distributors, and a variety of sources that profess to have access to such hard data, but in most cases there is quite a bit of variation between the data and therefore averages are the best solution.  Some of the discrepancies come from the almost infinite variations in panels, particularly monitor and notebook panels, which makes direct price comparisons quite difficult.  There is less variation in TV panels however and TV panel pricing, while not a perfect science by any means, is a bit easier to sort through, and given that TV panel production still represents a significant portion of LCD display capacity and even more of revenue, price movements in TV panels are significant indicators.
We have already noted the weakness in TV panel prices twice this month (8/6/21, 8/23/21) and have indicated our belief that TV panel prices were destined to correct in previous months, so we continue to monitor data on TV panel prices to see if the drop in September will be greater, the same, or lesser than in August.  Again with the disclaimer that variations in panels can have an effect on price comparisons, it seems that smaller TV panels (32”/43”) are under more price pressure now than they were earlier in the month, which will put more price pressure on Chinese panel producers who are the largest suppliers of such panels to the TV set industry.  With IT panel pricing expected to be flat, panel producers will see additional margin erosion in September, particularly those that supply emerging markets where smaller size TVs are more common.  We expect BOE and LG Display to be the most affected considering external inventory levels for smaller TV panels.

​Back before the internet, and even before electricity, kids had toys.  Maybe they were not particularly sophisticated by today’s standards, but you work with what you have, and endless hours were spent playing with what were mostly wooden toys.  There was one that was quite popular and was even written up in the 1889 issue of Scientific American called the Jacob’s Ladder, a simple toy made of thin blocks of wood and ribbons that looked like each block was descending down the chain when held.  The toy was actually an illusion, as the blocks only reversed sides and did not move, but the effect, at the time, was astounding.

At a recent exhibition in South Korea, Samsung Display (pvt) showed a version of what is likely a prototype of a potential foldable product slated for 2022 or 2023 that we have written about a number of times going back to 3/20/2018 (below) when SDC filed the initial patent, a number of times as further designs were revealed, and most recently in May of this year when SDC showed an earlier prototype.  In the most current version, the display is larger (7.2”), closer to a tablet than a phone and while the 35 second video (ctl-click here) shows little about how flexible the device is or how thick it is when closed, it does show a bit about how the display software works, adapting the image to a variety of formats that single out sections of the device or make it into a continues single image that can scroll across the device. 
Much of the development work behind this device seems to have been completed, which leads us to our conclusion that this will eventually become a viable foldable product with timing more likely set by marketing and production capabilities than technology limitations.  At least from our perspective it seems that SDC has realized that a tri-fold smartphone, given its fully folded thickness, might be a difficult sale relative to the almost paper thin devices currently available, but as a tablet, which would normally be more of a work device and typically carried rather than pocketed, the tri-fold concept makes more sense.  We have noted other tri-fold demos, such as the TCL (000100.CH) device we noted in a 12/23/2019 note (see Fig. 5), similar tri-fold demos from LG Display (LPL) and Visionox (002387.CH), and even a 2014 demo from Semiconductor Energy Lab (pvt) in Japan, but have yet to see an actual product, although it seems SDC is getting close(r).
 

​As we have previously noted, in March Magnachip (MX) entered into an agreement with Wise Road Capital (pvt) under which Wise Road would be purchasing Magnachip for $29/share.  While the South Korean Ministry of Trade, Industry, and Energy initially gave tacit approval to the transaction the Korean government expressed the view that Magnachip’s technology was ‘core technology of South Korea’ after a bit of cajoling by the US Treasury Department, citing an investigation by the Committee on Foreign Investment in the US (CFIUS).  While Magnachip’s production is in South Korea, it is a Delaware company and therefore under the auspices of CFIUS, and with Wise Road being a Chinese entity, the scrutiny was inevitable..
Complicating things further, Magnachip received another offer, roughly 20% higher than the Wise Capital offer from Cornucopia Partners (pvt), another Chinese & Hong Kong group of investors, despite the cloudy regulatory picture.  In mid-June, the company received notice from the US Department of the Treasury essentially creating a standstill action, preventing any further movement toward the completion of either deal, until CFIUS makes a final conclusion.  On August 27th the company received another notice from Treasury indicating that CFIUS had identified ‘risks to the national security of the United States as a result of the merger’ and has not identified any mitigation measures that it believes would alleviate those identified risks. 
At this point, unless new information is uncovered, CFIUS is expected to refer the issue to the President for a final decision.  As always, there is no assurance that either the company or the acquirer would agree to any proposals that would satisfy CFIUS, so until the President makes his ruling, the deal is on hold.  As much as we don’t see Magnachip’s driver technology as putting US security at risk, there is enough political and national sentiment against China that we see almost no chance for the Wise Road deal to progress, which opens the door to Cornucopia.  That said, the details where capital from side investors is situated in that deal will also be reviewed, which could lead to another CFIUS review.

​You finished work, hopped into your car and head home, but when you get there you find that your apartment door is partially open.  You’ve been robbed!  After calling the police, the apartment management and a locksmith, you realize that since the thieves took your 65” Samsung (005930.KS) TV, you will be watching TV on your smartphone until you can get a chance to get to a store and buy a replacement. You get even angrier as you envision the robbers sitting around your beautiful TV with a few beers, watching the Lakers game and laughing about today’s caper.  Well, a call to Samsung and a few questions identifying you and your TV is going to give you at least a little satisfaction as Samsung then activates a remote ‘kill switch’, turning off your stolen TV and putting a damper on the burglars basketball bash. 
Samsung seems to have installed such a remote kill switch in its TVs, allowing the company to disable a stolen or lost TV in the same way your carrier can disable your smartphone if it is lost or stolen.  Samsung used this function when the population in South Africa (see our note 7/14/21) rioted over the detention of the country’s former president and a number of Samsung and LG Electronics (066590.KS) warehouses and factories were looted near the Durban airport.  Samsung was able to identify the stolen TVs taken from their distribution center in Cato Ridge and use the switch to disable the stolen sets.  A Samsung official stated "In keeping with our values to leverage the power of technology to resolve societal challenges, we will continuously develop and expand strategic products in our consumer electronics division with defence-grade security, purpose-built, with innovative and intuitive business tools designed for a new world. This technology can have a positive impact at this time, and will also be of use to both the industry and customers in the future".
While this is a handy item to have and one that might discourage a few potential thieves, if they knew of its existence, it does open the question as to whether the system by which Samsung is able to remotely control TVs is secure and whether it could be coopted by hackers looking to control your TV or worse, enter your network.  Backdoors, which are ways in which companies can enter software potentially to diagnose problems or make upgrades, are a vulnerability that hackers use to either gather information, effect ransomware, or to gain access to other hardware that might allow further illegal activity.  While backdoors are common in lots of software, they are a vulnerability and despite the potential security that the brand might profess concerning access, they are hard to control in absolute terms.  Turning off a stolen TV is a bit of justice for those who have been wronged but of little consequence in the long-run.  Good homeowners insurance and a security system would like be a better alternative.
 

​Gaming is big business, and we don’t mean sports betting or lotteries, but on-line gaming.  As both a panacea and a nightmare for parents, assumedly idle time is filled with hand-held devices, consoles, PCs and smartphones being twisted, turned, pushed, swiped and generally attacked while battles rage, respawning occurs, civilizations are built and destroyed, and super teams are created that could never exist in real life.  Statistics on the gaming industry vary considerably with the high end at ~2.9b players in the global market generating ~$176b in revenue this year, with the Asia/Pacific region having the largest share at over 7 times the number of gamers in the US, but China’s most recent set of rules could put a bit of a dent in those numbers.
The National Press & Publication Administration, the agency that regulates the distribution of all publications in China under the auspices of the Propaganda Department of the Chinese Communist Party, has issued a notice entitled “Notice on Further Strict Management and Practically Preventing Minors from Indulging in Online Games”.  While we have not seen the actual notice, the agency has summarized the content as follows:

• All on-line game companies can only provide minors with 1 hour of service from 8PM to 9PM on Friday Saturday, Sunday, and holidays.
• No on-line services to minors can be provided at any other time and real-name registration for user accounts is required.
• No service is allowed to any unregistered user at any time
• The implementation of such measures will require strengthening supervision and inspection in order to prevent minors from indulging in online games and to deal with online game companies that have not strictly implemented these rules in accordance with laws and regulations.

The note is summarized with the statement that “…it is necessary to actively guide the co-management and co-governance of families, schools, and other social sectors, perform the guardianship responsibilities of minors in accordance with the law, a create a good environment for the healthy growth of minors.” 
The age of consent in China is 14 but most game companies have already implemented their own restrictions that vary from 12 years old to 8 years old and lesser limitations on those between 12 and 18 years old, but there are already adult gaming accounts that are available for rental, meaning it can be ‘rented’ by anyone who has the account password, which gets changed for each ‘renter’, with the account holder and the ‘manager’ sharing the rental fee of 2 yuan ($0.31) per hour.   In some cases you don’t even need a password, only a QR code, which is supplied by the manager, and applications that give access to available rental accounts are available in a number of on-line stores.  ~18% of the Chinese population is 14 or younger.
That said, a report from Tencent (700.HK) indicated that in July of this year an average of 13.6m minor accounts were forced off-line by their system as they triggered the company’s 1.5 hour play limit and 10,000 accounts triggered facial recognition verification during the game payment process, with 92.4% of those for ‘failure to verify’ rules.  There are still companies that allow authentication for those that do not have their ID numbers, but we expect it will be a relatively short time before those re able to remain outside of the new restrictions..  While the onus for maintaining the welfare of gaming minors falls primarily on game companies, who would likely feel the wrath of the government when violations are discovered, the rules do acknowledge that the responsibility also falls to the game platform, parents, and schools, although little is specified as to how such rules be implemented outside of the game companies, which likely means additional rules going forward.

​Last Thursday we noted that Murata (6981.JP), the leading supplier of MLCCs (Multi-layer Ceramic Capacitors), a small, but essential component used in 5G smartphones, automotive electronics, and a myriad of other consumer electronics, had closed its factory in Takebu, Japan due to an outbreak of COVID-19 adding to the already tight market for such devices.  With much of additional MLCC production coming from factories in Malaysia and the Philippines, where COVID-19 remains a significant public health threat, other suppliers are facing potential issues in terms of production, with estimates that Samsung Electro-Mechanics (), the 2nd largest producer of MLCCs, has ~40% of its capacity in those countries.
We noted that lead times for MLCCs have been increasing and we have seen data indicating that the industry fell short of demand this month by between 2% and 10%, with shortages expected to continue until early 2022, and while supplier Yageo’s (2327.TT) plan to reduce MLCC prices by 10% to its Chinese customers is still an enigma, if they are looking to generate share, China represented over 45% of MLCC demand last year, making it the largest regional buyer.  China itself does have capabilities for MLCC production but has yet to establish itself as a global competitor in terms of quality, but as a market that has grown from $8.55b in 2016 to $16.25b last year, it presents an attractive opportunity for Chinese suppliers looking for growth oriented markets.
Fenghua Hi-Tech (000636.CH) has indicated that it will be spending $1.16b in three phases to increase its MLCC production capabilities by 45b units/month when fully completed or 10% of global capacity according to the company.  A second Chinese MLCC supplier, Chaozhou Sanhuan (300408.CH) has also indicated that they will be raising at least $600m to increase MLCC capacity, although we have no timeline as of yet.  With both companies increasing capacity by roughly 100% between 2016 and 2020, China is certainly making an attempt at penetrating the MLCC market, but much of the proposed capacity is still in the planning stage, so we expect little significant change on the supply side this year and with the problems surrounding COVID-19 in Malaysia, the Philippines, and Japan, we expect the market to remain tight this year despite Yageo’s plans.

While companies in the US and other regions face Q&A from analysts and investors on quarterly conference calls and investor presentations, individual Q&A from same tends to be via e-mail or a phone call that rarely is made public, especially given the disclosure rules that could force a public disclosure ‘event’ if non-public information is accidentally disclosed by a company and further disclosed by the analyst.  Chinese companies, at least some, disclose contact with brokers and analysts but also have ‘public’ forums where investors can ask questions ad hoc, directly to company managements.  In most cases questions are focused on technical points such as current shareholder count or details of some complex share transaction, but companies do get asked more specific questions about business details which are sometimes both highly specific and quite direct.
Company spokespersons are careful to keep competitive information close to the vest however at times company enthusiasm can seep through with details about a particular topic or product, while similarly when things are difficult to answer company’s refer back to a number of platitudes  or explanations that are far from answers.  Here’s an example that is part of a Q&A between investors and BOE (200725.CH), China’s largest display panel producer:
Q            What is the progress of the company’s acquisition of minority shares in Wuhan B17? And is there any acquisition plan and timetable for the minority stake in Hefei B9? Thanks.
A            Hello!  For the financial data, please pay attention to the company’s regular reports.  Please pay attention to company announcements for major issues.  Thanks!
The question, which was getting at trying to gauge whether BOE is progressing with a plan to buy out smaller shareholders in a particular company LCD fab, which would put BOE just behind the government as the 2nd largest shareholder, was not answered, with a very typical generic response, however another question, which was of more value from a publicity perspective was answered with considerably more detail:
Q            Chengdu BOE Electronics CO. Ltd., in which the company has a shareholding, was established on August 26.  Is it to support cooperation with Changan Automobile (000625.CH) and Cherry Group (pvt) in automotive smart cockpit display and vehicle applications?  What is the company’s shareholding ratio?
A            Hello! According to the announcement of the company’s holding subsidiary BOE Seiki Co., Ltd. (BOE Seiki, 0710.HK), the company and the company’s holding subsidiary BOE Seiki’s wholly-owned subsidiary Hefei BOE Automotive Display Technology Co., Ltd. (Hefei BOE) and Chengdu BOE Automotive Electronics Co., Ltd. was established as a joint venture by Canada Investment Co., Ltd. (Annual Canada). The investment ratio of the joint venture company is 40% of the company, and Hefei BOE 40%, with an annual increase of 20%. The establishment of the joint venture company will be able to strengthen the BOE Group's layout in smart car display devices. Thanks!
This was obviously something that the company wants shared, and was willing to be more specific about details, especially as BOE has been promoting its stature in the automotive display market for some time, but when another question touched on a topic that was a bit more sensitive to the fact that BOE is the largest producer of TV panels globally, the Q&A took a more defensive tone.
Q            Hello, not only did the TV screen drop sharply in August, but in September, according to third-party media surveys, there will also be a sharp drop. The 43-inch price is even more likely to return to January. May I ask the company once said the industry’s weak cycle, why can’t it be reflected at all? ,thanks
A             Hello! In the past year or so, the prices of TV and IT LCD products have risen sharply. At present, product prices have gradually begun to differentiate, and prices of basic products have begun to loosen, but the prices of tight-selling and high value-added products will remain high. At present, the prices of IT LCD products, which account for a higher proportion of the company’s revenue, remain high, and the prices of some products are still rising. The price of TV LCD products has dropped to a certain extent, and the price of relatively larger and higher-end products has fallen slightly. There are large differences between different products, but due to the continued tight supply of upstream raw materials, the overall effective capacity increase is relatively limited, and the profitability of products, especially the profitability of high value-added products, is still expected to remain at a good level. Thanks!
It is quite obvious from the company’s response that this is a topic that was very carefully considered before an answer was given and crafted to maintain a sense that the company has things well under control and has planned for such an eventuality, which is usually not the case.  In reality, panel producers tend to be reactive rather than proactive, making decisions based on relatively short-term prospects and Chinese panel producers tend to be more so inclined, and while there are many considerations that go into capacity expansion decisions, an underlying goal for China’s display space has been to gain a dominant position at almost any cost.  This desire for ‘share bragging rights’ and the state, provincial, and city government’s desire to fund this aspiration has certainly given China the dominant position in the LCD panel space, and for the last  year, been a source of profitability for almost all Chinese panel producers.
That said, even if there has been a shift away from LCD TV panel production from Chinese panel producers, there is little escaping the effects of the rapid drop in TV panel prices seen this month.  There are some offsets, such as a bit of an increase in IT panel prices or the lesser impact of the TV panel price decline on the very large TV panel segment, but the panel industry is so obviously cyclical that no matter what language company’s use to explain how they have morphed into non-cyclical entities, it is difficult for us to believe that such rhetoric will change the eventual outcome.  China will continue to dominate the large panel LCD space over the coming years, but whether that will sustain profitability over the next few years is a less likely scenario.

Samsung Electronics (005930.KS) finally released its latest iteration of foldable smartphones, the Galaxy Z Fold 3 and the Galaxy Z Flip 3.  Given that there has been an endless number of ‘leaks’ associated with these two devices, there is little to say that hasn’t been said, so as Sgt. Joe Friday used to say “Just the facts, ma’am”