While Samsung Electronics’ (005930.KS) smartphone production goals for this year were optimistic when they were made late last year, they now seem even more optimistic given the confluence of events that have suppressed smartphone sales across the globe.  Samsung’s original production estimate for this year was for the production of 240m units and an additional 60m to 70m produced by ODM, for a total of 300m to 310m.  Samsung shipped 74m units in 1Q but likely produced ~77m units, leaving an excess of ~3m units.  Based on our estimates for Samsung’s production and shipments for the remainder of the year, we expect using Samsung’s original production estimate (single point of 305m units), the company would overproduce by between 13m and 14m units.

​[1] 5 Year Average Share of Full Year Shipments
[1] Aggregated shipments from multiple sources

​Based on our existing shipment estimates for 2Q – 4Q we expect Samsung would likely reduce production in 2Q and 3Q, with signs that they have already reduced production in April and a bit more severely in May seem to indicate that they are at least at this point on the path to a reduction in overall production this year.  We have seen estimates for production as low as 280m units but we remain a bit more optimistic at 290m based on what we know so far.  Our biggest concern would be if 2Q shipments come in lower than 68m units, which would push us to lower full year again, although we expect Samsung will push production back up in June as the COVID restrictions in China are loosened.
The effect of reductions in Samsung’s smartphone production plans will likely be felt more by ODMs, as Samsung will likely focus on marketing the more profitable flagship phones that it produces internally, and we noted last week that Samsung was already expected to reduce the number of feature phones it produces for the India market this year, which are produced by Dixon Technologies (DIXON.IN).  We expect Samsung’s other ODM, most likely Wingtech (600745.CH) and Huaqin (pvt) will have seen some cutbacks, with Samsung Display (pvt), an affiliate of parent Samsung Electronics, seeing less of a reduction as it produces the Galaxy S series flagship line and the Z Flip & Z Fold, Samsung’s foldable smartphone offerings.

As always we take long-term estimates for new CE products with a grain of salt with the understanding that rarely are products out substantially ahead of timelines and volume estimates exceeded, but we understand the necessity for some to extrapolate  earlier growth rates in order to stimulate interest or sell products.  The AR/VR product space has been just such a new product sector, falling short of promises made as far back as 2013 when Google (GOOG) Glass (AR) appeared as well as the Oculus Rift VR headset, with pundits forecasting that the global population would soon be walking around wearing AR glasses, no longer having to pull out a smartphone or ask for directions, while those at home would spend their days gazing at endangered species in Africa or climbing the Alp, virtually of course.
As far as consumer products go, AR/VR headsets and associated accessories are small potatoes, and despite the exhortations over 27% y/y increase in VR unit shipments this year, the total count is likely just under 14m units, and at a average ASP of ~$400, it’s a $5b market as compared to the TV set market of ~$100b or the smartphone market of $520b.  That said, there are many that see the growth of the AR/VR space, led by the still somewhat nebulous Metaverse, as the next mass market CE product, and one that will spread like wildfire across the globe.
While they wax poetic about AR/VR, there are a number of obstacles in the way of such mass adoption, despite the notion that Apple (AAPL) will be joining the AR/VR headset world in the ‘near’ future.  VR headsets are uncomfortable and even the most ardent supporters admit that they fatigue rather quickly in the VR environment, while AR glasses are considerably less so and are nearing designs and capabilities that are near acceptable norms.  Progress has certainly been made toward bringing down the weight and bulkiness of VR headsets over the last few years, while improvements in optics and display design and capabilities continues to improve ‘wear-time’, but smartphones allow you to communicate with the world and TVs allow you to access a vast repository of information, entertainment, and content, while VR headsets allow you to play games.  We are not criticizing VR gamers, but there is very little VR content outside of games and the ability to create VR content is limited to a relatively small segment of the global population.
So what is missing are applications.  Not FP shooters, MMOs, or BC miner games but applications that provide that enhance that connection folks desire from their phones, their TVs, or social media.  Yes, one day there will probably be enough content that one could spend hours a day prancing through Transylvanian castles alongside Dracula or tending a curio shop on some obscure exoplanet, but VR needs a killer application that adds to an individual’s ability to communicate with others, and despite the pitfalls of social media and the low quality offerings of most streaming services, the estimates won’t really matter until such an application is found.  The success of Twitch (AMZN) or Tik Tok (pvt) prove out that isolating folks in a VR world, no matter how interesting, is really a distraction to the desire to stay connected to friends, family and the world in general, and the direction that VR application developers need to go.  AR is far less isolating, and applications that allow AR glasses wearers to share what they see with their friends should be relatively easy to create, and some of the AR applications that we have mentioned in the past, particularly face-to-face language translation give AR a place in the real world, but if one is looking to forecast units, it should be based on applications as an application that becomes popular will drive the improvements in hardware faster than any government subsidy or industry-sponsored development program would.  Sort of “if you build it, they will come” for the application and “If they come, you will build it…” for the hardware.

​Earlier this month w noted that five large Chinese companies would begin delisting procedures that would remove their shares from the New York Stock Exchange over a dispute with the Public Company Accounting Oversight Board, a 501© non-profit organization created by Congress under the Sarbanes-Oxley Act that required US public companies to face external audits, with broader powers than those held by the SEC.  Auditors themselves (if they have more than 100 public companies as clients) are audited yearly, and since its inception, the PCAOB has made public a database of additional financial material, usually held between company auditor boards and outside auditors, all a response to the constant flow of ‘restated earnings’ that were prevalent in the late 1990’s.
While such auditor inspections have become commonplace in the US, other countries do not have the same standards and there lies the problem with Chinese companies that are listed on US exchanges.  Many of such foreign auditing firms have not provided the necessary detail requested by the Board, and peppered with a bit of anti-China sentiment, a conflict has grown as to the undisclosed data and whether it might reveal conflicts of interest at the audit firm level or ties to what the US calls ‘adversarial organizations’ in China, which means the military, that were not revealed in the financial materials provided by the companies.
As we noted, a few have already made the decision to delist, although those procedures have not been completed, while the board is trying to work with other US listed Chinese companies to find a solution that satisfies both sides.  The US has selected Alibaba (BABA,9988.HK), JD.com (JD, 9618.HK), Yum China (YUM,9987.HK), and a number of other Chinese US listed companies for inspection in September as part of what seems to be the end of the dispute.  The audits will be done in Hong Kong (all have dual listing in the US an HK), whose exchanges have slightly more rigorous disclosure regulations.

​Samsung Display (pvt), an affiliate of Samsung Electronics (005930.KS), and the world’s largest producer of small panel OLED, has sold roughly 2,000 patents to Chinastar (pvt) a subsidiary of China’s TCL (000100.CH), a company in which Samsung has a 12.3% stake.  That stake was acquired as part of the 8/31/20 sale of its 60% stake in its Gen 8.5 LCD fab in Suzhou to Chinastar for $1.08b US.  In the patent package were 577 US patents owned by Samsung Display and to put that number in perspective Samsung Display has 18,860 US patents and 3,968 US patent applications, with 325 applications and 1,731 with “Liquid Crystal Display” in the title.  The price of the sale, which could have been done piecemeal, was not disclosed, although it will eventually show up in SDC’s financials, and given the company’s new revelation as to compensating those who were responsible for the IP when it is monetized, more detail will eventually show up in the footnotes.
As Samsung Display made the decision to end the production of large panel LCD displays back in 2020 and has slowly sold or shuttered all of its large panel LCD fabs, selling line equipment and converting some to small and potentially large panel OLED production, along with the company’s OLED derivative. QD/OLED, monetizing these IP assets are a logical path for SDC.  TCL/Chinastar will now have a broader IP platform under which it can more conclusively defend itself during IP litigation, while typical agreements call for the previous patent owner to be grandfathered against new litigation.
The question however, is whether Chinastar will use the extended portfolio against Chinese rival BOE (200725.CH), the largest panel producer in China, as a tool to limit BOE’s competitive ability, a practice relatively common in the display space and certainly in the CE space, and one that gains momentum as the financials of panel producers deteriorate.  The problem here would be that litigation against BOE by Chinastar could be taken as a tacit challenge from Samsung Display and potentially from Samsung Electronics, who purchases large panel LCD product from both Chinastar and BOE, given the links back to both Samsung entities.  For now things are quiet, but we expect  TCL’s lawyers are review all of the new IP to see if it pertains to existing litigation and whether it can generate new legal challenges going forward.

Fun with Data – PC Shipments
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It is no great revelation that PC brands were overly optimistic about prospects for shipments earlier this year, so there is little need to reiterate all the things that were assumed or misconstrued earlier this year, or the issues that might have made them worse thus far, but it is interesting to see how far off some of the brand estimates were and how current targets equate to last year’s shipment levels.  Before we go further, Apple (AAPL) investors take hope in that the only PC vendor who has not changed its 2022 targets or seen them changed for them with weak 1H performance, is Apple, a nob to their more realistic optimism and the value of their brand.  We note the data in the table comes from Digitimes and can differ greatly from other estimates, including ours, as some include tablets, chrome-books, and monitors while others do not, with the point being more that PC brands set targets with blinders on earlier this year and now have taken them off.

​According to the Chinese trade press, Samsung is planning to resume ordering TV panels from suppliers after halting those orders in mid-June.  While no sources were named or quoted the gist was that Samsung’s TV inventory, which ballooned to 16 weeks in June, was now at a more normal 8 weeks and the company was ready to place orders with its panel suppliers, BOE (200725.CH), Chinastar (pvt), Innolux (3481.TT), and AU Optronics (2409.TT).  The sources go further in that they blame Samsung, the share leader in the TV market, as the reason for the downturn in the display space, as they ‘did not notify their supply chain for over a month’ when inventory levels became too high.
While we expect Samsung, as did most other brands, was want to acknowledge that the demand side was weakening, but to be accurate, the best indicator that TV demand was weakening would be the price of TV panels, which peaked in July 2021, and was certainly a visible sign to the entire display supply chain, including panel producers, who decided to continue to produce at levels that would maintain positive gross margins despite the obvious signs that something had changed.  Additionally LCD capacity additions and greenfield expansion projects continued to be announced, financed, and constructed through much of the downturn and utilization rates that should have been cut in March, were maintained by almost all panel producers until they were forced to make those cuts in June.
It would be wonderful if Samsung was able to reduce 16 weeks of TV inventory down to 8 weeks in what amounts to 9 weeks during a highly inflationary period, but with the lower demand seen for many CE products in recent weeks, making that assumption still seems to be a bit of a stretch.  More likely Samsung is doing what all TV brands typically do in late August and that is to begin ordering enough components to meet expected demand for the holiday season.  Jumping to the conclusion that everything is back to normal in the TV space is ignoring what really caused the problem in the first place, over capacity and over-ordering, along with the assumption that the COVID induced out-performance of late 2020 and much of 2021 was the ‘new normal’.  Optimism is OK but being overly optimistic carries the same number of potential negatives as does being overly negative.
 

As we have noted many times, typical small OLED devices such as smartphones and tablets operate using RGB (Red, green, blue) sub-pixels to create color.  The RGB process differs from large panel OLED manufacturing, which coats the substrate surface with a combination of OLED materials that create white light, which is then passed through a color filter, essentially a sheet of red, green, and blue dots, to create color.  The RGB process is more complex, involving separate process steps for each color and has limitations on the size of the substrate, but the color filter in the WOLED process reduces the amount of light that reaches the user while the RGB stack does not.  The red and green (and yellow/green in the case of WOLED) OLED emitters are phosphorescent materials, which simply put, generate much more light than fluorescent materials, such as the blue emitter material used in both instances, as a commercial blue phosphorescent emitter does not exist…yet.
There are a number of large companies involved in R&D to develop a blue phosphorescent OLED emitter as its use would vastly improve the characteristics of the OLED stack, but, as opposed to red and green OLED emitters, the energy levels of blue emitters makes them unstable and limits their lifetimes.  Universal Display OLED) the primary supplier of phosphorescent OLED emitters to the industry spends ~$20m/quarter on R&D, and while not all of that goes toward the development of blue phosphorescent emitters, we expect a large portion of that budget does.  Of course, OLED panel producers, the buyers of phosphorescent OLED materials, have a particular interest in the development of a blue phosphorescent OLED emitter, both from the standpoint of improving the efficiency and quality of their OLED display products, and from a competitive standpoint.  The quality side is easy to understand but owning the IP to such a material, as does UDC for red and green, would be an enormous asset and would allow the owner to license (or not license) or sell (or not sell) the material to other OLED display producers.
All  OLED producers test emitter materials, both the emitters themselves and host materials in which the emitters are ‘doped’, looking for, in the case of blue, a phosphorescent material that is ‘deep blue’, has a high efficiency, and a long lifetime, but as manufacturers their job is to produce OLED panels, not research new OLED materials, and most do not have the resources to do so, however Samsung Display (pvt), the largest producer of small panel (RGB) OLED displays and affiliate of Samsung Electronics (005930.KS), the largest producer of OLED smartphone, does.  In our 8/26/22 note, we mentioned that the CEO of Samsung Display indicated that it expects to move from using fluorescent blue emitter material to using blue phosphorescent or blue TADF emitter materials.  While we believe all OLED producers have the same plans ‘eventually’, when a commercial blue phosphorescent emitter is developed, we expect SDC or SDC and a partner will be the first to commercialize such a material.
SDC has applied for a number of patents, both in Korea and in the US that relate to blue OLED materials, particularly those that have a Boron component along with the more typical heavy metal ligand structure that most phosphorescent materials are based on.  By substituting Boron and Nitrogen for Carbon in some of the molecular ring structures, the IP filing states,
“The organometallic compound…may emit blue light having an emission wave-length of about 450nm or greater and less than 490nm.  When the organometallic compound…is included in the emission layer of an organic light-emitting device, formation of an eximer and exiplex with a host may be suppressed.  Accordingly, the colorimetric purity and lifespan of an organic light-emitting device including the organometallic compound may be improved.”
What that means is that by changing the molecular structure of the blue phosphorescent emitter material, some of the pesky ‘byproducts’ of phosphorescence that reduce lifetime can be removed, and while the IP noted here did not give an indication as to the lifetime of such substitutions, the indication was that the blue emitter material’s characteristics improved.  We note that given the 161 pages of potential molecular structures in the SDC IP we reference, the specifics as to whether SDC is just covering its bases by listing almost an infinite number of possible chemical combinations and structures that would help it build a case for an IP lock on any blue phosphorescent organometallic Boron-based material that might come to market, or whether it is purposefully obscuring a specific material structure that it believes would have commercial value, is a question we cannot answer. 
We note that other R&D teams have made many similar broad claims as to improvements in blue phosphorescent material characteristics, although the industry still lacks a commercial blue phosphorescent OLED emitter material.  UDC has given a loose timeline for commercial production in 2024, with industry specs met by the end of this year and TADF material developers have promised a commercial blue as far back as 2020 but have been unable to meet those goals.  That said, Samsung recently purchased Cynora (pvt), one of the few TADF developers that have been working toward the commercialization of a blue OLED emitter with phosphorescent characteristics, but actually only purchased the company’s IP, more likely as a way to cover a broader swath of potential blue material development than it would have had as an investor. 
So as the activity toward a commercial blue material gain momentum, it would seem that Samsung Display is not only using dollars and IP to keep itself in the game, but is also working toward the possibility of an internal development, or one jointly with UDC (the logical choice) or another partner.  UDC’s IP and supply contract with SDC will expire at the end of this year, although it can be renewed for two additional years, and while the terms of the contract are not public, we believe the current contract only covers red and green (and similar derivatives) phosphorescent IP, with blue to be negotiated when necessary.  It would be difficult to disaggregate a change in contract terms between UDC and SDC that would relate to blue IP, but it is something to watch as we head into 2023.
 

​While it is hard to believe that it took the Taiwan Taoyuan District Court essentially three years to make a decision, said court has ruled that former panel producer Chunghwa Picture Tubes (defunct) is bankrupt.  CPT, a once robust panel producer generating over $500m in quarterly sales back in the late 2000’s, found itself unable to compete, with sales down to $13m/q by the end of 2018, along with a heavy debt burden incurred during the construction of the company’s 2nd G6 LCD fab and its investment in a Chinese subsidiary.   
According to court documents CPT  had total liabilities at the end of 2021 totaling $1.372b US which far exceeded the value of its assets (not provided but were ~$772m at the end of 2019), and the court sponsored auction of the company’s plants and associated building, which was priced at $206.6m (base price) received no offers.
The court has appointed an accountant and two lawyers to oversee the bankruptcy proceedings with a creditor’s meeting scheduled for the end of October.  The company’s largest shareholder is Tatung (2371.TT), a Taiwan-based manufacturer of PCs LCD TVs, and appliances, holds a 39.7% stake in CPT, along with eChem Solutions (4749.TT) and a variety of smaller stock and note holders, a sad demise for a company that at one time held an 8% share of the global small panel LCD market.

​Crystal Clear Codec (pvt) a company licensed in Texas in 2019 and Warsaw, Poland is suing Chinese smartphone brands Xiaomi (1810.HK) and Oppo (pvt) for patent infringement after the companies challenged Crystal Clear’s patents under rules of the US National Intellectual Property Rights Coordination Center, a part of the US Homeland Security system and the US Immigration and Customs Enforcement (ICE) program.  The patents involved refer to EVS technology (Enhanced Voice Services) a codec that is used in packet-switched networks that improves quality, reduces error rates, and improves compression, which allows more efficiency and bandwidth across voice networks.
CCC has a portfolio of 12 patent families concerning EVS and licenses that IP to a variety of companies, with the IP EOL dates extending from 2026 to 2035.  CC charges a rate of $0.44 for cumulative units of 10m, with tiered levels up to $0.29 for 60m+ units, relatively standard rates, but what makes this a bit unusual is the fact that much of the IP is assigned to Huawei (pvt), formerly the largest smartphone producer in China.  Huawei has indicated tin the recent past that it was licensing its massive portfolio of broadband IP that it generated as a part of its smartphone and telecommunications product development over that last few years but with the demise of that business, the company has been looking to monetize those IP assets to make up lost revenue.
CCC is a licensing entity (NPE) that that has had a relationship with Huawei in the past, most likely as a patent representative that takes care of licensing details and more importantly protects the IP from those it believes are infringing.  Last year the company initiated a lawsuit against Xiaomi for other Huawei based IP and las also initiated IP claims against Apple (AAPL) and LG Electronics (066570.KS), some of which are based on the IP that Oppo was trying to get invalidated.  Huawei has also used other NPE’s to represent its IP interests in Wi-Fi, on occasion against Xiaomi and Oppo, which were settled, however while Huawei is certainly less a competitor in the smartphone business, they don’t seem to hesitate to make sure they are getting paid by other smartphone brands, regardless of where they are located.

​TCL (000100.CH), the owner of display producer Chinastar (pvt), released its annual report, giving some additional insight into both how the company performed and how its display business segment fared during 2021.  The 212 pages was loaded with praise for the company and its leading share in a variety of products and niches, and much about its silicon wafer and solar businesses, which represented 37.5% of sales last year, a 79.7% increase y/y, while the display business, with a 44.1% share of sales, saw a decline of 8.8% in sales y/y.  While all of the positive rhetoric, such as this flowery Kumbaya moment in the financial notes…
“TCL Technology will continue to invest in fields closely related to human life (such as intelligence, health, low carbon, energy saving, etc.), to establish a leading edge in technology and products, to bring people a wonderful experience and a better life. We will uphold sustainable development, People-oriented concept to promote harmonious coexistence. Committed to environmental friendliness, employee love and social trust; committed to people and nature, (and) the harmonious development of man and society. At the same time, we will join hands with stakeholders to jointly build an open and win-win industrial ecology, and adhere to a benign competition and coordinated development, adhere to open cooperation, symbiosis and win-win.”
…were also followed by some less optimistic hints about the display business…
“In the long run, the growth rate of production capacity in the large-size display field will slow down and the competitive landscape will continue to be optimized.  Given the severe situation, TCL CSOT will continue to improve its efficiency and efficiency indicators and go through the industrial development cycle.”
To TCL’s credit, the company was able to show an increase in operating income of 13.6% for the year, with operating costs up 31.8%, due to the strength in the silicon business against the loss in display, although the net loss was $390m US.  While there was certainly an emphasis on the company’s wafer and solar businesses, they gave some updates on the status of the many display projects that TCL/Chinastar has underway, with much of the emphasis on LCD rather than OLED capacity, despite the multiple OLED projects that the company is developing.  There was mention that the company would be starting mass production of a VR product in September, but seemed to intimate that it would be based on LCD rather than the more popular micro-OLED technology.
They did mention that the T4 G6 OLED fab is still in the ‘early cost stage’, which we take to mean unprofitable, while no information on how far along the development of Chinastar’s T8 Gen 8 OLED fab had progresses, which is expected to be on-line in 2024.   They did note that the T5 Gen 6 OLED fab had progressed from construction to equipment move-in, with the delivery of the first lithography system, which would indicate that the first line should be in mass production around mid-year 2023, a step toward increasing the company’s small panel OLED capacity.
All in, TCL was able to offset the weakness in the display business with its exposure to the continued demands of the silicon business, a luxury few other display producers have (other than Samsung (005930.KS)).  We expect 2022 to be similar, albeit with a bit less growth in the wafer business, but most important will be the eventual status of TCL/Chinastar’s expansion projects, including capacity expansion at T3 and the progress on T5, both of which will add to the industry’s over-capacity issues.  While TCL is the leader in ultra-large LCD market (capacity), we expect they are currently working under lower utilization rates at those fabs, which will have an impact on their ability to generate cash from the display business.  With that in mind, the 35.1% decrease in cash from operations and the 74.6% decrease in overall cash & equivalents could slow those expansion projects, at least for the remainder of this year, which we see as a positive, although it is inevitable that they will eventually be completed.