In our 9/20/21 note, we mentioned the Meta-Verse, a concept that has gained popularity in Asia and made recent headlines as Facebook (FB), in a classic corporate misdirection attempt, renamed itself “Meta” to indicate that the company is supposedly moving away from its core of selling ads and increasing engagement time and becoming a player in the new world of the Meta-verse.  While lawmakers struggle to understand even the most basic ways Facebook operates, the Meta-verse will force those young senatorial aides that wrote most of the Facebook questions to go back and get a better understanding of what Facebook is talking about, or at least what they seem to be talking about.
In our earlier note, we separated out the term Meta-verse from science fiction and astrophysics, where it implies a multitude of parallel universes that exist in space-time, to what is an outgrowth of AR (Augmented Reality) where you wear a pair of AR glasses from the moment you wake up until the moment you go to sleep.  Said glasses provide a visual overlay on top of whatever you happen to be looking at and being connected to the internet at all times, can provide information on whatever you happen to see.  The concept also includes the creation of global meta-universes that can be shared by the entire world, unlike game or application specific ‘worlds’ that are directly tied to the application itself.  These global Meta-universes can be dedicated to a particular theme or purpose, such as a Meta-verse for those that like trains, where one could ride the luxurious Maharaja Express across India or the Ghan across Australia without leaving home, or can be more general, but while the concept is both futuristic and opens up all sorts of wonders to those that might never get the chance to see them, there is a downside, and its not what you think.
While in the concept of global Meta-Universes there will be many new ways that the darker aspects of human behavior can be explored, the real downside is the same as it is for social media today.  The objective of those spending millions or billions to create these global or more specialized Meta-verses is to get compensated and walking down 5th Avenue in an NYC Meta-verse would likely trigger an ad or “More info?” banner as you happen to look into the window of Armani or Harry Winston.  Every glance or finger point in this Meta-world will be logged, analyzed, and categorized, and potentially sold to advertisers who will then will find ways to serve you ads that ‘will enhance your experience’ across other Meta-verses or any other potential platform that you happen to use, sort of what social media companies do now, but on what could be an even larger scale.
But there are some good points to the Meta-verse concept, and one that caught our eye comes from the government of Seoul, South Korea, who has decided to spend ~$3.3m to create a “Meta-verse Seoul” by the end of this year.  The government has come up with a “Metaverse Seoul Basic Plan” which outlines the city’s mid- to long-term direction and Meta-strategy through 2026.  This includes moving diverse administrative services, which are now on private platforms, to a single Metaverse ecosystem, where all services, such as the economy, tourism, culture, education, and civil complaints can be gathered, with avatars for everyone from the Mayor to the city’s historian available to those who enter that universe.
Such a world would provide visual and audio content, and would allow those in other locations to attend special events held in the city, and would free administrators from having to be in a specific location for much of the day while giving residents the ability to get information and solve problems without leaving home.   Much of the reasoning behind the plan is not only specific to the concept of the Meta-verse, but also a way to bring a multitude of disparate services to one unified platform.  In this case the objective is to provide services to city residents and other individuals and would likely be less tied to consumer interest pattern collection than more commercial sites, but we would still expect that an individual hitting the Seoul Meta-verse site and asking the administrative avatar about upcoming events will see virtual ads from car services, local restaurants, and external festival promotional services rather quickly.
All in, the Meta-verse concept will have the same basic pluses and minuses as much of social media, only on a more addictive scale.  While social media companies do everything possible, ethical or otherwise, to keep you on a site, we expect it will be even easier to capture consumer time on Meta-verse worlds as they involve even less effort than current social media platforms and can be infinitely more interesting and entertaining to a consumer who has a particular interest in that Meta-universe.  Its one thing for a classic car enthusiast to watch a YouTube (GOOG) clip of Jay Leno’s Garage, but another to walk through the Jay Leno Garage Meta-verse virtually and speak with one of the guys who takes care of those cars, while the stats appear in front of you for each as you pass by.  Don’t be fooled by those who say “New name, new (more ethical) philosophy”, its all based on the same concept of getting you to buy something.  Its just making the pig a bit prettier with glossy lipstick.

​While many manufacturers complain about component shortages and transportation issues making it difficult for product to reach retail shelves before the holidays, Nintendo (7974.JP) has made a very definitive statement about its plans to reduce shipments from an expected 30m Switches in fiscal 2021 to 24m, despite strong demand in Japan, said to be at a record level.  Nintendo’s President Shuntaro Furukawa stated that “It is not at all that the sales peak has passed, it is that the production volume cannot be produced in full and the production plan is unclear.”
Accordingly, the company notified its suppliers of the reduction, which is based on a lack of silicon based components that have already limited supply in Japan, where stores are resorting to lotteries to manage the lack of supply. Retail store comments have indicated that volumes received are less than half of what was expected, causing sales in September to decline by 37% y/y, following two months of y/y sales declines.  As a check, we looked at the price of the 6.2” LCD Switch on Amazon (AMZN), which can be seen in Fig. 2, a good indication that it is hard to come by.

According to recent comments from a number of analysts (primarily Chinese) the LCD industry is on the road to recovery based on a lessening of panel price reductions and the potential for panel price increases next year, with some even citing that panel price reductions in the 2nd half of October were less than those in the first half of the month.  While there are reasons to take both the positive and negative sides of this argument, citing a 15 day change in panel prices is a waste of time and effort as there are so many factors that can affect sort-term panel prices that such data is of little use.  The need for an optimistic view of an industry that China has and continues to dominate from a production and investment standpoint is a great motivating factor that can easily color one’s view and allow for such short-term data to appear game-changing, but there are other factors that are less obvious that also come into play when trying to understand the prospects for the display space over the next two years.
If one is citing a short-term panel price rate of change as a major factor, than one might also look at the absolute panel price changes that have already occurred.  After 14 months of consecutive LCD TV panel price increases (June ’20 to July ’21) prices fell precipitously in August (-10.1%) , followed by an even larger drop in September (-19.1%), the largest single month decline in our data, with October falling 11.1%, hardly something that could be considered a ‘recovery’.  While expectations for November are for a decline in the 6% to 7% range, again that is almost double the average monthly decline over the period between 1/2017 and 6/2021.  If one assumed that the rate of decline for the last three months were to continue at the same rate, by March of 2022 TV panel prices would be at the same depressed level as they were in late 2019 before the COVID-19 pandemic began.  While one could make such an assumption based on current trend lines, even the most pessimistic view would likely be less onerous, as it would assume that most panel producers would be operating at or below cash costs for their large panel production.
We have assumed that the rapid drop in TV panel prices seen during the last three months would abate somewhat as TV set inventory was worked down, but we see the potential for ‘a more stable pricing environment’ by December a bit of a stretch.  Looking at the demand side, TV panel order reductions were the were the breaking point for TV panel prices, and the continuing rise in panel prices over the last year eventually had to slow demand, along with a lessening of COVID-19 restrictions and government subsidies that were responsible for the strong demand seen in 2H 2020 and 1H 2021.  Panel producers have cut back utilization rates for large panel production to a degree which is likely the reason that declines of over 10% m/m are no longer necessary, but TV set producers are still working with high cost inventory, leaving little room to stimulate TV unit demand during the holidays.
The good news in the mid-term is that as TV panel prices decline, TV set brands have more room to offer discounts, but we see this as more of a 2Q ’22 event than a short-term move, and see little reason for a systemic increase in TV demand next year.  While Samsung is expected to shutter its existing LCD large panel capacity at the end of this year, which was originally expected in 2020, capacity increases at Chinese fabs will offset much of that, leaving large panel LCD capacity biased toward oversupply and demand relatively flat.  Other than on a seasonal basis, this would not set the tone for large panel price increases next year, and while monthly declines will be reduced, even smaller declines will move panel producers toward break-even in their large panel business.  This ups the competitive pressure for IT panel production, where most panel producers have migrated.  We would be watching IT panel demand and panel prices more closely than TV panel prices, as the risk to sales and margins if IT panel prices decline is higher than that of TV panels and considerably more than it was a year ago.

​Canada runs at a slower pace than the US, but should that mean Canadian time is different than US time?  If you were an iPhone user yesterday, it seems that you woke up an hour earlier than usual.  Cellular based Apple (AAPL) devices decided that they could not wait until next Sunday and set themselves back an hour, anticipating the end of daylight savings time by almost a week.  The issue came not from iOS or WatchOS, which have had DST problems in the past, but from a number (unknown) of Canadian cellular carriers, particularly Bell of Canada (BCE), where the company indicated that it had discovered and was investigating the problem at 7:42 AM, with the company righting the problem by 7:50.
Some other carriers were affected but more sporadically, with the problem being traced back to Bell substituting a -5 in front of Greenwich Mean Time, rather than a -4, which told phones that it was six days later and had them reset to that incorrect time.  Some folks found that company managements were not particularly sympathetic to their lateness, given they were unaware of the problem, while others did not consider any excuse a viable one for being an hour late.  It is possible to turn off the automatic date and time updating on an iPhone, and it will still correct for DST as that is embedded in iOS, but the phone will no longer update if you cross a time zone.  The alternative is to get an old alarm clock, as they did not update automatically and avoid any battery complications by plugging it in.  We live in a complex world.

​According to an announcement by the Shenzhen government, TCL (000100.CH) owned Chinastar (pvt) aka Huaxing Optoelectronics, has petitioned to acquire land adjacent to its T6/T7 production fab in order to scale production.  The overall project is expected to increase T6/T7 combined capacity by 60,000 sheets/month.  The project includes an operations center and R&D center for TCL’s TV products and commercial display business, the additional production capacity, and housing for company employees. 
Chinastar currently operates two Gen 8.5 and two Gen 10.5/11 fabs in Shenzhen, with the larger capacity fabs currently totaling 180,000 sheets/month maximum capacity.  While some of that capacity is shared with OLED production, Chinastar/TCl has barely begun to produce OLED displays and we have seen no indication that they have solved OLED production issues for large panel production on Gen 10.5/11 lines..  That said, part of the new construction project, aside from the increase in LCD capacity, is to go toward “a production base for semiconductor display materials, devices, equipment and downstream applications” which would likely indicate a module line, and “…high-performance vapor-deposited organic light emitting display tube localization project, printed OLED display localization material project…” which sounds like it would be either an OLED pilot line or similar type project.
While the ultra-large LCD panel market remains the most lucrative in terms of LCD TV panel production and as a source for TCL’s growing TV business internally sourced production is ideal, we wonder whether consideration has been given to the longer-term prospects for large panel display production.  There are certainly efficiencies to be had by using Gen 10.5/11 fabs to produce 77” and 88” TV panels, but at ~14% of the TV market currently, those sizes will be somewhat limited to a subset of consumers despite an increase of 4.4% share over 2020 

The Magic Kingdom in Shanghai is a wonderful place where kids can enjoy the fantasy of a world that has little connection to the day-to-day reality we, as adults, experience.  On Sunday however, as the evening fireworks sparkled over Sleeping Beauty’s Castle park crowds received a Weibo (SINA) message from Disney management saying the park was closed and rides had stopped, new guests could enter the park and the ~34,000 guests who were within the park confines, could not leave and must be tested.  There was no panic, according to many, and after a few words continued to watch the fireworks.  At the exits were tables with PPE-suited workers that began working through the lines that were longer than those on any of the popular rides earlier in the day while the Disney staff handed out power packs so folks could charge their phones and stay in contact with those outside of the park.  Later that night 200 busses took park goers home for two days of isolation.
This unusual circumstance was prompted by the discovery of a single Shanghai visitor that tested positive, with questions as to whether she had actually visited Disneyland itself, but the park indicated that  that the testing and subsequent three day closure was to “cooperate with the pandemic investigation in other provinces and cities.”  On the next day China (population 1.447b) reported 54 new COVID-19 Delta variant cases, totaling ~500 cases across the country, concentrated in Heilongjiang, a province in Northeast China that borders Russia and Inner Mongolia.  Officials in the province have responded quickly with lockdowns, travel restrictions, and mass testing, while in other cities officials have stopped all traffic by turning all stoplights red, until the public protested, and severe restrictions in other cities have caused residents to leave over the last year.
While the public’s patience with the government’s strict COVID-19 rules, there seems to be an understanding that the only way China is going to maintain control over the COVID-19 virus is to enact such intrusive measures when even a single case is identified.  Given China’s very low rate of infection and death, it seems to be working, at least as far as the data can be trusted.  There are few countries where such a strategy is workable, especially when much of the rest of the world is trying to reopen despite the continued spread of the virus, but while the authoritarian government in China rules with an iron hand, it seems that much of the population understands that even a small breakout must be dealt with swiftly or will spread in such densely populated cities.  With over 74% of the Chinese population vaccinated the numbers prove out.

​MLCCs (Multi-layer Ceramic Capacitors) have been seeing increased use in hybrid and fully electric automotive applications and in 5G smartphones and similar devices.  As part of that demand cycle lead times for a variety of MLCCs have increased as car manufacturers built inventory levels to avoid the crippling shortages that they faced with semiconductor products.  The leading producer of MLCCs, Murata (6981.JP) (31% share) has indicated that orders for MLCCs have slowed and their book-to-bill has fallen to below 1.  With capacitors the company’s largest product segment, they tend to be a good indicator as to the state of the MLCC industry, which is limited to only a few players, with the top five accounting for almost 80% of the market.
Murata stated that orders from automotive and PC related customers decreased as inventory levels returned to normal and that the company’s backlog may be reduced over the next two quarters, after capacitor sales increased 34.8% y/y in the 1st half of this year and MLCC sales increased by 7% over the same period.  We expect this is as much a warning that demand from customers is being limited by material and component shortages and is expected to continue in calendar 4Q and beyond in both the automotive and PC markets, so we went back to the components themselves to see if lead times for MLCCs have been affected.
Of the 30 MLCC varieties we checked 10 had seen an increase in lead time while two had seen decreases, with the remainder stable.  This indicates little change in MLCC demand as yet, which leads us back to the caution from Murata..  With some automotive silicon production increasing, we expect that much of the slower automotive order rate stems from the aggressive inventory build that occurred over the last few months, but on a longer-term basis, demand for MLCCs continues to increase as usage increases.  Similarly, display drivers are also seeing a bit of production relief, and while we expect a similar inventory situation in that space, MLCC demand based on 5G continues to grow.
All in we expect tougher comparisons for MLCC providers as they lap the strong inventory build periods of earlier quarters and a more realistic growth outlook, based on real demand rather than panic inventory building.  Price weakness might occur if lead times fall quickly, so greater attention to lead time updates will be necessary going forward but the underlying demand picture for MLCCs continues to grow despite potential weakness in the near-term.

​In our 9/17/21 note, we indicated that Rainbow (600707.CH), aka Caihong Display Devices, aka IRICO had announced that the board has approved the construction of a large Gen 8.5+ LCD glass production facility in Xianyang.  The project, which is to cost $1.41b US will consist of 8 hot lines and 4 cold lines, ~4 times the size of the company’s existing two Gen 8.5 glass lines in Hefei.  At the time financing for the project had not been reached and caveats that the project might be delayed if full funding is not completed.  It seems that while financing has not been confirmed, the company has decided to begin construction on the new project, which is to complement the company’s existing Gen 8.5 substrate line.
Rainbow indicated that based on the feasibility study and the stable operation of the existing G8.5 glass line, the project would begin construction.  The first line was said to have operated at 100% capacity in 3Q and the cost structure was better than planned, achieving profitability in 3Q.   The given timeframe for the construction is 36 months, so the earliest completion date would be 4Q 2024.  As a new site, we believe the company will build the shell and necessary infrastructure for the facility and then add kilns and processing lines individually based on profitability prospects at the time. 
As we noted previously, while Chinese glass producers are expanding capacity, they are not competing directly with Corning (GLW), Asahi (5201.JP), and NEG (5214.JP), who are supplying Gen 10.5 glass to China’s ultra-large panel fabs.  While there is certainly a market for Gen 8.5 substrate glass in China (China hold >58% of Gen 8.5 LCD production capacity), much of the growth in the industry has been related to ultra-large TV panel production.  China controls over 70% of that capacity but has been unable to supply quality substrate glass to its own producers, a sore spot with the Chinese government.  While Rainbow is moving to expand its Gen 8.5 capacity to help its LCD producer’s source locally, they have yet to build out Gen 10.5 capacity.

​Mini-LEDs are a display improvement that will help to sustain LCD technology during the next few years as it is buffeted by competition from OLED technology.  But a number of firms have lowered their expectations for Mini-LED unit volumes this year, even as Apple (AAPL) seems to be adopting the technology more deeply.  There is a reason and it is really quite obvious in that the price of LCD panels has increased throughout most of the 2020 and 2021 years while OLED displays have not seen comparable price increases.  As Mini-LEDs are relatively new from a production standpoint, they are expensive and when coupled with increased panel price costs, have slowed their adoption among consumers.  The combined higher LCD panel cost and the high price of the Mini-LED backlight have given OLED more ground in which to compete and estimates for Mini-LED notebooks are now expected to fall below those of OLED notebooks.
But is this a sustainable issue?  Not in our view, as the price for large panel LCD displays has begun to fall and the Mini-LED supply chain is expanding rapidly.  As we have previously noted, we expect real progress from Mini-LED backlighting to begin in earnest in 2022 as competition increases and costs decrease.  Coupled with TV panel price reductions, this should make Mini-LED TVs more competitive and better able to compete with OLED TVs, although OLED TV production costs have also seen reductions as LG Display expanded capacity at its Guangzhou large panel OLED fab.  Mini-OLED usage in notebooks will be a more difficult challenge as panel prices in the IT space have not declined, but the promise of more Apple mobile devices using Mini-LEDs will expand momentum next year. 
Given that Samsung (005730.KS) is a big proponent of OLED notebooks, the battle between display technologies in that space will be a more complex one, but in the TV space we expect to see a number of new brands entering the Mini-LED TV market in 2022, especially as Chinese panel producer BOE (200725.CH) is trying to build a business as a source of Mini-LED backlight units to local panel producers  As long as we don’t see excessive large panel price increases in 2022, we expect overall Mini-LED adoption to expand and become meaningful in the premium TV category during the 2022 holiday season.

Samsung Display’s (pvt) QD/OLED project is a game changer for SDC, who has moved away from generic LCD TV production over the last three years.  The project, which has developed a process for producing a blue OLED emitting platform that gets partially converted to red and green using quantum dots, creating an RGB pixel, is a process that would require new production facilities that are specific to the technology.  As this process does not require a color filter, it has the technical ability to be brighter and less expensive when compared to the WOLED process currently used by LG Display (LPL) to produce OLED TV panels.  While the structure for QD/OLED is different from typical RGB OLED displays, the basic OLED stack still has the same materials that surround the emitter that help to generate light, such as HTL (Hole transport layer), ETL (Electron Transport Layer), HIL (Hole Injection Layer), and EIL (Electron Injection Layer), along with blocking layers and an anode and cathode.  One new material that has been said to be included in the QD/OLED stack is called ‘filler’ and while it seems more like it might be akin to cereal by-products that have little nutritional value but add bulk, it serves a purpose that adds to the structure’s ability to produce light.

Such a structure, as seen in Fig. 2, uses a high refractive material as the filler and an encapsulation material, however much of the light is reflected internally, so the OLED stacks (#42 in Fig. 2) are surrounded by a bank of material that sends the internally reflected light out of the display rather than being trapped internally.   While the concept of structures that extract light from displays is certainly not new, it seems this concept is being built into SDC’s QD/OLED process directly, making the ‘filler’ part of the display structure for the first time.  We believe Solus Advanced Materials (336370.KS) (formerly Doosan Solus) is the supplier of the filler material, creating a new category of materials to the QD/OLED stack, and while the use of fillers will depend on how easily the structures can be built and how effective they are in capturing light, we expect Solas to join other QD/OLED material suppliers such as SFC (JV between SDC and Hodogaya Chemical (4112.JP), Duksan Neolux (077360.KS), and Merck (MRK).
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