​We have noted previously that LG Electronics (066570.KS) has been selling IP assets for businesses that it has closed in order to monetize those no longer needed for production.  At the end of March, LGE closed the sale of its smartphone business in China to an affiliate of Inspur Group (600756.CH), a large server company based in Jinan, China.  The smartphone lines in other countries were originally to be sold however it was found that there were few buyers that had the need or financial capacity for the lines, while the Inspur sales was easily accomplished due to the existing relationship.  LG had contemplated selling the entire mobile division last year to a number of possible global scale buyers but decided to hold onto the IP, a portion of which is related to 5G, which the company says can be applied to a number of affiliated businesses outside of smartphones, particularly as some of those patents are part of a license agreement it has with Apple (AAPL).
Since then there have been a number of IP sales made by LG, one being through affiliate LG Innotek (011070.KS) to Scramoge Technology (pvt), a non-practicing IP holding company in Ireland that is known for it’s lawsuits against major CE companies, and a number of licensing agreements with Chinese smartphone brands.  While LGE has held on to other mobile IP, which it believes can be used by other divisions, LGE seems to be continuing to sell its non-mobile IP.  In September and October it sold 942 patents relating to its solar business, which it closed at the end of February this year, to Jinko Solar (688223.CH), the 6th largest global solar panel manufacturer, based on capacity, and is expected to sell more such IP to Jinko in the future.  It has also signed a non-exclusive license agreement with Hanwha Solutions (009830.KS), a large Korean chemical company whose Q-Cells (pvt) division is a competitor of Jinko.
LG now shows the intellectual property business as an income line item, with over 24,000 mobile related patents generating revenue, but it is not all profit as LG agreed to share IP profits with employees in July and is still involved in  a number of lawsuits over compensation for the IP ‘invention’ that have been sold, and while the company has been offering compensation to employees for many years, the value of such compensation and its calculation are the basis for those suits.  All in we expect LG to continue to monetize its unused IP, particularly as the near-term outlook for the CE space remains cloudy at best, and we expect another round of intensive segment reviews in 1Q ’23, which could lead to additional segment closings and IP sales in order to reduce losses.

It has been a difficult year for smartphone component prices and a difficult year for smartphones in general, following a number of slow growth years for the overall smartphones space.  Apple (AAPL) has been a standout in that the company has been able to grow share over the last few years while volume leader Samsung (005930.KS) has seem no appreciable share growth.  Apple plays a more subtle marketing game in the smartphone space, limiting offerings to a very small number of models each year and paying little attention to the ‘feature race’ that is common among smartphone brands.  Rather than try to ‘out-feature’ its competitors, especially its biggest competitor, Samsung, who is also the leading smartphone display supplier to Apple, the company focuses more on style, performance, and building a large ecosystem that both feeds iPhone sales and is also fed by the same.

The ‘feature race’ is a function of the fact that the cost of components for a steady state smartphone built in 2018, should decline over time as new suppliers compete against entrenched suppliers for Apple share, and along with that axiom, comes consumer attitudes that tend to see lesser values in features as they become commonplace and are therefore less willing to pay a premium for features that are ‘last year’.  Brands, particularly Samsung, given its vast resources (captive display, captive semiconductor memory, etc.), are constantly adding features, especially to high-end or flagship models to entice consumers with the latest, greatest, or most talked about features.
Apple tends to be a laggard when it comes to features, with the company’s adoption of OLED, a slow process that was years behind other leading brands, but at the same time the company does considerable research in key areas and has bought a number of companies over the years that allow Apple to develop some of what it believes are key components, or at least have a prized research team/IP.  An example is Apple’s focus on its “Face ID” system which it unveiled in 2017 on the iPhone X.  Over 10 years ago Apple began working on developing the technology, purchasing PrimeSense (pvt) in 2013 and InVisage (pvt) in 2017 and has maintained its use since.  On that same premise, Apple has spent years working toward developing its own processor and in 2020 it replaced incumbent Intel (INTC) with its own M1 chip, produced by Taiwan Semiconductor (TSM).
By bringing the chip design in house Apple can better control both its capabilities relative to the demands of iOS and key Apple applications, and its overall performance, one of Apple’s ‘differentiators’, and while iPhone performance has always been a selling point, better performance is a key driver for the devoted Apple fan base that is always ripe to criticize competitor brands’ more generic applications, slower performance, and overcompensation with features that are plentiful but are little used.  While the A Chip series certainly is a differentiator, it also carries a cost, and Apple’s relentless push toward higher performance goals adds a bit to the BOM relative to a more generic processor or even its own predecessor.
Given that component costs have been on the rise over the last 18 months one would expect Apple to pass on those rising costs to consumers, however the high-end smartphone market has become less elastic as prices moved above $1,000 in 2017, however when looking at the iPhone Pro Max, the top end of the iPhone line, the price has not changed between 2018 and the current iPhone 14 Pro Max and remains at $1,099 base price.  During that time, the BOM has varied, with more sophisticated communication hardware, larger batteries, and more plentiful suppliers.  Apple has had to make up the margin impact of these component BOM changes in other places, such as negotiating lower assembly and shipping costs by establishing production closer to fast growing markets or by redesigning the physical aspects of the iPhone line, but in 2020 Apple stopped supplying chargers with new iPhones, which rang the bell indicating that Apple was pushing hard to maintain iPhone margins.
Component BOM for the iPhone Pro Max has varied between -4.4% and +5.2% from the mean during the period between 2018 and 2021, but soaring component costs this year have pushed the component BOM of the iPhone 14 Pro Max up 14.1% from the 2018/2021 mean, or 2.7 times the largest change over the period. Some of this can be attributed to the A16 processor that Apple is using in the iPhone Pro and Pro Max (iPhone 14 and iPhone 14+ use last year’s A15 processor), which is produced by TSM on a 4nm node[1].  While reviews seem to indicate that the faster clock speed and other features of the A16 give it a slight edge over the A15, most say the differences are negligible.  With the A16 system cost rising from ~$45 (A15) to ~$110 (A16), based on recent teardown analysis, the performance boost is an expensive one and coupled with other more expensive components, the base component cost has reached new heights.


[1] Actually a 3rd Generation 5um node

 Apple will need to make up this incursion into iPhone Pro Max margin in other places, as materials and component prices, while having come down from recent peaks, are still a cost burden.  We expect that Apple has negotiated price concessions with a number of key component suppliers by committing to higher unit volumes, which led to headlines a few months back about Apple increasing order volumes for older iPhone models along with the pre-release orders for the iPhone 14 line, a viable strategy at the time.  That said, as the macroeconomic picture deteriorated over the last few months it is getting more difficult for any smartphone brand to develop an increasingly optimistic view of the remainder of the year, which could lead to Apple having to reduce 4Q supplier expectations and lessen those volume discounts. 
There is still time for a big iPhone 14 advertising push into the holiday season, but it looks like it will be a bit more difficult for Apple to maintain iPhone 14 margins at the same level as the iPhone 13, especially as the performance differences between the iPhone 14/14+ and the iPhone 14 Pro/Pro Max seem to have encouraged consumers to lean toward higher than expected volumes of the Pro/Pro Max, which likely carry lower overall margins relative to the lower-end iPhone 14/14+.  There is one positive behind all of these component machinations, and while it will do little to help Apple financially, a look at the source of the iPhone 14 Pro Max components reveals that 32.4% of the total component BOM are sourced in the US, up from 22.6% last year, while all other regions saw component share declines.

In September we noted that new regulations in the EU, would forbid the sale of 8K and micro-KED TVs.  The rules are not specifically targeting 8K or micro-LED TVs but set power consumption requirements that are based on the energy efficiency (EEI) of the device in order to improve the ecological and environmental impact of television usage in the EU.  Based on a 2016 study, the Eu concluded that the energy consumption from such devices was 3% of the region’s total energy consumption, and that would grow (including monitors and digital signage) to nearly 100 TWh per year by 2030, or roughly 5 times the output of the Grand Coulee Dam in Washington, that services over 8m people in Arizona, Southern California, and Southern Nevada.
The regulation excludes projectors, medical displays, white boards, digital signage, and VR, and set the EEI based on a compilation of the power requirements of HD and UHD (4K) sets available between 2012 and 2017.  They applied those findings to the higher resolution of 8K, however there is a problem with that logic.  The pixel density of an 8K set is 2X that of a 4X set, meaning twice as many pixels must take up the same space, forcing each pixel to be smaller.  Each sub-pixel is surrounded by a black mask that keeps light from reaching the driving electronic (which would cause transistors to stop functioning), however, the electronics that drive each sub-pixel (red, green, and blue) are basically the same size as those in 4K sets, as the same display backplane production infrastructure is used for both 4K and 8K sets.  This means that the black mask for 8K pixels takes up more of the pixel and reduces each pixels’s brightness.  In order to compensate, and make the 8K TV and bright as a 4K TV, the backlight must be brighter, which means it consumes more power.
No current 8K or micro-LED TV sets meet these requirements, and 8K proponents were hoping that the EU would meet again before the end of this year and revise the regulations.  Unfortunately such a meeting has not been scheduled, which leaves only a few months next year for such a meeting, which, if held, might come to the same decision.  As western Europe is only 16% smaller in terms of the sale of advanced (4K and 8K) TVs, even though the 8K market is still a small part of the overall advanced TV segment, it will have an impact on the plans of TV set brands until the issue is resolved.  Creating the infrastructure to reduce the size of the electronics for 8K sets is likely a non-starter for most brands, so there seems to be no near-term alternative unless 8K advocates are able to convince the EU commission to postpone or change the new rules, if they can even get a meeting, so if you live in the EU and you are desperate for an 8K set, you have util March 31 to grab one…

Small panel OLED displays are ubiquitous in the mobile market, with a quick look at the current crop of smartphones showing 42.6% of available smartphone models with OLED displays, up from 38.7% last year, and 33.3% in 2020.  There are a relatively limited number of small panel OLED suppliers, at least currently, so calculating shipment share is feasible, but, as with many CE companies, they are not always forthcoming with shipment data, especially during cyclical industry declines.  There are a number of firms that generate OLED shipment data, although the numbers can vary considerably depending on the source, with suppliers more willing to quantify granular shipment data than others. 
That said, we use available data and conversations with panel producers to build out a picture of small panel OLED supply, as shown in Figure 1, and while there have been a multitude of stories as to how Samsung Display (pvt) is losing share in this lucrative market to other producers, even with the substantial quarterly variations seen below, the trend line for SDC’s shipments is almost flat.  There is growth among the other providers, but with SDC having such a share lead it becomes hard to discern both SDC’s share changes and the growth detail of other suppliers.  In Figure 2, which omits SDC’s data, it is a bit easier to see the growth in small panel OLED shipments from other suppliers, and the table below shows the CAGR for those companies.  We note that as the SDC trend line in Figure 1 shows, Samsung Display has seen a less than 1% decline in shipment growth rates over the 11 quarters of data shown.

As we have noted previously, we do expect Samsung Display to lose share in the 4th quarter as LG Display begins to supply LTPO OLED displays to Apple (AAPL), ending SDC’s reign as the sole supplier for the iPhone 14 Pro and Pro Max, with LGD ramping LTPO production further in 2023.  However Samsung Electronics (005930.KS), SDC’s parent accounts for ~22.1% of small panel OLED demand (2022 YTD) itself and while Samsung does contract out ~30% of its smartphone targets to OEMs who can choose components, these tend to be low to mid-tier phones.  Of the 28 Samsung smartphones currently offered, 46.1% are OLED, which drops to 30% for Samsung phones $500 or less, and to 12.5% for Samsung phones selling for $300 or less. 
While this gives SDC a bit of protection in the small panel OLED space, Apple has become a significant factor in small panel OLED demand over the last few years, and while much of that demand comes late in the year, Apple’s influence in the small panel OLED market continues to grow, as seen in Figure 3.  This reduces SDC ‘protection’, pushing the producer away from generic OLED panel production and more toward those OLED displays where price/area is higher, such as foldable displays, where the company holds a very significant lead.  We would expect to see Samsung Display’s share of the OLED market to decline, as such premium products are more niche oriented, but would expect sales share to remain more stable.
The small panel OLED market has moved from being a niche market itself, to developing into a ‘market of niche’s’, with rigid, flexible, foldable, and micro-OLED segments, along with the potential for further expansion into tablets and notebook/laptops, so while SDC might lose share on a unit volume basis, SDC continues to push the development of new OLED display modalities that keep it ahead of the pack.  It is inevitable that Chinese small panel OLED producers will encroach on the ‘generic’ small panel OLED market, as they did in the LCD space, but we believe SDC will remain the de facto leader in small panel OLED for the next few years, and while SDC will have to make a decision as to what emerging technology it might support as small panel OLED matures further, we believe they have been developing a number of LED based display solutions for a number of years.  With SDC the only small panel OLED producer that has a major semiconductor foundry as an affiliate, we believe that will prove to be a distinct advantage for SDC in later years, as we expect small panel display will shift toward silicon based production over a 10 year timeline.

​As of Tuesday a Federal judge in California is wrestling with a decision as to agree to a motion that would block Meta (FB) from collecting or disseminating information that the company collects from hospital, provider, or patient portal websites using pixel tracking.  The motion was made as part of a number of consolidated individual and consolidated class action lawsuits against Meta concerning the collection and potential sharing of medical information that was allegedly collected without the permission of the user.  Last year a study found that 33 of the top 100 hospitals used the MetaPixel application to collect information about ads that ran on their sites, but the application (allegedly) also collected information about clicks and form information.
While on-line privacy and security is a relatively new area for litigation, we know that such information can be collected and shared as long as the information is anonymous, but studies have found that when a patient communicates with a health care provider’s website where the application is present on the login page, the code redirects the exact content of the patient’s communication with the health care provider in such a way as to identify them as a patient.  According to court documents, the data that the Facebook app records or sends is:

• What method the user used to communicate with the provider
• The fact that the patient logged in to the site and the page name of that login
• Whether the patient had previously been to the site for similar specific health information
• The patient’s IP address
• Cookie and browser information and identifiers

Patient status is protected by HIPAA laws which require a compliant authorization before it can be collected and according to the suit neither the hospitals nor Facebook had any such authorization, although Meta says that the term sheet for Meta Business Tools requires users to ‘obtain all necessary consents’, and that ‘advertisers should not share data with Meta for any child under the age of 13, or that includes health or financial information or other categories of sensitive information.’  The suits go further in that it alleges that Meta has not taken any action to enforce or validate its requirements and uses the information to generate targeted advertising on-and-off Facebook, specifically targeting ads that relate to the patient’s information and page views on the provider portal.
HIPAA does not consider personal names, addresses or phone numbers as protected as they are typically available from public sources, but if that information is listed along with health condition, health care payment data, especially if it contains specifics as to treatment location or treatment location type (XYZ Cancer Center, etc.), individual authorization must be given before that information can be used for marketing. 
The Meta Pixel application places a small bit of JavaScript code on customer websites that works with Facebook cookies to match website visitors to their Facebook accounts (Meta’s own words), and given that the identifier is one pixel by one pixel, it is essentially invisible to the site visitor.  When the user takes any action on the site, the Meta system tells the user’s computer to redirect that information to Meta as it happens, even before the provider gets the information, and while Meta has stated that it (plans top) remove ad targeting options that refer to ‘sensitive’ topics, but qualified it for only the Facebook platform, telling advertisers they could still use “website custom audiences and lokkalikes” to “healp reach people who have already engaged with a business or group’s website or products, which, according to the suit, means people who are already engaged, such as patients.
Yes, this is complicated stuff, especially given HIPAA’s ridiculously complex language, and the legal limitations on who can sue for privacy violations (the government can but you cannot unless its part of a class action suit), but on-line data collection is an area with few hard regulations and is technical enough that legislators tend to have the attitude that such regulations mean little unless there is some political capital or saber-rattling that can get some media time, deferring much of the research to ‘the kids’ on their staff.  But it is a serious topic and the judge’s outrage over the sensitive data collection mentioned in these suits is interesting, if he finds that the suit has merit.  Otherwise Meta will know every time you make an appointment with a doctor, visit an ER or urgent care, or get a vaccination, and that virtual folder of information that Facebook has on almost everybody will get larger every day.

The Single’s Day celebration is the large shopping ‘festival’ on the globe, and Alibaba (BABA), the original sponsor of the ‘shopping holiday’ has seen Single’s Day sales grow each year since 2009, last year climbing to over $84b, but this year things might be a bit different.  There will still be growth at Alibaba, albeit likely relatively modest growth, especially as the competition has continued to increase over the last few years, but more so the ‘refocusing’ of the on-line retail industry as the Chinese government looks to present a less aggressive picture of the Chinese consumer.
Pre-sales for the ‘holiday’ (not a legal holiday) began on October 24, and ‘Phase One” of the holiday began on October 31 and ran through November 3rd, with the big push starting on 11/10 and continuing through 11/11, the ‘official’ Single’s Day.  Last year Chinese on-line retailers felt pressure from the government to rein in some of the massive promotional programs that are part of the holiday, with key influencers generating millions in a matter of minutes when they promote specific products, but this year, with government investigations into large Chinese on-line retailers intensifying, those promotional programs are toned down even further than last year. 
The theme seems to have changed from one of “buy, buy, buy” to one that looks to generate customer loyalty, and while there are still the “…spend 300 (RMB, ~$41.44) and get 50 off (~6.91)”, the Chairman’s mantra of “…moderate wealth for a common prosperity…” and away from “…promoting mindless consumption…” seems to have made an even greater impression on on-line retailers this year, while the weakening economic position of Chinese consumers has reduced the contribution from smaller cities, where much of the sales growth has come from in the past.
All in, expectations for the holiday are low this year, which we believe is being influenced by the more obvious slower growth In the Chinese economy and the continuing issue of the country’s strict COVID policies that have been limiting travel, manufacturing, and commerce in general.  We expect there will still be a positive spin put on results, but in a more subdued fashion, with more of a nod to rational behavior and less toward the “…we sold 100,000 lipsticks in the first 60 seconds…”  On-line retailers are certainly not going to miss a chance to hawk whatever they have to sell, but will be careful not to promote so aggressively that they fall further into the purview of government regulators, or worse, a statement from Chairman Xi.

Japan Display (6740.JP) reported weak fiscal 2Q (September) results that were below the company’s May 13 guidance of 92,250m¥, although sales for the quarter were 81,192m¥ ($554.39m US), up 42.2% q/q and up 12.9% y/y, one of the few LCD display producers that saw positive y/y comparisons in the quarter.  Operating profit was 4,900m¥ ($33.46m US), which was above company guidance of 4,200n¥.  This puts 1H sales ~10.6% below guidance, with JDI lowering expectations for the fiscal year from 329,100m¥ ($2.247b US) to 280,000m¥ ($1.912b US), down by ~14.9% from earlier guidance, with a similar reduction in fiscal year operating profit from -19,400m¥ ($-132.46m US) to -34,900m¥ (-238.29m US).
Not surprisingly both mobile and non-mobile segments saw reduced demand as inflation slowed CE demand, and while end-user demand for automotive displays continued, manufacturers were still facing limitations on the availability of analog silicon components, which forced them to slow production and ordering in 1H.  The company is concerned that potential energy availability issues in Europe, due to the Ukraine war, could also pressure automotive manufacturing during the winter, and with the automotive display segment growing from 28% of sales in 1Q ’18 to 48.8% in 2Q ’23, now JDI’s largest segment, the potential for continued limitations on the automotive display segment have been included in the reduced guidance.  On the positive side, the depreciation of the yen has helped to offset some of the rising cost of material and transportation, but the net is lower overall.
Since JDI received a bailout from Ichigo (2337.JP) in 2020, the new management has been making considerable efforts to return the company to profitability, having sold one of its display module plants and contracted for the sale of a second, closing an older, inefficient fab, and commercializing a new technology and a lithography based OLED material deposition process that is being evaluated by Samsung Display (pvt).  The company has developed a high resolution VR display (included in the ‘non-mobile’ category) that we believe is being used in headsets released by Skyworth (000810.CH), YVR (pvt), and Lynx (pvt), but that said, the best intentions can do little to overcome a global demand crisis, and JDI continues to face the same issues as most other small panel LCD display producers, including a recent reduction in VR display orders from a major customer.  JDI is slowly making its way back toward becoming a force in the display space and returning to profitability, but the macro environment is going to extend that timeline, despite the company’s efforts.  

As we previously noted, October LCD panel pricing was mixed with TV panel pricing up 4.5% and combined aggregate IT panel pricing down 1.6%, which implies that panel producer results will be quite dependent on the overall mix of orders.  TV panel revenue for most panel producers has been declining as a percent of the total, given the rapid TV panel price declines that have been evident since July of last year so the TV pricing leverage will be relatively small, although AU Optronics (2409.TT) saw its 3rd consecutive monthly improvement is sales, while competitor Innolux (3481.TT) did not, after a sales jump last month.  Hannstar (6116.TT), primarily a small panel producer, saw a m/m improvement in sales after a weak September, but continuing the downward trend of sales for the year.
While m/m results are looking a bit better for Taiwan LCD panel producers, we expect they will, bounce along the bottom for the remainder of the year, with the objective being to lower inventory levels and attempting to only take orders for lots that are priced above cash costs.  Taiwanese based LCD supply chain participants tend to be focused on making aggressive inventory adjustments before year-end to enhance year-end financials, and weakness coming from Chinese COVID lockdowns will all likely contribute to a lackluster 4Q.  That said, there is some hope that the inventory reductions underway will keep the seasonally slow 1st quarter from being a disaster, but without a demand driven recovery, it would be hard to make the case for anything but a relatively flat 1Q.  

Samsung Display (pvt) has been the exclusive supplier of LTPO based displays to Apple (AAPL) since the company began using the more advanced TFT process for two models of the iPhone 13 last year.  As high screen refresh rates are desired by consumers to keep fast moving images from smearing, device designers also had to deal with the fact that those higher refresh rates mean the images on the screen are redrawn more often each second, with draws more power from the device’s battery.  LTPO (Low-temperature Poly-Oxide) is a combination of LTPS (Low-temperature poly-silicon) and IGZO (Indium Gallium Zinc Oxide) backplane solutions, and is able to allow high refresh rates as well as low refresh rates, which gives the device designers the ability to create a ‘variable rate’ device.  Such systems can sense the resolution of an image stream and tailor the display’s refresh rate to meet that need, so the device can run high resolution images when necessary, but can also throttle the refresh rate to very low levels for text or other slow moving images, saving considerable battery resources.
Apple is credited with the development of LTPO and has used it in the Apple Watch since 2018, but it was used in Samsung (005930.KS) smartphones (Note 20 Ultra) in 2020 and a number of Chinese brands before Apple began to migrate to the technology last year.  The process for producing LTPO is more complex than either of the two processes from which it is derived and that complexity gave Samsung Display the first mover advantage for LTPO, especially in 2021 when it was the sole supplier for the iPhone 13.  This year however, LG Display (LPL) has been working toward adding LTPO to the displays it provides to Apple and had to go through Apple’s rigorous qualification process to join rival SDC, which took longer than expected, leaving Samsung Display as the sole OLED display supplier to the iPhone 14 Pro Max and the iPhone 14 Pro until the end of October.  From that date forward LG Display can now provide LTPO displays for those models, in addition to the two LTPS models it previously supplied, which will reduce SDC’s shipment levels and give a boost to LG Display’s mobile OLED display business, which took a hit when parent LG Electronics bowed out of the mobile phone business last year, especially as the two LTPO models have proven more popular than expected.
BOE (200725.CH) remains a supplier of the iPhone 14’s two LTPS models, but has been working toward improving yields on its LTPO production, although we expect they will likely not qualify this year.  That said, there is the possibility that BOE could get LTPO qualified for the iPhone 15, which would eat further into SDC’s dominant position.  While this is certainly a factor, yield is still a major consideration, and SDC’s long experience as an LTPO producer will likely leave them as the highest volume supplier, but the addition of LG Display and potentially BOE will likely put pricing pressure on SDC going forward.  We expect this will trickle down through the component supply chain in 2023, with purchasing leverage moving from SDC to LGD and BOE, and Apple able to make progress in lower display costs.