For panel producers, large or small, decisions about entering new markets or expanding or reducing capacity are significant given the cost of both the construction and equipment involved in such decisions.  The ~18 months needed for building out greenfield capacity, along with the additional 6 months of ‘tuning’ and yield management that follows, can make those decisions even more critical as the CE space sees shorter product cycles and considerable competition from Chinese producers.  A wrong decision can leave a panel producer with an expensive line that takes years, if ever, to become profitable, along with the burden of depreciation.
Both LG Display and Samsung Display are in the midst of that major decision making process, with both finding the current macro environment making those decisions harder and less likely to be made as originally expected.  SDC has been working toward the expansion of its OLED production capacity to facilitate a push to bring OLED technology further into the IT space, meaning monitors, notebooks, and tablets.  SDC is already producing relatively small numbers of such IT displays which have made it into mainstream products, but this production has been done on existing Gen 6 SDC infrastructure, which is more oriented toward small panel (smartphone) production.  While the glass substrate upon which mobile devices (smartphones) are produced are almost 30 ft2 and can contain almost 300 devices on a single sheet, the chambers used for the deposition of OLED materials are unable to process such sheets, forcing the substrate to be cut in half or quarters to be processed.  This slows production and makes it less efficient, so SDC and other OLED producers have been working toward moving their RGB OLED display production to Gen 8 lines, which use substrates that are over 2x larger, there are problems associated with such large substrates, along with the deposition chamber size issue mentioned earlier.  As we have noted previously, Samsung is working with partners to develop a deposition system that can process an entire Gen 8 substrate without cutting, which would have a significant impact on efficiency and therefore cost, but the decision as to whether to build out capacity based on a tool that has not been used for mass production is a serious one, along with the cost of such a tool, which we would expect to be $200m to $300m, and the other equipment and fitting needed.
Samsung Display is also evaluating the timeline for the expansion of its QD/OLED production capabilities, which are currently limited to a 30,000 sheet/month line.  The expansion of that capacity would likely cost less than $1b, given it would be done in an existing SDC site that is currently not in operation, but again, it would include substantial depreciation, capital expense, and likely weigh on profitability for some time after it begins operation.  At the same time, LG Display is evaluating when it might order equipment for a potential OLEDos (OLED on Silicon) production line that would be used to produce AR/VR high resolution displays, with a timeline that must coincide with Apple’s plans for a 2nd generation AR/VR device (Sony (SNE) is expected to produce the displays for the 1st generation device).  Such a decision, particularly the equipment ordering, was expected last quarter but was postponed and could be pushed forward again.
These decisions are all being hampered by the state of the global economy, particularly the fear of a global recession in 2023, and the prospects for continuing Chinese COVID-19 lockdowns adding to the negativity.  As these are major capital and strategic decisions, it is understandable that managements want as much time as possible to see how the macro economy develops, and with the holiday season on the horizon, how consumers participate this year.  Other factors, like the war in Ukraine and the semiconductor trade issues with China add to a witch’s brew that seems to have put the display space and much of the CE space on hold until next year, with little excitement over delving into new technologies or capacity risk taking. 
All  of this is understandable, especially to those that cannot count on governmental subsidies to fund new projects or support extended payback periods, but at the same time the rapid change in demand that occurred when COVID became a global issue made it apparent that the JIT global supply chain was far less flexible than most had thought and without the capacity expansion and technology risk taking that seems to have gone by the wayside currently, the CE space will face another cycle of rapid price increases or shortages whenever the demand gap is suddenly filled by some global event.  In the past companies like Samsung and LG took big risks in the display space and in most cases reaped significant rewards, but we fear that the recent CE down cycle might have tempered some of the bravado that is necessary to lead an industry.  Hopefully the fear will pass quickly.

​HC Semitek (300323.CH), the 2nd largest LED producer in China, has announced that China’s largest display producer BOE (200725.CH) will become its largest shareholder through the acquisition of 272m shares in a private placement executed late last week.  The transaction was effected at 5.60 CNY ($0.80 US) per share, a 24% discount to the closing price on October 28th.   The shares make BOE the company’s largest shareholder, with a 23.08% share with BOE making voting agreements with other shareholders that increase its stake to 26.66%.  Previously Zhuhai Huafa Real Industry Investment Holdings (State) was the largest shareholder at 24.87% but that will be diluted to 19.13% after the transactions.
HC Semitek produces LED chips, wafers, and sapphire substrates and ingots, which will feed BOE’s developing mini-LED business and eventually (2024) the company’s initial foray into micro-LEDs.  The company cited a 30% growth rate for the overall MLED (Mini & Micro) market, and an 18% growth rate for the Micro-LED market (to $30b) through 2030, although no data source was mentioned.  HC Semitek is expected to use almost all of the new capital to boost its mini-LED and micro-LED manufacturing capacity.
BOE will use the relationship to further the expansion of its mini-LED backlight business, which is based on its abilities in three basic categories, semiconductor display technology, driver architecture, and transfer technology, which BOE has been using to develop and market its 65” full sheet mini-LED glass backplane while developing a 75” and 86” single sheet product in conjunction with Skyworth (000810.CH), and continues to develop its chip transfer technology, which we believe is based on a ‘pin-push’ system that moves die from tape to the substrate at ~100 chips/sec. 
We note that this is the second such transaction in the mini-LED space in China in recent weeks, with Hisense Visual (600060.CH) increasing its stake in Xiamen-based LED chip and wafer producer Changelight (300102.CH) by 3.26% to 16.82% and is expected to continue to acquire additional shares going forward.  Given that China dominates the LED space and the LCD display space, it seems logical that Chinese display companies would move toward capturing as much of the mini-LED production infrastructure as possible, especially as it extends the life of the LCD space as it competes with OLED technology.   BOE is the first Chinese company to produce a commercial glass mini-LED backlight, with others based on PCB boards that make it difficult to align TFT circuitry with LCD pixels.  While Micro-LED technology is different in that it is self-emissive, bypassing the use of LCD technology, it is based on LEDs, albeit small ones, and the Chinese government and Chinese display producers are working toward making sure that they can compete directly with Korean and Taiwanese display producers as that space develops.

Semi.org has made their predictions for silicon wafer shipments (area) through 2025, with growth of 4.8% this year and growth each year through 2025 except 2023.  Simply put, macro conditions in 2023 are blamed for the decline in polished wafers, but growth resumes again in 2024 and 2025, which we have to assume means that inflation is brought under control in 2024 and beyond.  Hopefully, that will be true, but we expect estimates to come down a bit further  for 2024 & 2025 as we move through 1Q 2023.

​In June we noted that Foxconn (2354.TT) had been offering aggressive bonuses to workers at its Zhengzhou assembly plant known as “iPhone City”, where it employs over 200,000 to assemble iPhones and similar Apple (AAPL) products.  The incentives were offered to assuage worker fears that COVID restrictions might keep them at the plant for an extended period of time and limit their ability to travel to their homes when not working.  Last week we noted that the Zhengzhou government had done just as the worker’s feared and locked down the city, with many workers having anticipated the move and left the plant days earlier.  Foxconn provides for the workers that remain on campus with dormitories, food, and a few stores, but communal meals and other typical amenities are restricted.
Early indications pointed to Foxconn’s ability to transfer some of the Zhengzhou workflow to its assembly plant in Shenzhen, which faced its own closings in March and July, but was still operating at normal capacity.  In our note last week we calculated that while the issues in Zhengzhou could push out delivery times, they would not substantially impact 4th quarter iPhone shipments, though in worst case could push some sales into 1Q ‘23.  It seems that we were wrong as Apple made the following announcement this morning:
“We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models.  However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products.” 
While we expect there might be a bit of the general economic macro malaise built into that statement, it seems more workers than expected anticipated the lockdown and took off before the restrictions began, leaving the factory at lower capacity than we had expected.  Apple did not give specific targets for 4Q iPhone shipments, but street expectations seem to be concentrated between 50m and 55m units for this year.  Apple’s previously had an optimistic view of iPhone shipments, as in June the company was said to have increased orders for iPhone components from suppliers by 5%, and during the pre-order period that started September 9, early pre-orders, especially for the iPhone 14 Pro and Pro Max, were said to be ahead of the corresponding iPhone 13 models released last year.  With this morning’s iPhone statement and what is likely another week+ of lockdown in Zhengzhou, the lockdown seems to be having a greater impact than we originally thought.  Our estimation of an 11.2m unit shortfall seemed high at the time and a bit extreme, but today’s comments from Apple make it less so.

VR, in our view, is hardware still looking for an application, and while gaming seems to be the application of choice for those who value the VR experience, the VR industry continues to tout its use in other, seemingly more legitimate applications, such as VR classrooms, VR in medicine, VR in business, VR in travel, and of course, VR in shopping.  That said, gaming is the largest category for VR application, and while there are great differences in estimates for the VR gaming market itself, we expect that VR gaming sales are second only to VR hardware, with all of the other applications being secondary, other than shopping, which, in what are somewhat stunted forms currently, likely become the largest VR applications down the road.
That said, we came across a VR application that struck us by its very strangeness, the use of VR in psychedelic psychotherapy, a field that must rely on clinical trials given the Federal illegality of many psychedelic drugs.  Psychedelic therapy, which can be used for PTSD, anxiety, OCD, and other cognitive and social disorders, is difficult on its own, as it is expensive and must be done in a strictly controlled setting with trained clinicians, but Enosis Therapeutics (pvt), a small firm located in Melbourne, Australia has developed four VR applications that the OVID Clinic (pvt) in Berlin is using as part of its psychedelic psychotherapy, an adjunct to the clinic’s Ketamine-based therapy.
The VR applications are (company words):

• Grounding – Used during the preparation, dosing, and ‘integration’ stage of the therapy session, providing a transition space from daily life to therapy.
• Surrender – Used during the dosing stage, providing an ‘awe-evoking’ scenario that helps the patient to engage more deeply with their trip and sets the focus on their intention.
• Rescue – Used during dosing, known as ‘digital diazepam and reliably and transiently pulls the participant out of the experience if it becomes counterproductive..
• Anchoring  - Used during all stages of therapy to create a multi-sensory memory library.  Expands tangible connections between insights and creates a multi-sensory mind map as the meaning making process unfolds and invites users to revisit and consolidate their recorded insights into a memory library.

Whether you believe the company’s theories about how VR can be used in conjunction with psychedelic psychological therapy or not, you have to give the company credit for coming up with a novel use for VR.  While we are not sure that a VR environment is tolerable for anyone micro-dosing psychedelics, we can’t rule out the concept as we have yet to experience it, however we expect we would rely more on the clinical results from other studies rather than our own potential experience.  One typical aspect of those under the influence of psychedelic substances is the loss of reference points, sometimes relating to one’s body, and a similar loss of the sense of space, which are also analogous to the phenomena many experience in VR.  Whether the experience of using both psychedelics and VR intensifies or reduces those phenomena is an open question for most, but we expect the potential use of VR in psychedelic psychological therapy is not an application that will move the needle in the VR world.
Watch the Company promo here: https://youtu.be/l_B8OMsQ7xM
 

Only a few smartphone brands have the wherewithal to develop and use their own application processors.  Samsung (005930.KS) does and Apple (AAPL) has been doing it since 2010, while Google (GOOG) has its “Tensor” AP that it has recently used and Chinese brand Oppo (pvt) is in the throes of an AP development project, but most smartphone brands settle on one of the few AP producers, particularly Qualcomm (QCOM), Mediatek (2454.TT), UniSoc (state), or HiSilicon (pvt), or mix and match when necessary.
AP processor choice is a mix of price, performance, and availability that plays out in the year before models are released, with most consumers oblivious to what is running their smartphone.    Brands with models that vary widely in price, have to sacrifice performance for lower priced models, sometimes using an AP from an earlier generation in order to maintain margins within that price tier, but when it gets to high end flagship phones, the competition is fierce and processors can become a positive or negative to consumers.
Samsung went through such a scenario with the Galaxy S22, where it uses its home-grown AP (Exynos) processor in Europe and Qualcomm’s Snapdragon  chipset in the US and the rest of the world, something Samsung has been doing for years, although at times Samsung gets even more country specific as to which AP they use.  The Exynos processor, which Samsung designed, had some speed and power issues this year that caused a bit of a ruckus when compared to those same phones that used a Qualcomm Snapdragon AP, and recent indications from sources in Korea seem to indicate that Samsung is considering not using its own Exynos Ap in any of the Galaxy S23 flagship line to be released next year, regardless of its regional destination.
As the Samsung mobile division makes such decisions, and is ultimately responsible for the success of the smartphone line, regardless of whether it is the fault of the processor, we expect cost considerations were less important than another ping to Samsung’s smartphone reputation.  But this potential decision leads us to consider why Samsung has mixed processors on its flagship phones in previous years.  Understandably it is likely less expensive for Samsung to use its own processor in mid to low-priced phones, but why use it in flagship phones based on destination?  We have not been able to come up with a reasonable answer other than Samsung is trying to promote the Exynos processor whenever possible and the possibility that a self-designed processor will allow certain features to be enhanced, but we have been unable to understand (if that is the case) why Samsung would limit that to certain countries.
But Samsung’s AP design division is not taking the potential snub lying down and has split the processor design team in two, with one group working toward the development of a processor for computing and AI, and the other working toward the development of a processor specifically designed for communication applications.  Additionally the communications design team will receive input directly from the mobile division, allowing for a more ‘smartphone specific’ design.  We expect the reorganization will do little to change things for the Galaxy S23 line, but should have a positive effect on the S24 (2024), but even with Samsung’s massive resources there are a lot of moving parts to creating an AP that can outperform all other mobile application processors, and there are also questions as to how much Qualcomm being a customer of Samsung’s semiconductor business influences such decisions.  Ideally we expect Samsung would like to equip all of its smartphones with its own AP, but that has proven to be a difficult task for everyone other than Apple who has been at it for over 12 years and sells only top price tier phones.
 
 

In reference to passive components, we have mentioned Taiwan-based Yageo (2327.TT) a number of times concerning its leading share position in a number of passive component categories and its top 3 position in MLCC (Multi-layer Ceramic Capacitors), all of which the company has developed through acquisitions that target large vertical application segments and leverage those through direct sales and relationships with EMS providers and distributors.  Yageo is the share leader in SMD Resistors (34%), Tantalum Capacitors (43%), and 3rd in MLCCs (15%) and Inductors (13%) and continues to maintain a well balanced mix of components across the company as shown in Figure 1.

However, the company faces the same demand issues as other CE component manufacturers and is looking to bring up the share of its specialty products and lower its exposure to commodity components, with the goal of bringing up product segments that carry higher (premium) margins to 75% on a long-term basis.  That said, if we break down Yageo’s 2Q results by application category, we see that the ‘commodity segments (consumer, computer, & communications) represent 46% of sales, with 54% falling into ‘premium categories, which carry higher margins, longer order cycles, and have a higher barrier to entry.
What makes Yageo interesting is that last month the company made two acquisitions in a new product application segment that if included in 2Q results, would lower the ‘commodity’ share of sales from 46% to 36%, while increasing the premium segment from 54% of sales to 64% of sales (see Figure 2 & Figure 3), a major step toward the long-term goal of 75%.    Both acquisitions, which cost a total of $755.8m US, are in a new product category, that of sensors, including thin-film temperature sensors, electro-mechanical sensors, and electronic switches, all of which have applications in industrial and automotive applications (both premium categories) and putting the overall new sensor category at ~20% of sales based on 2021 sales from both acquired companies.

​All in, while we are not recommending Yageo to investors[1], we found it interesting that within a month the company’s two acquisitions changed the financial make-up of the company substantially and added another growth segment to the company’s component portfolio that is growing between 7% and 9% CAGR between 2021 and 2026.  This reduced the company’s exposure to cyclical /commodity components, with the company paying roughly 2x 2021 sales, and while the final closings will likely extend into 2023, we see it as an intelligent response to the volatility seen in many basic components over the last two years while not moving far from the company’s core manufacturing expertise, a far better response than the usual rhetoric of  ‘we will be focusing on more profitable product segments’, which usually translates into relatively minor changes to product structure and a quick return to ‘how it was’ as the cycle turns upward.


[1] We do not make specific company recommendations, nor do we have any stake in, affiliation with, or receive compensation from any company mentioned in our notes

​The Board of Directors of China’s BOE (200725.CH) has approved the capitalization of its latest OLED fab project, a $3.98b US project to be constructed in the Beijing Economic & Technological Development Zone.  The project is a Gen 6 OLED fab (1500x1850) that will sit on a 420,000 m2 site, and will be oriented toward the development and production of VR devices using micro-OLED technology.  The fab will also be capable of producing mini-LED backlight products and will have capabilities for both LTPS and LTPO backplane technologies.
The fab construction is expected to begin next year and be completed in 2025, with mass production scheduled for 2026.  BOE will be responsible for 11.5b RMB of the 29b RMB cost, with the remainder coming from a subsidiary of Beijing’s Economic Zone State-owned Asset Investment & Development program.  As is typical of such state financed projects, BOE will own 79.31% of the project, despite providing 39.7% of the financing.
This project will give BOE the ability to produce VR oriented micro-displays, a capability it does not presently have, and will further the development of its LTPO backplane technology when it is in operation.  LTPO is a key technology in that it combines the best aspects of LTPS and Oxide backplane technologies, but more to the point, is the backplane choice of Apple for OLED displays going forward.  Currently Samsung Display (pvt) is the only high volume LTPO provider, with LG Display (LPL) beginning to commercialize the technology, so if BOE is to compete with SDC, they need to spread their LTPO know-how to as many potential Apple projects as possible.   While Apple’s first foray into the XR world is expected to be produced by Sony (SNE) using micro-OLED, 2nd generation devices could be micro-OLED or micro-LED, both of which could be produced at the new BOE fab, according to the company, so it seems obvious that BOE is moving ahead with this project to gain ground with Apple.  That said, the competition for a 2nd generation VR display out a few years, will be intense and while Samsung Display is the de facto leader in small panel OLED, micro-OLED displays are far more difficult to produce than current smartphone or current VR displays, which are still primarily LCD displays.  While this project is an ambitious one, it will not be in production until 2026.  A lot can happen in the interim. 

Samsung Electronics, as the world’s largest producer of smartphones, has assembly plants across the entire globe, but over the last few years has farmed out both the design and assembly of some of its phones to outside sources under its Joint Development & Production program (JDM).    While Samsung shares in the design of these phones, the four outside assemblers work with Samsung on the design and are responsible for purchasing all components directly with suppliers, as opposed to OEMs, who are subcontractors and are told who they can order from.  Samsung has been increasing the amount of JDM it uses each year, moving from ~6% of total phone production in 2019, to over 10% in 2020 and is expected to reach almost 20% in 2023 in order to reduce the cost of Samsung’s low and mid-priced phones.
At the same time Samsung still produces the majority of its phones through its own facilities around the globe, utilizing lower-cost labor for the manually intensive assembly process.  Given the high cost of labor in South Korea, Samsung does little assembly work in its home country, with the majority of phone assembly going to factories it owns in Vietnam, but this year Vietnam has been plagued with COVID lockdowns and rapidly rising labor costs, up 6% this year after a one year freeze in 2021, so Samsung is reducing Vietnam’s share of total production from 50% to 60% this year to 45.8% next year, with much of the shift going to India and Indonesia, two regions where Samsung has aggressive long-term production plans.
Of course, in terms of actual production, much will depend on whether Samsung is able to reach its mobile phone production target for next year, which is 320m units, as it will likely fall short of its original 310m target for this year by ~10%, but the rise in JDM share will remain on the increase to contain costs.  There is however some downside to the JDM program, the loss of leverage for Samsung itself with suppliers.  As the JDM is responsible for choosing suppliers and purchases parts directly, Samsung will lose a bit more of the buying power it has with suppliers, and that could result in higher costs, so there is a difficult evaluation that has to be made if the JDM program is to continue to grow, and the difficult task of determining whether the cost of components is going up because of macro trends or due to a loss of leverage, will have to be made by the company, a complex task at best.  It seems the world learned much about the global supply chain over the last year, but it is infinitely more complex than most people think, with billions of dollars at stake with each new factory or supplier relationship