BOE – Straight From the Horse’s Mouth
While Chinese panel producers tend to be a bit opaque when it comes to revealing critical information about details of their operations, there are some rules in China (at least for public companies) that make it possible to gain a bit of perspective on company philosophy or focus at a given point in time. That said, as we have noted in the past, many such conversations are carefully worded to obscure details, but at least some nuance and specific information shows up occasionally. As with most public corporations, Chinese firms do have conference calls, albeit in local language, which leaves us primarily English speaking folks to either read summaries, which can be biased, or hope that the company releases a summary transcript in some reasonable time.
As the country’s largest panel producer, BOE (200725.CH) does just that and we look at the relatively short Q&A as a bit of help in understanding the company’s current views. Here is a collection of the most recent Q&A which took place about a week ago. Our comments are in red and what we believe to be translation errors are in parentheses.
“How do you view the future industry landscape? Does periodicity still exist?”
Judging from the past industry development process, the panel industry is (a) cyclical. In the industry, the main reason for the formation cycle in the past was the concentrated release of production capacity in a short period of time. This led to oversupply, an imbalance between supply and demand, and panel prices fell sharply. As supply and demand close, the system gradually balances, and panel prices gradually return to normal levels.
Judging from the background of this round of panel price recovery and the characteristics of the process, it is different from the past. The cyclical rise is different. We believe that the semiconductor display industry will move in the future, cyclical characteristics, and become an industry with certain growth:
(T)he industry’s memory capacity and production capacity gradually withdraw(al), the total amount of new capacity is limited, and the pace of capacity release is slow, and the market share is gradually increasing. The industry’s leading companies, including the company (BOE), are concentrated, the industry concentration has increased significantly, and the supply and demand structure (sees) continuous improvement.
In the future, the rapid development of the LCD industry driven by investment will gradually enter a mature period. A sharp cyclicality dominated by the supply cycle turns into a narrow wave affected by the low and peak demand seasons. As a leading company in the industry, the company's profitability is expected to remain at a good level.
Simply put, “This time it is different”. We expect that philosophy to hold until he first quarter of panel price declines, at which point it will change to something like, “as the industry leader, we are able to withstand those periods when declining panel prices challenge profitability for competitors.”
“How do you view current and future panel price trends?”
According to data from third-party consulting agencies, since June 2020, panel prices continue to rise, and this round of panel price increases has lasted for more than a year. The current supply and demand of IT products, which account for a higher proportion of the company’s revenue, is still very tight. The industry is showing an upward trend, and the price increase trend is expected to continue until the end of the year or even 2022.
(In) the first quarter the price increase of TV products, which accounts for the second largest proportion of the company’s revenue, will show (a) divergent trend potential. The supply and demand of large-size LCD panels are still tight, and the prices of 65- and 75-inch TV products are It is hoped (that it) will continue to increase for 1-2 months. (relatively) Small TV panels such as 32-inch, 43 inches, due to the large increase in the previous period, the next price increase space is limited.
First chink in the panel pricing armor, essentially panel price increases will be specific to certain products rather than across the board. We expect panel buyers to step back a bit if TV panel prices flatten or weaken, but the ability to fill specific inventory gaps will keep panel producers thinking that they are still in the driver’s seat as to pricing. If holiday demand is weak, the refill rate in early 2022 will disappoint and the leverage will shift to the buy side.. We believe it will be difficult for some panel producers to recognize this issue, while some have been anticipating such an event already.
“How is the company's flexible AMOLED business progressing? What is the yield, Household situation, and shipment situation?”
The overall shipment volume continues to increase. The current situation is good, and the production line is climbing. The exhibition went smoothly, especially the shipment volume of key customers and key projects exceeded expectations. Currently mature, the yield rate of AMOLED products can reach over 85%.
The company has provided high-end flexible AMOLED products for many global top-tier brands.
Next, we will continue to develop more product series for brand customers. The future follows the increase in customer demand and the smooth climb of the company’s flexible AMOLED production line. Product shipments are expected to continue to grow rapidly, and the operation of flexible AMOLED production lines will continue (to) improve.
We are skeptical concerning utilization rates at BOE’s OLED fabs, not because we believe they are low, but more as to what they include. BOE currently has two Gen 6 OLED fabs that are in full production, a third which is in the final expansion stage, and a 4th that is under construction. Panel producers have been known to include production lines that help such statistics, while excluding those that are still in low-yield start-up mode. Given that such utilization rate estimates are unqualified, we take such statements with a grain of salt. That said, if BOE’s active small panel utilization is over 85% that would be a positive for the company.
“How about the company's depreciation in the next few years?”
In terms of inventory depreciation, there will be multiple LCDs starting from 2021. The depreciation of the production line has expired in terms of increments (the flexible AMOLED production). In the future, the company's overall depreciation scale will still increase, but the growth rate will slow down significantly.
A bit hard to decipher but we take this to mean that the depreciation of its LCD fabs has ended or is close to, but the expansion of the company’s OLED production will continue to increase depreciation, albeit at a slower rate than in the past when both LCD and OLED fabs were included.
“How is the company's Mini LED business progressing?”
Mini LED business is an important component of the company’s "1+4+N" business group section. The company has a comprehensive layout in the Mini LED industry, initially focusing on TV products. (Mini)
The use of LED as a backlight with LCD can improve the display effect of LCD. The industry takes the lead in realizing the formal mass production of glass-based active Mini LED products, with a 75-inch COG. Mini LED backlight products achieved mass production and delivery.
While BOE is producing Mini-LED COG (Chip-on-glass), backlights, we expect it is still a very small part of the company’s overall business and is likely being touted to help the company appear to be a major player in the space, given BOE’s desire to increase its participation in Apple’s (AAPL) supply chain. Right now the company is focused on Mini-LED for large panel TVs, which are easier to produce. If they want to compete for Apple’s Mini-LED business, they will have to focus on bringing Mini-LED panel sizes down to monitor/notebook levels, where they would compete with a number of Taiwanese and Chinese suppliers who have considerable expertise in the space. The company is still quite vague as to where they stand in terms of Mini-LED market direction.
All in the Q&A was short and selective, but at least gave some indication as to where the company stands in terms of panel philosophy, particularly panel pricing. Given the huge commitment BOE has made to LCD over the last few years we would not expect anything other than a positive panel pricing outlook, so even the mention that panel pricing might not see the rapid increases it has over the last year is telling, but the “It’s different this time philosophy is so self-serving that we discount it almost entirely. BOE had an exceptionally strong 2Q and certainly deserves the credit for utilizing its vast capacity leverage to gain such results, but we are of the “what have you done for me lately?” school and look more to the next few quarters than those behind us.
As the country’s largest panel producer, BOE (200725.CH) does just that and we look at the relatively short Q&A as a bit of help in understanding the company’s current views. Here is a collection of the most recent Q&A which took place about a week ago. Our comments are in red and what we believe to be translation errors are in parentheses.
“How do you view the future industry landscape? Does periodicity still exist?”
Judging from the past industry development process, the panel industry is (a) cyclical. In the industry, the main reason for the formation cycle in the past was the concentrated release of production capacity in a short period of time. This led to oversupply, an imbalance between supply and demand, and panel prices fell sharply. As supply and demand close, the system gradually balances, and panel prices gradually return to normal levels.
Judging from the background of this round of panel price recovery and the characteristics of the process, it is different from the past. The cyclical rise is different. We believe that the semiconductor display industry will move in the future, cyclical characteristics, and become an industry with certain growth:
(T)he industry’s memory capacity and production capacity gradually withdraw(al), the total amount of new capacity is limited, and the pace of capacity release is slow, and the market share is gradually increasing. The industry’s leading companies, including the company (BOE), are concentrated, the industry concentration has increased significantly, and the supply and demand structure (sees) continuous improvement.
In the future, the rapid development of the LCD industry driven by investment will gradually enter a mature period. A sharp cyclicality dominated by the supply cycle turns into a narrow wave affected by the low and peak demand seasons. As a leading company in the industry, the company's profitability is expected to remain at a good level.
Simply put, “This time it is different”. We expect that philosophy to hold until he first quarter of panel price declines, at which point it will change to something like, “as the industry leader, we are able to withstand those periods when declining panel prices challenge profitability for competitors.”
“How do you view current and future panel price trends?”
According to data from third-party consulting agencies, since June 2020, panel prices continue to rise, and this round of panel price increases has lasted for more than a year. The current supply and demand of IT products, which account for a higher proportion of the company’s revenue, is still very tight. The industry is showing an upward trend, and the price increase trend is expected to continue until the end of the year or even 2022.
(In) the first quarter the price increase of TV products, which accounts for the second largest proportion of the company’s revenue, will show (a) divergent trend potential. The supply and demand of large-size LCD panels are still tight, and the prices of 65- and 75-inch TV products are It is hoped (that it) will continue to increase for 1-2 months. (relatively) Small TV panels such as 32-inch, 43 inches, due to the large increase in the previous period, the next price increase space is limited.
First chink in the panel pricing armor, essentially panel price increases will be specific to certain products rather than across the board. We expect panel buyers to step back a bit if TV panel prices flatten or weaken, but the ability to fill specific inventory gaps will keep panel producers thinking that they are still in the driver’s seat as to pricing. If holiday demand is weak, the refill rate in early 2022 will disappoint and the leverage will shift to the buy side.. We believe it will be difficult for some panel producers to recognize this issue, while some have been anticipating such an event already.
“How is the company's flexible AMOLED business progressing? What is the yield, Household situation, and shipment situation?”
The overall shipment volume continues to increase. The current situation is good, and the production line is climbing. The exhibition went smoothly, especially the shipment volume of key customers and key projects exceeded expectations. Currently mature, the yield rate of AMOLED products can reach over 85%.
The company has provided high-end flexible AMOLED products for many global top-tier brands.
Next, we will continue to develop more product series for brand customers. The future follows the increase in customer demand and the smooth climb of the company’s flexible AMOLED production line. Product shipments are expected to continue to grow rapidly, and the operation of flexible AMOLED production lines will continue (to) improve.
We are skeptical concerning utilization rates at BOE’s OLED fabs, not because we believe they are low, but more as to what they include. BOE currently has two Gen 6 OLED fabs that are in full production, a third which is in the final expansion stage, and a 4th that is under construction. Panel producers have been known to include production lines that help such statistics, while excluding those that are still in low-yield start-up mode. Given that such utilization rate estimates are unqualified, we take such statements with a grain of salt. That said, if BOE’s active small panel utilization is over 85% that would be a positive for the company.
“How about the company's depreciation in the next few years?”
In terms of inventory depreciation, there will be multiple LCDs starting from 2021. The depreciation of the production line has expired in terms of increments (the flexible AMOLED production). In the future, the company's overall depreciation scale will still increase, but the growth rate will slow down significantly.
A bit hard to decipher but we take this to mean that the depreciation of its LCD fabs has ended or is close to, but the expansion of the company’s OLED production will continue to increase depreciation, albeit at a slower rate than in the past when both LCD and OLED fabs were included.
“How is the company's Mini LED business progressing?”
Mini LED business is an important component of the company’s "1+4+N" business group section. The company has a comprehensive layout in the Mini LED industry, initially focusing on TV products. (Mini)
The use of LED as a backlight with LCD can improve the display effect of LCD. The industry takes the lead in realizing the formal mass production of glass-based active Mini LED products, with a 75-inch COG. Mini LED backlight products achieved mass production and delivery.
While BOE is producing Mini-LED COG (Chip-on-glass), backlights, we expect it is still a very small part of the company’s overall business and is likely being touted to help the company appear to be a major player in the space, given BOE’s desire to increase its participation in Apple’s (AAPL) supply chain. Right now the company is focused on Mini-LED for large panel TVs, which are easier to produce. If they want to compete for Apple’s Mini-LED business, they will have to focus on bringing Mini-LED panel sizes down to monitor/notebook levels, where they would compete with a number of Taiwanese and Chinese suppliers who have considerable expertise in the space. The company is still quite vague as to where they stand in terms of Mini-LED market direction.
All in the Q&A was short and selective, but at least gave some indication as to where the company stands in terms of panel philosophy, particularly panel pricing. Given the huge commitment BOE has made to LCD over the last few years we would not expect anything other than a positive panel pricing outlook, so even the mention that panel pricing might not see the rapid increases it has over the last year is telling, but the “It’s different this time philosophy is so self-serving that we discount it almost entirely. BOE had an exceptionally strong 2Q and certainly deserves the credit for utilizing its vast capacity leverage to gain such results, but we are of the “what have you done for me lately?” school and look more to the next few quarters than those behind us.
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