​A Samsung spokesperson has said that the Samsung Austin Semiconductor fab that was shut down during the winter storm power outage that took place in Texas six weeks ago is ‘returning to levels prior to the halt.’  The Austin fab is able to produce 100,000 wafers/month when at full capacity, although from the language of the comment, we expect the fab is still ramping up production.  When the fab was shut down the company was said to have sent 300 technicians from Korea to assist in the repair and restart of the fab, which is a key producers of CMOS image sensors, display drivers, SSD controllers, and application processors, a number of which were already in short supply before the shutdown.  The cost of the shutdown has been estimated to be between $250m and $275m.

​As commentary on shortages in the CE space is getting to be a daily occurrence, we try to pass on those comments that we believe are based in fact and are not intentionally inflammatory, of which there are quite few.  It does serve the interests of many CE companies whose cyclicality only give them short periods when they can remain profitable, to ‘promote’ the concept of shortages and its resulting increase in prices.  As we have noted above, such component shortages take time to work through the CE supply chain and are lessened in the near-term by components that have been stockpiled by experienced buyers, but eventually those costs take their toll and intermediate or end-user prices rise.
Hon Hai Group (pvt) (aka Foxconn (2317.TT) is not a reliable source in our view, and we could cite many reasons why we have come to this conclusion, but as the largest assembler of Apple (AAPL) products and one of the top global OEMs, what they say does carry weight.  Yesterday, during a telephone interview, the chairman of the Hon Hai group stated that he thought the impact of the shortages many not slow down until the 2nd quarter of 2022.  While this is certainly a radical view, he also mentioned that the impact of such shortages, particularly semiconductors, was not obvious during the first two months of the year, however changes are gradually appearing.  Of course, that was followed with the comment that the impact on Hon Hai group will not be too great.
He went on to indicate that the shortages affect about 10% of normal orders, but the impact on rush or urgent orders is greater, which we assume is due to rapidly increasing component lead times and stockpile reserves allocated to large customers.  Again he added that “if there is no impact from the epidemic and a lack of materials this year, the group’s profit margin is expected to have an opportunity to reach 7%,” which is like saying “If we hadn’t hit that iceberg and there were more lifeboats, we would made it to shore...”  Sooner or later “Something’s Gotta Give” (Johnny Mercer – 1955).

​While Magnachip (MX) is listed on the NYSE and is technically a Delaware corporation, the company has a business address in Luxembourg and operates primarily in South Korea as a supplier of display drivers particularly for OLED displays, with display products representing ~59% of sales, and the remainder being power semiconductors.  Last year Magnachip sold its mixed signal foundry business and fab to a Korean firm for $350m which allowed them to pay off their outstanding $225m senior notes which would have been due this year, deleveraging the company.
It seems that this has made Magnachip more attractive to potential buyers as they have announced a merger agreement with Wise Road Capital (pvt), whose entities will be buying the company for $29 per share, a 75% premium to the company’s 90 day average price, with a total deal price of $1.4b.  The buyer is a Beijing-based Private Equity firm that has a number of smaller investments in technology companies mostly in the semiconductor space, including Huaqin Communication (pvt) one of the largest global OEM for a variety of CE devices.
Magnachip is the leader in the OLED driver IC market and was affected by the closing of Samsung’s (005930.KS) Austin plant during a recent winter storm, however Samsung is bringing the fab back up currently and as a customer of Magnachip, will reinstate production relatively quickly to insure that other Samsung affiliates, such as Samsung Display (pvt), will be less ‘silicon constrained’.  While the premium Wise Road is paying for the company is high, as the OLED display market continues to expand, they likely see the continued expansion of Magnachip’s OLED DDIC business, its reduced debt burden, and its exit from the analog foundry business as justification.  That said, the deal will still have to pass US government scrutiny by the end of this year according to the agreement, which would trigger a $105m termination fee to the company, less certain reductions if not completed.  Given the strained relations between the US and China, particularly over semiconductors, getting all the necessary approvals could prove to be a daunting task.  

​The Ministry of Finance of the People’s Republic of China issued a notice concerning the country’s policies toward Customs and Taxation for the Integrated Circuit and Software Industries.  The notice stated that ”Logic circuits and memory manufacturers with integrated circuit line widths less than 65 nanometers (including, the same below), and specialty processes with line widths less than 0.25 microns (ie, analog, digital-analog hybrid, high voltage, radio frequency, power, optoelectronic integration, Image sensor, micro-electromechanical system, silicon-on-insulator technology) integrated circuit manufacturing enterprises, importing domestically produced raw materials and consumables for private use (including R&D, the same below) that cannot be produced or whose performance cannot meet the demand, special construction materials for clean rooms, Supporting system and integrated circuit production equipment (including imported equipment and domestic equipment) spare parts.” 
This allows the import tax exemption for any standard IC with a less than 65nm line width that cannot be produced in China, including those that can be produced but do not meet performance metrics (unspecified).  The exemption notice also includes a wide variety of materials (photoresist, masks, etc), including 8” and larger wafers, and a host of software used to test various points in the semiconductor production cycle.  The notice actually gives a rebate on taxes that would now be un-taxed under the new rules going back to July 27 of last year, and will continue through 2030.
While this might seem to be counterintuitive to China’s desire to rapidly build out its semiconductor infrastructure, it seems to us to be more of a near-term incentive for semiconductor companies outside of China to step up the supply, as they will now see some of the price increases that have been instituted offset by the elimination of the import tax for more items.  Whether this really has any effect on supply to China or just gives ammunition to US semiconductor component and equipment suppliers to lobby the federal government for less trade regulation with China remains to be seen, but it does indicate that China remains in the same precarious position as others in relation to near-term semiconductor shortages.  

While we applaud those who can predict (or try to) the future of certain aspects of the CE space, we also keep track of those estimates and how they compare against reality.  In 2020 most of the estimates made in late 2019 turned out to be incorrect as did the adjustments to those estimates made in the early part of the year due to the effects of COVID-19.  That said, there are trends and as we have mentioned foldable displays are one that Samsung Electronics has been championing, both because its affiliate Samsung Display (pvt) is the leader in the space, and because such devices sell for premiums that have become progressively harder to glean from even top-tier smartphones.
Foldables are certainly attractive to consumers, who gain size without the inconvenience of having to tote a large device, but at a cost.  Whether this ultimately becomes a more standard display format depends on the progress that is made in producing foldable displays that remain viable as long as a more typical smartphone, and much of that depends on the hinge system and the materials the display is made of.  While some components can be separated inside the device, such as the battery and some PCBs, the display and its associated components have to be able to withstand at least 100,000 folds without showing signs of wear.
To this end, early foldable devices used a clear polyimide film as a cover to protect the display from dirt, scratches, and other potential abrasions, but the film itself was found to retain multiple folding creases which did not sit well with consumers.  Further, while the polyimide is said to be clear, it is not as optically clear as glass, the traditional cover glass used in many smartphones.  Polyimide certainly had some advantages, particularly its ability to withstand cracking and scratching, the nemeses of cover glass, but continuing developments in chemically strengthened glass have narrowed that advantage. 
Until recently, cover glass could not be made thin enough to act as a substitute for polyimide, especially when an essential requirement of foldable devices is for them to remain exceedingly thin, meaning the glass would have a tight fold ratio when the device was closed, however much R&D has been applied to the problem and the development of commercial UTG (Ultra-thin glass) has been the result.
A recent study in South Korea predicts that UTG will remain the choice for foldable device cover glass through 2025 and will have a share exceeding 75% through the period.  Polyimide will still be used, as it is ultimately less expensive than UTG, but will likely remain the choice in low-tier priced foldable devices.  All in, whether you believe that foldables are the wave of the future or not, UTG seems to have solved one of the early problems associated with foldable devices and as volumes improve, should see overall pricing decline, particularly given Samsung’s dominance in the foldable space and their early focus on UTG.  Should Apple (AAPL) adopt UTG when it revels its first foldable iPhone, the relegation of polyimide as a cover material to low-end phones would be sealed, and with Samsung a likely supplier, the odds are even greater.

Samsung (005930.KS) has indicated that it has sold one million units of its Galaxy S21 smartphone series in its home country of South Korea as of today.  The company reached this sales number in 57 days, about a month earlier than the previous Galaxy S20 (2020) series, although the Galaxy S10 (released in March 2019) sold 1m units in a record 47 days.  As the sales share leader in South Korea by a large margin (72% in 3Q ’20), Samsung’s success in its home country is based on its ability to create something new each year as the penetration rate for smartphones in South Korea is ~76.5%, just a bit below France (77.6%), Germany (77.9%), UK (78.9%) and the US (81.6%), which tops out the list, and last year’s model, the S20, was a bit of a disappointment.
We do note that Samsung has been offering a number of promotions including coupons for Samsung wearables worth ~$88 and a generous trade-in program as we deliniated in our 3/25/21 note and continues its “Galaxy-to-Go” program that allows potential buyers to rent a Galaxy S21 series phone for three days to try it out. That said, we expect the real reason that the Galaxy S21 series is doing better than last year’s model is due to pricing, which is shown below.  All three versions are $200 less than last year’s 5G models and have similar or better features, thus coupled with the discounts and incentives, represent a reasonable entry point for a new customer or replacement.  This indicates that features have become less important than price, a trend that was beginning to appear when COVID-19 became a serious issue, and now has taken center stage. While Samsung does still compete with South Korean smartphone producer LG Electronics, the verdict remains out as to whether LGE will continue to produce smartphones given its years of losses in that segment.

Japanese OLED producer JOLED (pvt), a 2015 amalgamation of the OLED development divisions of Sony (SNE) and Panasonics (6752.JP) that was funded by Japan’s quasi-state funding organization (Innovation Network) and subsequent funding from Sumitomo Chemical (4005.JP), Denso (6902.JP), Screen Holdings (7735.JP), Nissha Co. (7915.JP), Toyota Tsusho (8015.JP) and Chinastar (pvt), has gone commercial.  By commercial we mean they are selling OED displays that have been produced in a mass production environment, rather than on an R&D or pilot line and what makes this more unique is that the OLED production line being used is not a typical vapor deposition line, where OLED materials are deposited on a substrate in a heated chamber through a fine metal mask, but using ink-jet technology developed by the company and its partners.
JOLED’s OLEDIO™ line of displays range from 10” to 32”, and while JOLED has been producing a 21.6” display used in medical monitors on a trial basis since 2019, the new line will be a full production mode and will start mass production with three 4K models ranging from 22”, 27” and 32”.  LG Electronics (066570.KS) is already using the 27” and 32” JOLED panels in its (Coming Soon) 2021 OLED monitor lineup, which is quite surprising considering it subsidiary LG Display (LPL) is the largest producer of OLED displays globally.  That said, LG Display is likely running close to full capacity on its OLED TV production lines and is not set up for panels smaller than 48”.  JOLED did provide a limited number of 21.6” IJP displays to Japanese monitor producer Eizo (6737.JP) from its pilot line in late 2019 but does not seem to be currently available.
The LG OLED monitors that use the JOLED displays cost $2,997 and $3,996, putting them at the high end of the monitor pricing spectrum, close to what are called ‘reference monitors’ that are used in video production for their ability to accurately reproduce colors, with these monitors covering 99% of the DCI-P3 standard  used by the US film industry.  The displays themselves are considered ‘bright’ at 540 nits (peak - typical LCD TVs are ~350 nits) but eventually will have to compare against mini-LED displays that can run up to 2,000 nits peak.
The most important part of the JOLED story is that they are using ink-jet printing to deposit the OLED emitting materials using an RGB patterning system, the same as used in OLED smartphones.  Since the patterning of OLED materials using standard deposition methods must be done through a fine metal mask to create individual colored sub-pixels, there are limitations as to the size of those masks, as despite the very rigid materials they are produced with, they begin to sag when they get too large. This causes the RGB process to be limited to relatively small panel sizes.  LG Display circumvents this problem by using a different method to make large OLED TVs, coating the entire panel surface with a combination of blue fluorescent emitter and yellow/green phosphorescent emitter, which produces a white light.  That light must pass through a color filter, similar to those used in LCD TVs, which reduces the brightness, as 2/3 of the white light must be filtered to produce a single red, green, or blue color dot.
Ink-jet printing however allows for the direct placement of ‘drops’ of a particular color emitter to be placed on the substrate and therefore does not use a color filter, with no limitation on size of the substrate.  That said, Ink-jet printing has its own issues, particularly that the OLED materials must be in solution in order to pass through the printing heads.  This can mean that the materials have to be refined or recreated to work with a solvent without limiting specifications, such as life time.  In order to place the droplets correctly, the substrate needs to be pre-treated to create ‘wells’ to hold the droplets until they cure, which adds cost and complexity to the process.  On an overall basis however, the ink-jet process should be a less expensive system for OLED deposition and JOLED certainly has been a pioneer and the first to actually commercialize the process.  If JOLED can prove that the process is commercially viable, they will have taken a large step toward the improvement of display technology, particularly large panel RGB OLED production.

​While Huawei (pvt) has been the focus of much of the US trade tension over the last year or so, the company has not been sitting still.  The company’s trade problems with the US have severely affected its smartphone business, which has been restricted from accessing the Google (GOOG) Play Store, Google Maps, or YouTube.  While this is less of a problem in China, it limits Huawei’s ability to sell smartphones in almost all other locations.
To that end, Huawei has been developing its own operating system which it hopes to use to replace Android in its own phones and those from other brands.  Huawei is expect to release the first non-Beta version of its Harmony OS before the end of 1H and possibly sooner, and has already enlisted over 300 3rd party partners but it will take years to develop the same following as Android or even Apple’s (AAPL) IoS.  Hauwei has set a goal of having more than 100m smartphones operating under the OS this year, along with another 100m from other brands.
While we have heard good things about the Harmony OS, less has to do with the OS itself and more to do with how many developers write to the platform.  Huawei is not charging a fee for access to the code so it will be essential ‘open source’ but without a vast group of developers, consumers will still be limited to local Chinese apps.    Huawei will certainly gain some momentum in China itself, which might be enough to convince off Mainland developers to port to Harmony, but it’s not going to be as easy task, with others, including Microsoft (MSFT) willing to acknowledge, having failed to conquer the mobile OS space.

​As we noted previously, TV brand Vizio (VZIO) began trading yesterday, offering 12.25m shares at $21/share, with a shoe of 1.837m.  The stock took a bit of a fall on its first day of trading, dropping a bit over 9% to $19.10.  If we remember correctly, the original offer was for 15.1m shares @ between $21 and $23, so even with the shoe, the deal size was reduced, with $257.25m being raised initially rather than the $332m original ‘expected’.
Revenue estimates we have seen range from $2.15b to $2.19b for this year and $0.13 proforma, with next year sales estimates ranging from $2.175b to $2.249b and $0.19.   Gross margins look between 11.5% and 11.7% this year and between 14.8% and 14.9% next year as high margin advertising and license revenue has an increasing effect.  2023 revenue estimates range from $2.35b to $2.46b and eps of $0.43 with GMs getting close to 15%, but at more than 2 ½ years out, we put little faith in estimates for the TV space.  We have no stake in Vizio but we do own two Vizio TVs, which have been trouble free.

​Cancel culture in the US is a nagging problem with a relatively small number of ‘influencers’ driving social media onslaughts against everything from past presidents to Dr. Seuss, but in China, things get a bit more ‘cancelly’.  Take H&M (HMB.SS), the Swedish clothing retailer whose position over the use of cotton produced under forced labor by Xinjiang producers seems to have struck a nerve with a more ‘robust’ cancel culture orientation on the Mainland.  A number of Chinese technology companies have actually removed all references to H&M from applications, particularly the popular ride-hailing app Didi Chuxing, (pvt) where the app no longer recognized H&M store locations as valid addresses.  Baidu (BIDU) and Tencent (700.HK) maps no longer show H&M stores on their maps and purchases of H&M products on leading e-commerce platforms are blocked.
The ultimate ‘cancellation’ however came when H&M store employees placed an order with the country’s largest demand delivery service Meituan (3690.HK) and had it denied.  H&M still has somewhat of an online presence in China on WeChat and Weibo (WB) but Tencent removed two Burberry (BRBY.LN) (another target) skins from Honor of Kings, a popular online game, just days after announcing a deal with the company to promote its outfits on its games.  It looks like China has a better idea as to what ‘cancel culture’ means than we do.  Then again, state controlled media does have a bit of an effect….