​Beijing based BOE, the largest Chinese panel producer, gave preliminary 1Q net profit and EPS results for 1Q as follows:

BOE (000725.CH) is following in the footsteps of other panel producers, although as we have noted, the comparisons against 1Q 2016’s rapid panel price declines are quite easy.  Profitability is up as panel pricing has improved since mid-year 2016 and remains somewhat stable currently and BOE’s vast panel producing capabilities are running at high utilization rates.  We would expect y/y comparisons to become more realistic in 2H 2017.

Way back in April of last year, we noted that Vizio (pvt) was considering buying back 2.43m shares from AmTran (2489.TT), reducing AmTran’s stake to 12% and opening the door for another investor to help them expand its worldwide share.  The transaction was said to be part of an interest in the company by LeEco (300104.CH - formerly LeTV), a Beijing-based content provider and recent entrant into the Chinese TV market (4m units last year).  In July 2016, LeEco announced its intent to buy Vizio for $2b and brought in Hong Kong based Sunac China Holdings (1918.HK) as an investor in LeEco (8.6% stake in subsidiary LeTV, 16% stake in LeVision Pictures and a 33.5% stake in an LETV sub), along with another $2.44b investment from another group of Chinese investors to reduce the financial burden of the Vizio acquisition.
The Vizio acquisition would have placed LeEco as the 3rd largest TV brand worldwide, behind South Korean giants Samsung Electronics (0056930.KS) and LG Electronics (066570.KS) and ahead of Chinese rivals Hisense (600060.CH), TCL (000100.CH) and Skyworth (752.HK), which might have caused the US government to hold back its approval, as it has for a number of other recent potential acquisitions, but given that the acquisition would be entirely consumer oriented, the US government gave its approval.  The Chinese government however held its approval, and the deal was postponed from the ‘end of 2016’ timeframe.
The final end to the acquisition came yesterday when the companies jointly announced that the deal had been cancelled due to ‘regulatory headwinds’, which would likely be the understanding that Chinese authorities would not allow the deal to be made.  The Chinese government, through the State Administration of Foreign Exchange, began scrutinizing deals over $5m (formerly $50m) where capital would be leaving the country late last year, as outbound capital investments soared ($530.9b in the 1st 9 months of 2016) after the 6% depreciation in Chinese currency last year.
Now the two companies are said to have reached some form of partnership agreement but speculation is still rife that Vizio might reconsider an IPO, which had been speculated early last year before the LeEco negotiations began, giving both founder William Wang and employees a chance to liquefy a portion of their investment, but LeEco faces a less sanguine future as it has been accused of overextending itself financially in order to expand its ‘empire’ into a variety of side businesses. The joint agreement will hopefully still allow Vizio to expand to China, using LeEco content, but Chinese regulators took the outbound financial characteristics to heart in order not to exacerbate the continued pressure on the yuan.

For those with multiple screens on their desks, life is not easy.  Usually they are a hodgepodge of screens with different sizes, aspect ratios, and color quality, being driven by video cards from an earlier era that can just decide to freeze, shut down, or crash when the demands for screen memory becomes too intense.  Samsung Electronics (005930.KS) is going to solve all of that with what it has designated as ‘Double full HD’, essentially a 49” wide, 3840x1080 resolution, 32:9 aspect ratio display, and a curve that will help you take it all in more easily.  This is the equivalent of two 27” displays.
While the display seems to be oriented a bit toward gamers, carrying a 144Hz refresh rate (inexpensive monitors refresh at 60 Hz), and will have a brother/sister display with similar characteristics (3840x1200) at a mere 44”, or the equivalent of two 24.7” displays, for those that do not have the real estate for the larger version.  Actual production of these monsters will begin at the end of 3Q 2017, and will likely be available early in 2018.  Unfortunately no price has been given as of yet, but desktop real estate is worth more on a square foot basis than an apartment in Hong Kong.

E-Ink Holdings (8069.TT) and Sony Semiconductor (SNE) have formed a JV based in Taiwan and Japan, that will design, develop, manufacturer and license products that are based electronic paper displays.  While the two companies have collaborated on products since 2004, the new arrangement will formalize the development once it receives regulatory approvals.  Together the two companies will own ~70% of the JV shares, with the remaining stake being held by venture capital investors.
E-Ink has been around since 1992 (formerly called Prime View International) and is the primary developer and manufacturer of E-paper products that are based on electrophoretic technology.  This technology, which is used in a wide variety of commercial applications, is based on inks that are placed in ‘micro-cups’ between two sheets of glass or plastic.  Electrodes below and above the ink capsules can address them with a positive or negative charge, changing the reflective top layer of ink from black to white on an individual pixel basis.  What makes this technology different than LCD or other display technologies is that once the ‘state’ has been set, the ink remains in position without the application of power, while TFT based displays need constant refreshing to maintain a state, which obviously uses considerably more power.  While primarily used for black and white displays, E-Ink has developed ways to incorporate other color inks and systems to address these additional colors leading to low-power multi-color displays that have far wider applications than those in black and white.
Applications for E-Ink type products vary widely but the keys are very low power consumption, remote updating, and as the displays are reflective (no backlight), they are ideal for applications where sunlight or other issues would wash out other display types.  While most would recognize E-Ink type displays as those used in e-readers, they continue to find their way into a increasing variety of products and applications that would be unable to support more conventional LCD or even OLED displays.

While still in the clarification stage, as the Korean Stock Exchange has asked for direct clarification, the story that Google (GOOG) has offered 1 trillion won ($874m US) to help LG Display (LPL) increase its output of small panel OLED displays is circulating through the Korean media.  The purpose of the proposed investment would be to insure a stable supply of flexible OLED displays for Google’s Pixel smartphone line which was released in October 2016.  Neither company has made comments and sources quoted remain unnamed.
According to original article published in etnews, the offer was not based on panel purchase numbers, volumes, or specifications, such as the one between Apple (AAPL) and Samsung Display (pvt), which is also under continued speculation in the trade press, but a ‘strategic relationship’ to ‘secure priority’ and ‘stabilize panel supply and demand’.  That said, the focus would be on the construction of a Gen 6 flexible OLED line by LG Display to provide guaranteed access to Google, whose Pixel smartphone faced OLED display shortages last year.
LG Display currently has a number of OLED projects both producing, and under construction, but the company’s primary focus has been on developing capacity for its OLED TV business, which is based on rigid OLED displays using a metal foil substrate on Gen 8 production lines.  LG Display also produces flexible small panel OLED products on its E2 Gen 4 line, and is developing both E5 and E6 flexible OLED lines that are expected to begin preliminary production later this year and is developing a Gen 10 fab that is expected to be able to produce both LCD and OLED displays.  LG Display’s Paju display complex is ~5 mi from the North Korean DMZ and less than 20 miles from the North Korean Capital of Pyongyang.
In most cases, contracts between brands and panel producers are based on a percentage of capacity rather than on actual unit volumes.  Panel producers can never actually guarantee an absolute number of units over a specific time due to the large number of variables that can cause delays such as low factory utilization, material shortages, unusually difficult specifications, and unknown product yields, but the commitment to build out capacity is certainly made easier knowing that a commitment to a significant portion of a new fab’s output will be guaranteed.  That said, LG Display would have to be at least somewhat confident that it could fill the fab before making such a significant commitment, despite the financing, which in itself, would not be enough to build a reasonably sized flexible OLED fab.  This would add to LG Display’s risk level, financing burden, and potential for future shortfalls should Google not be as successful as expected.  While seeming an attractive offer, the decision process for such a venture is a complex one, and while the press can spin it as a competitive threat to Samsung Display/Apple or other potential combinations, if one looks at other ‘financed’ ventures, such as Apple’s funding of GT Advanced Technologies’ (GTAT) sapphire manufacturing facility or Sharp’s (6753.JP) Gen 10 fab, it’s not as easy a decision as most might think.

According to LG Display’s (LPL) CTO, the company expects OLED to account for 50% of total sales by 2020, up from the 10% noted last year.  Given that there were no details of how that revenue was broken down between OLED TV and smartphones, it is similarly hard to estimate the same for 2020, but just for reference, a 55” OLED TV generates $1.78 in retail sales revenue per in2, while the just released LG G6 smartphone generates $46.60 per in2, making the mix an important factor.  These are simple retail numbers, so significant adjustments are made for factory level pricing, but it illustrates a point.
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LG also stated that it took LCD TV manufacturing 10 years to achieve yields of more than 80%, while it took LG two years to achieve the same with its large panel OLED production, and further cited that price declines in large panel OLED TV were much faster than with large panel LCD products, both of which have been cited before.  Investors who have a focus on the OLED space have always been impatient relative to price declines that will jumpstart OLED TV sales, but giving credit where due, LG Display has done a monumental job in pushing large panel OLED manufacturing technology forward at a very rapid pace.  Can we make the case for 50% of sales being generated by OLED in 2020?  Certainly, and looking at the growth of Samsung’s small panel OLED business makes the assumptions even easier.  We tip our hat to LG Display regardless of whether the actual number meets or beats the current statement, knowing that expectations in the display space always tend to be optimistic, but regardless of that fact, the company has improved large panel OLED manufacturing far more quickly than previous display technology transitions.

AU Optronics (AUO) reported March sales of NT$ 31.052b, up 6.6% m/m and up 18.2% y/y, which puts 1Q sales up 24.5% y/y but down 3.6% q/q.  As noted previously, the panel pricing environment in 1H 2016 was extremely weak, leading to relatively easy comparisons this year until July.  Large panel shipments were 9.84m units, slightly under the 5 year average of 9.98m units, up 10.4% m/m and up 3% y/y, while small panel shipments were 12.72m units, up 8.2% m/m but down 13.7% y/y. 
Typical March sales on a m/m basis for AUO have been up 24.1% (5 year) although eliminating the anomaly year (2012) would show a more realistic gain of 27.0% (4 year), so based on the comparative data we would characterize the March results as weak.  That said, the consensus estimate for AUO’s 1st quarter 2017 is NT$83.16b, which was lower than February’s consensus of NT$85.454b.  Based on the newer consensus, AUO would have been expected to report NT$25.65b, which they obviously beat, so, from a consensus standpoint, the March results were better than expected.
Again, we expect AUO and other panel producers to continue to show positive y/y results after such a dismal 1H last year, but the true test will be whether there will be y/y growth in 2H 2017.  Panel producers also have a unique situation this year, as a number of older LCD fabs have been closed in order to convert that capacity from a-Si LCD panel production to small panel OLED production.  This sets up a situation where a-Si LCD capacity will decline for the year by almost 2% according to our industry model, although total capacity across all backplane types will still be up ~2%.  We note that a-Si LCD capacity has never declined on a y/y basis, at least since 2004, so this is a unique situation that indicates, at the very least, a change in the display industry, and while the growth of a-Si LCD backplane capacity will resume in 2018, it has led to a tighter pricing market than might otherwise have been seen. 
Knowing that the easy comparisons will be ending in 2H, and a-Si LCD capacity growth will be resuming in 2018, sets an unusual circumstance for investors, as those two factors could return the industry back to the relatively ‘normal’ situation where panel prices decline on a regular basis, but the timing will be tricky as we approach the mid-year point.  Those who believe will hold out hope for at least a strong holiday season, giving panel producers the benefit of the doubt, and those that do not will sell the panel stocks before the potential difficulties begin.  While history tells us it is usually better to anticipate a change in the display space, as the stocks move very quickly as it becomes apparent that a change is coming, on a general basis, the panel stocks have been quite resilient, and the next few months will likely be a point where the binary approach to panel stock ownership will end.

Amo Greentech, a subsidiary of Amotech Ltd (052710.KS) has announced that it will begin production of a flexible battery line this October that can be twisted, folded 180⁰, or cut with a scissor, without an ill-effects.  Given the disastrous battery fires that caused the recall of the Samsung (005930.KS) Note 7 and the following publicity nightmare, companies have been working has, particularly Samsung and LG (066570.KS), to find a stable battery product that will perform under the somewhat rigorous demands placed on smartphones.  While this product has some of those characteristics, it will not be the one, at least in its current form, to replace typical lithium-ion smartphone batteries, as its design is intended for wearables and VR/AR devices at least at the onset.
That said, the idea does make sense, and the practical application, maybe a bit short of the flagship smartphone battery, is still quite widespread, and the company has received UL[i] and IEC[ii] certification, which is necessary for sale to any reputable customer.  This puts them substantially ahead of the major smartphone manufacturers, who are not expected to have such a flexible battery until next year.  That said, the energy density of these batteries, essentially the amount of energy produced per mm2, is ~30% lower than normal Li-ion batteries, but it is certainly progress and will put even more pressure on other manufacturers to meet or beat these specs.
The company has encased the battery cells in aluminum pouches and additional coatings to prevent leakage that might be caused if the battery electrodes are damaged.  This, and the use of high-temperature plastics to separate internal cell components, allow the battery to withstand temperatures of 300⁰ or more, while normal Li-ion battery separators will melt between 130⁰ and 150⁰, causing the thermal runaway that can have serious consequences.  According to the company, they already have a contract with a Chinese IT device manufacturer.


[i] Underwriters Laboratories

[ii] International Electrotechnical Commission

Samsung Electronics (005930.KS) has decided to eliminate the digital camera business that it has been in since 1997, although it will continue to produce the Gear 360 camera, which is used to provide images for the company’s VR products, and smartphone cameras.  The high-end camera business has deteriorated as cameras in smartphones continue to improve and even those with far more experience than Samsung, like Nikon (7731.JP) and Canon (7751.JP) have struggled at the high end in recent years.  While Samsung will still produce specialty items, like the Gear 360 camera, they will no longer “produce and sell digital cameras”.
Digital cameras were included in the Samsung IM division reports until 3Q 2016, and while the company has not indicated where the ‘reinvented’ specialty cameras sales will go, we would expect them to be buried rather than prominently shown going forward.

Actually not a new fab, but some details on a fab that has been talked about for some time.  TCL (000100.CH) and Huaxing Power (aka China Star (pvt)) have finalized an agreement to build a Gen 6 flexible OLED display line in Wuhan China.  The line, designated T3, is a Gen 6 fab, which is said to have a final raw capacity of 45,000 sheets/month, will be based on LTPS backplane technology and will be oriented toward small and medium panel production.  The expected production date is sometime in 2020, with the project costing a bit over $5b US.  TCL maintains a 55% stake in China Star, along with the 30% stake held by the Shenzhen government and a 10% stake by Samsung.
We have included this fab in our industry model for some time, although we expect the initial production to be closer to 30,000 sheets, and we have used an initial timeframe of early 2020, rather than late 2020, as indicated in the press.  As construction is to begin in June of this year, we still hold out some hope that production can begin a bit earlier than noted.  We also note that a portion of the project is expected to be based on Oxide backplanes, but little is known yet about the ratio between LTPS and Oxide, and how they will be applied to various screen sizes.