​China’s BOE has had a difficult time with Apple (AAPL), having been rejected a number of times by the company as a supplier of OLED displays for the iPhone 13.  BOE failed the approval process a number of times and was finally given permission to produce limited quantities of OLED displays, starting with replacement screens for those phones returned to Apple for repair, and eventually progressing to larger quantities for actual iPhone 13 production.  BOE ran into trouble however when it was discovered that the company had modified TFT circuitry traces without the prior approval of Apple, which resulted in a halt to much of the supply agreement between the two companies in February/March.
While there has been considerable speculation as to the status of the relationship, particularly as production for the iPhone 14 is about to begin later this month or in July, BOE has been working toward reestablishing itself in the good graces of Apple to regain standing as a display supplier for the iPhone 13 and iPhone 14, which are by in large produced by South Korean rivals Samsung Display and LG Display (LPL).  We believe they have been re-approved for the iPhone 13 and are back in production, but according to local South Korean press, must undergo a new approval process for the iPhone 14, which is said to be underway at Apple.  If BOE wins approval, they are expected to be producing the OLED displays for the iPhone 14 basic model, which is based on LTPS backplane technology, as opposed to LTPO that is used on the higher end models.  Depending on the time it takes, and the success of the evaluation, BOE would be a few weeks behind SDC and LGD in terms of production, but we expect the company will do whatever it takes to meet the volume goals needed by Apple in order to maintain what is a rather fragile relationship currently.

Considerable talk was generated when China’ largest panel producer BOE exhibited a 95” 8K OLED panel at the SID show last month, giving rise to speculation that BOE intends to both produce that panel commercially and also to produce a line of 4 additional large panel OLED panel sizes starting at 55”.  The panel shown was produced on a pilot line at BOE’s B5 fab, using a WOLED (White OLED) process similar to that used by LG Display and an IGZO backplane.  The pilot line and the remaining B5 fab is set up as a Gen 8.5 line using a half cut process, which means the system can deposit OLED materials on half of the Gen 8.5 sheet and must process the other half separately.  Given that 2 95” panels can be cut from a Gen 8.5 substrate at an efficiency of 90%, the half cut process is ideal for this panel size, but half cut processing is more difficult than the ¼ cut processing used for smaller IT panels and making that transition can bring down yield.  It would seem that BOE has mastered that change, at least on it pilot line, allowing it to produce large OLED panels on a Gen 8 line.
The ability to process ½ cut OLED panels on a full 15,000 sheet/month line, such as exists at the company’s B16 fab in Chengdu, BOE must be able equip the line with ½ cut deposition equipment, which is typically produced by Canon-Tokki (CAJ).   Those tools are both expensive and have an extended lead times, which means ordering the equipment to get into the queue is essential for timely production and the cut status of BOE’s Gen 8.5 lines at either B5 or B16 is unknown.  We estimate that based on a 15,000 sheet line at 100% yield, BOE could produce ~60,000 OLED panels each month, which when using a more realistic yield of 75% becomes ~45,000 units monthly, and we believe that a 75% yield for a new producer and a new process is generous, and while we have already seen headlines predicting the rapid share loss of South Korean OLED producers, we expect the impact of BOE’s push toward large panel OLED commercialization will take some time to materialize.
The good news for BOE is that relatively few OLED TV panels are produced each year, with an expected 10m panels this year, and therefore a relatively small production line will have an impact on share of the market.  That said, we believe the biggest issue facing BOE in this situation is yield, which, at times, has been a limiting factor for LG Display, who has had more experience producing large panel WOLED displays than any other producer, especially when opening a new line or fab.  Producing a few ultra-large panels on a pilot line is one thing but producing high volumes is another and much of BOE’s OLED experience in in small panel OLED production.  As a public company in China, BOE does have to work within certain financial norms, and is expanding its OLED production to meet Apple’s (APPL) needs for small panel OLED displays, while developing production infrastructure for IT OLED products to try to capture Apple’s iPad business in the future.  Running what would likely be a money losing fab for many months puts additional pressure on the company’s profitability, especially during a period when LCD panel prices are declining.  We would expect BOE to sample large panel OLED displays to all of LGD’s customers, and would likely be the lower cost alternative, but both the ability to meet volume targets and reliability of product will take time to become established, so our expectations are that BOE’s impact on the large panel OLED space will be modest this year and will take time to build in 2023.
Based on our calculations, we would expect BOE to be able to produce 473,400 units during the 1st 12 months of production on a 15,000 sheet line, against LGD’s estimated 10m units this year.  Impact yes, ‘glorious revolution’ maybe less so.

​The same South Korean trade publication that we noted in our 5/4/2022 note was hinting that BOE (200725.CH) was in the Apple penalty box over changes made to circuit design without Apple’s permission, is back with similar speculation that BOE’s display production participation in the iPhone 14 could be reduced or eliminated, even after BOE officials visited Apple’s headquarters to plead their case.  A number of scenarios are presented in the most recent article by the South Korean media source, the most extreme being that BOE’s 30m unit OLED display order (6.1” panels) would be given to Samsung Display (pvt) (20m) and LG Display (LPL) (10m), who are already expected to be producing the iPhone 14 Pro and Pro Max displays in late June or early July, and that BOE would be limited to producing legacy iPhone (12 & 13) OLED displays for the remainder of this year, likely a total of 20m units, 10m of which have already been produced.  Less aggressive scenarios push back BOE’s iPhone 14 OLED display production until early next year and limit it to 10m units, assuming that they are fully reinstated by Apple by the end of this year.
As we noted previously, BOE struggled during 2021 to pass the stringent qualification requirements that Apple imposes on its OLED display producers and was given legacy OLED replacement screens initially as a test to make sure the company was able to meet yield goals.  This was then advanced to producing actual iPhone 13 and 1`4 OLED displays when BOE finally was able to qualify production, but within a relatively short time the story of BOE’s design change seemed to indicate that BOE was in the penalty box with Apple and had been suspended from further production, leading to a drop off in BOE’s flexible OLED unit volumes in February and March (unconfirmed). 
Given the source for this most recent speculation is South Korean, where both SDC and LGD reside, and that the Chinese trade press has made innumerable statements about how BOE’s inclusion in the Apple OLED display supply chain marks the end of South Korea’s domination of the OLED business, we are reticent to take it at face value until the data becomes available.  It would be surprising for a panel producer to make a change in design, even for a legacy product without getting approval or qualification from the customer, especially Apple, but it is certainly possible that such a change was made and is now causing BOE to bear the consequences.  Any negative scenario will hold back BOE from becoming a primary supplier, as can be seen from the years it took for LG Display to gain full OLED display qualification at Apple after it failed to meet production quotas back in 2019.

​Chinese panel producers are masters of hyperbole, using words like ‘glorious’ and ‘world-changing’ to describe their successes, regardless of how they relate to the global display space.  That said, it can be difficult to get a direct answer from the same companies when things are not going in the correct direction, as was the case during an investor meeting with China’s leading LCD and OLED producer BOE (200725.CH).  After the company described its 2021 and 1Q 2022 impressive results in detail, management seemed to be less willing to give details when asked a few harder questions.
There was little detail given on how the company is changing its LCD production to maintain ‘good profitability’ during a difficult pricing period, other than saying the company’s performance is better than that of the industry and that such changes (whatever they are) are ‘a test process of the company’s products’, which we assume to mean that if the products are good, they will continue to sell regardless of the environment.  They did cite flexible OLED as the current growth driver and maintained their target of 100m flexible OLED units by the end of the year, up from a bit under 60m last year, also mentioning the depreciation that they will continue to ‘digest’ to improve performance this year.
When questioned about their expectations for panel prices, they stated that they did not expect a sharp decline in the future and mentioned a chance for a structural rebound as demand improved in 2H, but when asked specifically about the company’s utilization rate they stated that “Under different statistical calibers, the value of the utilization rate will show different values…The adjustment of the structure will lead to the change of the production line, but it does not necessarily mean that the utilization rate will change.  At present, the production line utilization rate of the companyis maintained at a reasonable rate,” which is about as close to a non-answer as possible.  The company also refrained from answering earlier investor questions about rumors that Apple (AAPL) has suspended accepting displays from the company recently due to undisclosed changes in panel structure made by BOE, but were happy to disclose that they were supplying panels for Hisense’s (600060.CH) line of Mini-LED QD TVs.
All in, despite the detailed questions, little real information was gained at the investor meeting and while the Chinese stock market gives both institutional and individual investors a platform for asking questions directly to management, it is rare that Chinese display companies reveal any information, especially when things are difficult.  Perhaps it might be a bit easier to read the true meaning of some of those statements if we were face-to-face but after years of hearing company-speak from US and other foreign companies, we expect the nuance would reveal little that was not already implied.
 

Before we go further we note that ‘could’ shows up a large number of times in the source material, which leaves open the idea that much of this information is unverified and open to interpretation, so we present it here with that understanding.
According to a South Korean trade press source, Chinese OLED panel supplier BOE (200725.CH) has seen significant reduction in its small panel OLED panel shipments to Apple (AAPL) since February with speculation that the displays it has been producing for the iPhone 13 have been suspended by Apple after it was allegedly discovered that BOE had changed the display’s design without Apple’s approval.  Originally the reduced production was thought to be the result of display driver shortages that we noted in our 02/17/22 note, “BOE Behind the Eight Ball”, caused by the prioritization of drivers to LG Display (LPL) by LX Semiconductor (108320.KS) rather than BOE, given LXS’s ownership by LG Group (pvt), the holding company for LG Electronics (006570.KS), LPL’s parent.
While the above theory was both logical and not uncommon during periods when complete orders are unable to be filled, the source speculates that the reduced production was the result of Apple discovering that BOE had made changes to the layout of the TFT (Thin-film transistor) circuitry that triggers each sub-pixel in the display.  Apple has very strict rules about making sure that displays meet company standards and designs, which has been a problem for BOE in the past.  BOE was unable to qualify for Apple’s ‘new model’ display supply chain a number of times, although we believe much of that issue was based on yield rather than design, however BOE’s full iPhone qualification this year seemed to indicate a more reassured Apple toward the company’s production processes.
The speculation does note that there is no expectation that Apple will limit BOE’s iPhone 14 display production based on the possibility of BOE’s possible misstep under the notion that Apple needs BOE for leverage toward iPhone 14 panel pricing with Samsung Display (pvt) and LG Display and cites continued production at BOE’s B11 fab, where the iPhone displays have been produced, but some wonder whether Apple might have given BOE a warning and expects BOE to find a way to fix the issue going forward.  Again, while we consider much of the above supposition, it is certainly not out of the realm of possibility, especially given Apple’s tight control over its supply chain and product quality. 
Both Samsung Display and LG Display have faced quality issues relative to Apple products in the past, and while Apple had little choice to remain with Samsung Display, given they have been the only volume source of Apple’s non-standard small panel OLED displays at times, LG Display has faced significant volume cutbacks that took many quarters to completely rectify, which puts BOE’s possible entry into the penalty box a real possibility, but until production for the iPhone 14 begins during the summer, the possible impact will not be known.  BOE has been expected to supply the majority of the displays for the iPhone 14, while Samsung Display and LG Display supply displays for the iPhone 14 Pro and Pro Max.  BOE was said to have been using a 40m unit target for iPhone displays this year, but it would seem that not only will that fall short of expectations due to the above issues, but also as Apple is expected to have already reduced its overall build projections for the iPhone, as we noted on Monday.  While Chinese trade press is still extoling BOE’s virtues as the iPhone display provider that will replace SDC and LGD, it might prove a bit harder than BOE might have expected. 

​As we have noted, Samsung Display (pvt), LG Display (LPL) and most recently China’s BOE (200725.CH) have been working toward developing the technology necessary to produce IT OLED panels on larger substrates, moving from Gen 6 sheets, which are 2.78 m2 to Gen 8.5 sheets, which are 5.5 m2 to increase the efficiency of the process.  Recently is seems that other OLED producers are also looking to make such a change, although we believe the motivation and potential for success are different from those producers mentioned above.  Visionox (002387.CH) has been the name most often mentioned as a potential developer of such technology, although we have our doubts as to whether such stories are anything more than self-promotion.
As OLED display technology migrates to larger devices, OLED deposition technology comes up against some roadblocks, the largest of which is the use of fine metal masks that force gaseous OLED materials to form the pattern on substrates that become pixels on a display.  These masks are made of a nickel/iron alloy that is able to remain stable under the heat and high and low pressures found in OLED deposition equipment, as it is absolutely necessary that the FMM ‘screens’ keep the OLED materials in perfect order and spacing during production.  While the FMM are designed to handle heat and pressure they must also react to gravity, which can cause them to sag and misplace pixels, causing a panel to fail.  While this is not a problem for small OLED displays, such as those used in watches and smartphones, as the displays and masks get larger, such as might be the case for notebook or monitor panels, the effects of gravity get worse and yield management becomes more difficult.
Currently the number of OLED displays produced for IT products is relatively small when compared to smartphone production, but that is expected to change over the next few years with OLED adoption increasing for such products, which makes solving the production issues with larger OLED panels all the more important.  It is especially important to SDC, LGD, and BOE, all of whom are OLED display suppliers to Apple (AAPL), who is expected to continue to migrate more display based products to OLED.  Each of the three has been working toward find solutions that will improve OLED IT panel yields, each with their own ‘slant’ to the problems, but with each knowing that they have the ‘ear’ of Apple as they progress.  Visionox however is not a supplier of flexible OLED panels to Apple, with Chinese brand Honor (pvt) their biggest OLED display customer, along with Xiaomi (1810.HK) for whom they produce OLED watch displays.
To give some perspective in 2021, Honor purchased ~24m OLED panels, and while that might sound like a large quantity, it represents ~3.9% of the OLED display market (unit volume), and while Xiaomi has a larger share (~13.9%) given the size of OLED watch displays relative to smartphones or OLED IT panels, it represents only a small amount of small panel OLED industry capacity.  Apple however purchased ~184m OLED displays last year, most of which went toward iPhone production, giving them a ~29.6% share of the overall small panel OLED market, which is why the three mentioned above are working so hard to solve OLED IT production issues, especially under the assumption that Apple will continue to expand OLED penetration among its IT products.  While all three OLED producers are taking R&D risk and potentially large capital risk, the goal of becoming a primary supplier of small panel IT OLED products to Apple is in their headlights.
That said, it is not the same for Visionox, who would have to get qualified as a primary small panel OLED supplier at Apple before they would even have a shot at competing with SDC, LGD, or BOE for Apple’s incremental OLED IT business, so why would they circulate such stories?  Industry folk, and we certainly can see their point, infer that it is to garner support from the Chinese government in the form of subsidies.  Much of the early construction costs and operating expenses for panel producers in China are paid for through provincial or city-based subsidies that can defray construction costs that might normally be prohibitive, allowing Chinese producers to grow more quickly than non-subsidized producers, and during the early years of operation, those subsidies can offset low yields and low utilization rates for Chinese fabs.  As China has already become the capacity leader in LCD panel production, government organizations are want to give subsidies for such capacity, but a challenge to incumbent OLED leaders like SDC and LGD can still garner local government financial support, giving Visionox the hope that by dangling the idea of building out capacity to challenge others for Apple’s OLED IT business, they might set the wheels in motion for potential government help.
Visionox is said to be testing the OLED IT waters at its V3 Gen 6 fab in Hefei to work through production issues, and then would build a new Gen 8.5 OLED line in another location.  The V3 fab is being built in two phases with “the 2nd phase promoted in a timely manner” according to the company late last year.  Perhaps additional financial support is being hinted at for the phase 2 construction and equipment, which we had expected to be completed later this year, although not oriented to IT panel production.  If Visionox is able to solve the necessary IT OLED production issues on the V3 phase 1 line, it would encourage funding sources to push forward with phase 2 and potentially add a new Gen 8.5 fab designed specifically for IT OLED panels.  By indicating that there was potential for a new Gen 8.5 OLED fab to be built, the company can begin selling the idea to city leaders in other locations to see if funding is available and hopefully create a bidding war, similar to what occurred when Samsung was looking for a new silicon fab location in the US.
There is a lot of speculation here, but certainly not any that has not been seen by us over the years in the display space, so while we don’t like to speculate, the Visionox story has many similarities to others we have heard over the years, and feels as if we have been to this rodeo before.  We could be wrong, with Visionox much further along with Apple or the technology needed for IT OLED production, but we are less sanguine about the idea knowing that Visionox only grew their share of the small panel OLED market from 4.7% in 2020 to 4.9% in 2021, while Samsung Display and LG Display’s real competitor BOE grew its share from 7.3% in 2020 to 10.0% last year, which amounted to a 66.9% increase in unit volume y/y.  Without a very dedicated customer base already established, we expect it will be necessary for Visionox to win a few more games before they build ‘it’, especially knowing who ‘they’ are.

BOE (200725.CH) is China’s largest panel producer and the largest single display panel revenue generator in the display space, so we took some time to read through the company’s recently released 10K to clarify some points that have been in the trade press over the last few months, and a few that we felt important to clarify.  While most US investors are not familiar with Chinese display companies, during a portion of 2021 and in January of this year Chinese panel producers represented over 50% of the industry’s large panel LCD revenue and will likely continue to see that share expand over the next few years.  We do note that the above data only represents the large panel LCD business in China, and as we have noted, Samsung Display (pvt) and LG Display (LPL) have been reducing their capacity exposure to that segment since late 2020 so there is some give and take as to share, but the bottom line is that China is the dominant player in the large panel LCD display space currently.
BOE has been diversifying in order to maintain profitability through the cycles that are part of the display space, and we have broken out the company’s revenue segments below (Sales are in billions).  While product diversity is certainly a goal for BOE, with a 92.2% share of revenue, the display business was certainly the key to the company’s sales and the panel price increases seen in 2020 and 1H 2021 were instrumental in generating the 64.3% display segment growth and substantial increase in gross margins.  That said, we were a bit surprised at the size of BOE’s Mini-LED business, which generated $71m last year, which was a bit larger than we had expected.  BOE’s top 5 major customers represented 37.8% of sales last year, with the largest of the top 5 representing 9.05% of total sales, with 42.8% of total sales being made in China and 43.8% in other Asian regions, while the company’s top 5 suppliers represented only 17.9% of purchases in 2021.

While much of the 10K equivalent was typical boilerplate, there was mention of a number of capacity development projects particular to the display segment, which were and are at various stages of construction and development, however the most significant project that we see BOE embarking on this year is one that was not mentioned in the 10K.  BOE is expected to begin construction of a new Gen 8.5 OLED fab it will use to produce OLED IT products with the goal of mass production late in 2024.  This would put BOE in direct competition with Samsung Display and LG Display who are both working toward building Gen 8.5 OLED capacity in order to supply Apple (AAPL) with tablet and laptop OLED displays.  While the substrate efficiency of such Gen 8.5 OLED lines is similar to that of a Gen 6 line for tablets and laptops, the size of the substrate increases by 2x which means 2x more units per run, making a Gen 8.5 able to produce more units/operating time than a typical Gen 6 line.
The problem with running Gen 8.5 lines for RGB OLED displays has been the fine metal masks used to pattern OLED materials on the substrate, and while these masks are made of a strong alloy that is resistant to heat, even the smallest sag in what looks like a thin screen will create a defective display.  As the masks must be larger for Gen 8.5 lines, they run the risk of sagging and OLED panel producers have been wary of making the move from Gen 6 to Gen 8.5 fabs for RGB OLED displays.  In the case of the three producers mentioned, SDC has taken a new approach, devising a vertical OLED deposition unit, taking out the potential for much of the sagging, while LGD and BOE are working with conventional horizontal deposition tools to try to conquer the problem.

​All three OLED producers are working toward this new IT OLED capacity in 2024 and will likely be supplying test and qualification panels to potential customers as soon as the fabs are able to produce even limited quantities, but we would not expect to see any real product next year.  2024 is more of a realistic timeframe for these new fabs and while they face some difficult challenges, would represent the next step in OLED display production.  As we have mentioned in the past, one of the challenges facing OLED producers is improving brightness, which can be done in a number of ways, by creating new more efficient OLED materials, by stacking OLED emitting layers, and by improving light extraction, so the technology can play a role in who wins this rivalry.  What makes the game a bit more interesting now is that SDC and LGD now have some new competition to deal with and while BOE does not have the OLED expertise that South Korean producers have, they are quite aggressive and already have an established relationship with Apple for OLED smartphone displays, making the field a bit more crowded this time around.

​As we have mentioned in the past, much is made in the Chinese trade press about the country’s ability to dominate the LCD display business over the last few years, and credit where credit is due, as Chinese display producers such as BOE (200725.CH), Chinastar (pvt), and HKC (0248.HK) have become dominant or major players in the LCD space, particularly in reference to large panel LCD display production.  Much of this comes from the addition of new LCD capacity at the Gen 8.5 or Gen 10+ substrate sizes, with particular emphasis on Gen 10+ fabs. 
One area that has been neglected by the Chinese display industry is glass substrates where much of the industry relies on a small number of display glass producers that are both well established and have a vast production knowledge-base.  While China does have a few display quality glass substrate production lines there is only one that is able to produce substrate glass for Gen 8.5 panel production and none that are able to produce substrates for Gen 10+ fabs, most of which are on the Mainland.  This leaves Chinese large panel producers to depend on Corning (GLW), Asahi (5201.JP), and NEG (5214.JP) for those substrate sizes, with some producers building glass production facilities for Gen 8.5 and Gen 10 on the production campuses of those fabs.
We have seen statistics as to how China is developing it substrate glass industry, soon to ‘dominate’ as the country has done with panel production, but in reality that bravado is a bit misconceived.  We see Gen 10+ panel production capacity growing 31.5% this year, representing 21.8% of total industry capacity, which is up from 14.8% of the industry total last year, with growth below Gen 8.5 non-existent in the LCD space.  As larger glass sizes tend to come at a premium, not only does Gen 8.5/Gen10+ glass represent the only capacity growth in the LCD space, but maintains higher margins than generic substrate glass sizes. 
Much of this is the result of the technology used to produce substrate glass, which requires considerable production and formulation expertise that is not easily generated during the production of other glass types, and as Chinese OLED panel producers have learned, that technology expertise takes considerable time and expense to learn.  All in, if Chinese glass ‘domination’ were near, we would expect Mainland producers to be in production at Gen 10+ sites across China, which it seems they are not and given the unusual stability of substrate glass prices over the last few years, competition is little changed.

As we noted in our 9/29/21 note (“Walking the Tightrope”), Samsung Display and its largest ‘unrelated’ customer Apple (AAPL) do not always agree.  In that note we detailed a conflict between the two over how a potential Apple OLED product would be structured, with Apple wanting what is called a ‘dual stack’ or ‘tandem stack’ configuration developed, while Samsung Display thought a single stack OLED display would suffice.  At the time it was indicated that SDC had walked away from the development of a 10.86” dual stack OLED display reportedly for a new iPad, leaving Apple to find other suppliers who were willing to follow Apple’s guidelines.  It seems that SDC has changed its mind about the idea of a tandem stack structure and is now working toward the development of such a design to woo Apple back to the fold.
SDC’s reluctance comes from the fact that developing a dual stack OLED structure is not as easy as placing two stacks on top of each other, but has some inherent issues that make it more complex and more costly to produce, including a number of changes that would have to be made to existing production lines.  What might have spurred SDC into returning to such development is the fact that local competitor LG Display (LPL) has production capabilities for a dual stack OLED architecture and that China’s BOE (200725.CH), newly qualified as an OLED supplier to Apple, has been making modifications to its B12 – P3 line that would allow it to produce such tandem OLED displays.
Without taking a deep dive into the details, the problem facing tandem stack OLED structures is that the material connecting the two OLED stacks, called a charge generation layer, which allows both ‘stacks’ to be triggered at the same time, must be of a very precise thickness and material composition.  A thin CGL will cause the two stacks to be out of sync, which could cause a cancellation effect, while a CGL that is too thick causes an electrical field that can spread the light from the structure in the wrong direction.  As the whole purpose of the tandem stack structure is to create a brighter display (or a normal display that has a longer lifetime), either alternative works against the process.  While it was SDC’s original contention that the development of such a display would not be feasible at a reasonable cost, it seems that business over science is the winner here, and that SDC’s scientists and engineers have been told to make it work.
SDC is expected to be using a new material stack (‘T’) for this project, different from the updated material set (M12) as described in our 2/25/22 note, with that material set going into production next year and an updated (‘T2’) set in 2024, but such development timelines are certainly subject to change and Apple’s acceptance of the new materials could extend that timeframe, although we expect SDC to pitch the T1 or T2 stack to parent Samsung Electronics (005930.KS) for use in its tablet line in the hope that such a deal would justify the cost of modifications and give SDC additional production experience before any Apple product release.  All in, while it was surprising to hear that SDC had cancelled the development project earlier, the fact that there are two potential competitors who are willing to go the distance for Apple, makes it far less surprising that SDC has changed its mind.