China’s largest panel producer BOE (200725.CH) announced that it had placed 3.65b shares of its common stock with a group of private investors, raising $3.14b US.  The share (new) were priced at 5.75 yuan, with bids ranging from 5.64 to 6.3 yuan and carry a 6 month lockup for all purchasers except the largest buyer, who agreed to an 18 month lockup.  The new shares increased the total company shares by 10.5% to 38.45b shares for a market value of $46.037b US at the subscription price.
As previously stated the funds will be used for the following:

• Acquire 24.06% of Wuhan BOE Optoelectronics, the holding company for the company’s Gen 10.5 fab in Wuhan
• Continue the building and expansion of the company’s Gen 6 OLED fab in Chongqing and increase holding company capital
• Fund the company’s 12” silicon OLED micro-display project
• Add capital to the company’s Hospital project in Chengdu
• Repay Loan from Fuzhou Urban Investment Group
• Increase overall capital structure to avoid debt ratio issues

We were curious as to who purchased the shares, given the size of the deal.  The table below shows the deal participants, their business and the share of the offering that they subscribed for:

While the two directly state owned entities took over 22% of the deal, we were more interested in BOE’s top 10 shareholder list, both from any change in control (none) and the composition of the holders.  As can be seen in the table below, the only non-state owned holder of BOE shares (top 10) is the Hong Kong Stock Exchange (388.HK), although while still state owned, the Central Bank of Norway is certainly not owned by the Chinese government, as are all of the other entities.

This deal has been weighing on BOE shares for some time, with considerable pressure from individual shareholders who were concerned that not only was the deal depressing the stock but that private shareholders would be offered stock at a substantial discount, a practice not uncommon with Chinese technology companies.  Perhaps with the deal out of the way, some of that pressure will be off the stock, however the lockup is relatively short and the prospects for the LCD display segment have likely peaked or are near so. 
BOE continues to push to gain traction with Apple (AAPL) in the OLED space, and while they still have yet to become a primary supplier, we expect much of this deal promotion was based on that potential.  Apple tends to keep its actual suppliers from disclosing orders, more so lately given the number of ‘leaks’ that seem to appear weekly, but there is a considerable amount of time before Apple will have to commit to BOE for the next generation iPhone, which leaves plenty of time for rumors to ebb and flow as to BOE’s prospects.

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.

​Yesterday we noted that one of China’s better known OLED panel producers, while announcing strong sales and new orders, was also reporting a net profit loss due to expenses relating to the development of products for such new customers.  In all fairness, that was certainly the exception to the rule in 1H for Chinese panel producers, who saw massive increases in net profits on a y/y basis.  While not all have given projections as to their profit for the 1st half, the table below points to those that have and the improvement over last year’s 1H results, although we note that the improvement in demand and panel prices began late in the 2nd quarter, making such comparisons a bit exaggerated.  That said, with both demand and panel prices up, Chinese panel producers were able to leverage the capacity that they have been adding over the last few years.  How long that lasts is a much more important question.  Gareth L. Powell said it well, “We never know when we’re living through the good times.  It’s only when everything turns to ashes and crap we realize how fortunate we really were.”

​Conversations with Chinese display producers can be challenging both in that they are careful to choose which questions they answer, and those answers they do give can be quite difficult to decipher as wording is carefully chosen.  That said, even with carefully chosen wording, Chinese panel producers are usually proud to discuss progress that is being made on fab capacity or new projects that project the company in a positive light and through these conversations and Q&A sessions, we can grab a few tidbits about the working of the display space on the Mainland.
BOE (200725.CH), as the largest of the Chinese panel producers has a number of projects at various stages across its swath of fabs, R&D centers, and other production lines, which are in a constant state of change, and those changes are of great importance to BOE’s supply chain.  We recently noted that Corning (GLW) had officially opened its 6th glass plant in China, this one being in Wuhan on the site of BOE’s Gen 10.5 LCD fab, and is the primary (and likely sole) supplier of substrate glass to that fab, as local glass producers in China tend to be reliable for glass sizes up to Gen 6.  The fab itself is in the process of its phase 2 expansion, which BOE expects to be completed this month, giving the fab a stated capacity of 120,000 sheets/month, which should be reflected in Corning’s volumes going forward.  We note that a 30,000 sheet/month increase in capacity at this plant (Gen 10.5) consumes 80.1% more glass surface area than a 30,000 sheet/month expansion at a Gen 8.5 LCD fab, so the impact of such an increase is significant to any supplier that works with BOE on an area basis (glass, LCD materials, backplane, et.).
BOE is also in what it calls ‘ramp-up’ mode at its B7 Gen 6 OLED fab in Chengdu and its B11 Gen 6 OLED fab in Mianyang, both of which are in production but are expanding capacity, and the company is developing another Gen 6 OLED fab in Chongqing, which is currently under construction.  While the two OLED expansions are proceeding ‘smoothly’ according to the company, the Chongqing fab, when the construction is completed, will begin ramp-up mode and  be ’carried out according to customer needs’, which are ‘climbing’.  We expect this to be a reference to Apple (AAPL) and its quest to further diversify its OLED display supplier list, which now consists of Samsung Display (pvt) and LG Display (LPL), with BOE providing relatively small volumes, primarily for screen replacement.  As we have noted, BOE is trying to become a full-scale supplier to Apple’s OLED smartphone production, but has faced difficulties in maintaining yields comparable to others.  We expect the Chongqing fab is intended to prove to Apple that BOE is capable of becoming a primary supplier. 
BOE expects to increase its shipments of flexible OLED displays by more than 100% this year, but much will depend on the Gen 6 fab ramps and demand from customers other than Huawei (pvt), who has been facing extreme component and semiconductor shortages due to US sanctions.  Last year Huawei released 32 smartphone models with OLED displays.  This year they have released 7 to date, which makes it incumbent on BOE to broaden its OLED customer base in order to meet its goal.
BOE is also developing a 12” silicon substrate line for the production of ultra-high resolution AR/VR displays to complement its existing 8” line from which it says it has shipped both ‘fast LCD’ and micro-OLED displays, however while the company has shown demos of silicon-based OLED AR displays at shows over the years at high resolutions, we have yet to see any actual product above 5,644 ppi, although the company says they have a number of sizes under development.  In terms of micro-LED BOE says they are mass producing a 75” COG (Chip-on-Glass) micro-LED panel, although we believe it is a modular component that can be assembled into a larger system.
As noted, BOE is very aggressive in terms of growing its capacity, not only in display production but in a number of associated areas, albeit most associated with BOE’s LCD or OLED capacity in some way, yet as always in the CE space, much is done with smoke and mirrors.  Non-specific measurements are the stock and trade of panel producers and are helped by rags whose headlines often read, “…expanding capacity…” only to find out that the company mentioned is ‘considering expanding capacity if customer demand warrants the expansion and capital can be secured…’   That’s why analysts have grey hair at an early age.

We have been hearing that the world’s largest LCD panel producer, BOE (200725.CH) has begun planning a new Gen 10.5 LCD fab project.  While the company will not confirm anything official, BOE is already the global leader in large panel LCD production, and the addition of a 3rd Gen 10.5 LCD fab would certainly move them further ahead of their closest rival, fellow China countryman, Chinastar (pvt), who we expect will have a ~13.5% share of the global LCD market (capacity basis) against BOE’s 26.8% share at the end of this year.  While we have yet to see any documents that verify the new project, it would not be surprising to imagine BOE wanting to further capitalize on the large increases seen in LCD panel prices over the last year.
BOE’s last two Gen 10.5 fabs have a stated capacity of 120,000 sheets/month, and while speculation about the new fab is calling for 150,000 sheet/month capacity, we are, at least for now, adding 120k to our fab database, as duplicating an existing fab is always easier and less expensive than changing the configuration.  Timing is still a big question, as no announcements have been made, but we plan an announcement, if the project is approved by the board, in September, which would lead us to a phase 1 opening of June 2023 and a phase 2 opening of March 2024, with both ramping to full production over roughly 10 to 12 months. The ramp will begin to increase BOE’s global capacity share in 2023, and more so in 2024 and 2025, although much will depend on the timing and how quickly BOE can find customers to fill the new fab.  The table below compares our expectations for BOE’s gross LCD capacity share under current circumstances and with the inclusion of this new Gen 10.5 fb.

We note that BOE’s plans for its earlier Gen 10.5 LCD fabs were delayed from their original timeline, in part because of COVID-19, but also as a reflection of what were declining large panel LCD prices.  As those prices have increased, the expected profitability of new fabs, at current panel pricing, is very attractive and makes a strong case for government subsidies that now expect to see some sort of return, aside from job creation.  BOE’s management has stated that it believes the LCD display industry is exiting an era of cyclicality and becoming a more mature and more predictable industry.
While we agree with the fact that the LCD display space is maturing, we are not convinced that cyclicality is being washed out of the industry.  LCD displays will still have to compete with OLED and other potential display technologies, and while mini-LED backlighting and quantum dot enhancement can help to bring LCD specs closer to other display technologies, consumers want bigger and better TVs at lower prices and that means continued competition.  Unless the world has permanently changed due to COVID-19, there will always be periods of supply/demand imbalance, during which the profitability of LCD fabs will be marginal.  Building a Gen 10.5 fab does give BOE and others an efficiency advantage over older Gen 8.5 LCD fabs, especially with larger LCD panels (65” and over), but assuming that everything will remain the same as it is now years into the future is a dangerous game.

In a filing today, Chinese display leader BOE (200725.CH) has indicated it will be selling shares in a non-public offering to raise capital for a number of projects.  Under the plan, BOE will buy a 24% stake in the company’s B17 mixed use Gen 10 fab, additional capital for the company’s B12 Chongqing Gen 6 OLED fab (under construction), capital for the company’s micro-LED project, additional financing for the BOE Hospital, capital to repay loans provided by the city of Fuzhou (likely for the B10 LCD fab), and for ‘supplemental capital’.  We note that BOE has recently agreed to purchase stakes in two LCD lines from Panda for $1.1b US, so some of that ‘supplemental’ capital could be related to that purchase.
According to the preliminary filing, the total amount to be raised is ~$31b US, some of which has already been allocated to a number of Chinese investment funds and includes an 18 month lockup.  The deal pricing will be 80% of the 20 day average stock price previous to the closing, with the capital (if completed) to be allocated as follows:

• 24.06% Equity in Wuhan BOE Opto                                          $10b     
• Capital Increase to Chongqing BOE and Gen 6 OLED fab    $10b     
• Silicon Micro-LED Project                                                           $1.54b
• Increased Capital for Chengdu Hospitals                                 $.75b
  • Loan repayment                                                                  $4.63b
• Supplemental Liquidity                                                                $4.63b

 
This is obviously a very large capital project for BOE, who has been expanding at a rapid pace over the last few years and a key piece of the financing puzzle for what BOE is able to accomplish going forward.  We believe some of the funding is to give the company better control over how the fabs are being run by lessening local government representation, while significant amounts will be for construction projects that the BOE BOD has already approved, such as the new fabs and the micro-LED project.  That said, the total investment BOE has committed to for the projects above is over $105b US, so this financing will likely not be the last. More details to follow.

As part of the Chinese Ministry of Science & Technology R&D program, BOE (000725.CH) is developing a small panel (5”) quantum dot display.  The device, which is said to be produced using an ink-jet printing process, has no backlight, indicating that the device is generating light directly from the quantum dots.  While there is little information about the project, as it is only one of 863 programs sponsored by the ministry, and the most recent ministry newsletter is from 2012, we expect the device is a preliminary prototype, and far from near commercial production. 

As we have noted in the past, the current use of quantum dots is in films that enhance the color accuracy of LED backlight devices, with the next timeline inflection point being the use of the materials directly as LED phosphors, with the final goal, a self-emitting device, such as the one mentioned above.  The development of such a device, and its eventual commercialization remains a few years away according to our contacts in the industry, but we do expect to see similar articles, demos, and IP toward that goal, especially from Chinese display participants, as the playing field in QDs is far more level than in OLED, where South Korean producers dominate the space.  While we expect the BOE project is a very early stage device, where there’s a will, there’s a way…