The rivalry between South Korean panel producers (Samsung Display (pvt) and LG Display (LPL)) and Chinese panel producers has been ongoing for a number of years as Chinese producers have pushed South Korean producers out of the large panel LCD business.  As it became obvious that Chinese producers had the advantage of significant government construction and operating subsidies, South Korean producers began shifting from LCD display production to OLED production, a relatively new technology at the time.  While Chinese large panel producers eventually won the battle for LCD display domination, South Korean producers went on to establish OLED as a higher quality technology, particularly for small panel displays.  Not to be outdone, Chinese panel producers have been building OLED capacity to challenge South Korean dominance in the OLED space, and while there are a multitude of CE brands that use OLED displays, the top of that list is Apple (AAPL).
Apple’s transition from LCD to OLED starting with the iPhone X, released om November 3, 2017, is expected to continue for the next few years as they migrate much of their product line to OLED.  Samsung Display and LG Display have been the primary small panel OLED suppliers to Apple but are continuingly being challenged by China’s largest panel producer BOE (200725.CH), who has made some inroad with Apple, supplying replacement displays for earlier iPhones and as a 3rd supplier for some later models.  While BOE has had its own issues with Apple, they continue to challenge SDC and LGD, along with a number of smaller Chinese OLED producers, and SDC has gone to the US ITC alleging patent infringement, with BOE, and other Chinese OLED producers (Chinastar (pvt), Tianma (000050.CH), and Visionox (002387.CH)) responding by challenging the validity of those patents in US Patent Court.
As the ITC investigation continues (target date 3/17/25) the patent challenges also continue, and the US Patent Review Board has ruled on one of the 4 patents that Samsung claims were infringed upon.  The ‘683’ patent, filed by Samsung Display on 11/13/17 in the US and 3/6/12 in Korea makes 15 claims concerning OLED pixel structure, particularly Samsung’s ‘diamond’ pixel structure shown on the left side of  Figure 1.  The PTAB has decided that 10 of the 15 claims made in the original patent are not valid, while leaving 5 intact.  Samsung will have the opportunity to appeal that decision. 
Limiting the broad scope of a patent is not an unusual outcome in patent review cases, but narrowing the patent will also narrow the ITC’s investigation scope, making SDC’s case a bit harder, and could open one of the other patents included in the investigation to further scrutiny as it is essentially a continuation of the ‘683’ patent mentioned above.
All in, the validity of the ‘shape’ characteristics of the pixels (polygon, Octagon, or non-quadrilateral) as specified in the ‘683’ patent, remain in effect, which is a key point in terms of the infringement, but spacing between pixels, size, and arrangement, the other ‘683’ claims, are invalidated, reducing the points that SDC can cite in the ITC investigation.  We expect SDC will appeal the PTAB decision, but this ruling and any potential appeal will likely push out the final ITC decision and the battle for OLED supremacy will continue in both the consumer space and the courts for another year.  That’s how lawyers put their kids through college.

[Note: The US Patent Office considers a patent unpatentable when the difference between claimed subject matter and prior art would have been obvious at the time of invention by a person having ordinary skill in the art to which subject matter pertains, where ‘ordinary skill’ means a degree in electrical engineering, material science, physics, or similar disciplines, along with 2 years of professional experience working with display design, including OLED displays or an equivalent level of skill, knowledge, or experience.]

​The CEO of Chinastar (pvt), China’s 2nd largest panel producer, gave a few hints as to the progress being made on the company’s T9 LCD display fab.  At a conference he stated that the project, which is slated for a capacity of 180k sheets/month in two phases, at a cost of ~5.2b US.  There have been rumors that the project, which is situated in Guangzhou, would be expanded to 250k sheets/month for an additional $1.63b US, but little has been said about such plans recently, and no mention was made at the recent conference.  What was mentioned was that while the fab is in mass production mode, and was the fastest fab construction ever in terms of capping, move-in, fab start-up, and mass production (according to the company), the fab is currently ‘capacity climbing’ toward a goal of 95% yield by the end of the year.
What makes this significant is that according to the CEO, when that target is reached, phase 2 construction will begin, with our estimate of early 2024 for phase 2 fanfare, and mass production at acceptable yields (85% or greater) by year end 2025.  All of this in light of how the LCD large panel space develops over the next 6 months, as there is currently little need for additional LCD capacity.  In China, there is a different mindset that tends to be company centric, and Chinastar, and parent TCL (000100.CH) seem bent on expanding despite the lack of current demand.  While boasting about early completion of such projects is gratifying for the company, it leaves a bit less room for slowing the progress of additional construction, which also delays the start of depreciation on a low producing fab and preserves at least some profitability, although these seem existential matters when you have a few billion dollars on the line, at least until its time to meet those utilization deadlines.

​TCL (000100.CH), the parent of the 2nd largest panel producer in China, Chinastar (pvt), announced this week that it had taken orders for 2.806 billion new shares at 3.42 yuan each (current price 3.85) in a non-public offering, raising just under 10b yuan, or $1.378b US.  Institutional buyers will be required to hold the stock for a 5 month lock-up.  The capital will be used to fund the build-out of Chinastar’s T9 Gen 8.5 LCD fab in Guangzhou, which began production in September, and will be China’s first Gen 8+ LCD fab that is devoted to the production of IT products, rather than TV panels, according to the company.  When completed, the fab wilkl have capacity for 180,000 Gen 8.5 panels/month and will compete directly with BOE, who currently is the country’s largest panel producer.  Ample capital seems to remain available for the Chinese display industry…
 
 

​We have mentioned that several LCD and OLED panel producers have slowed or postponed decisions or plans to expand capacity over the last few months, a result of the macro inflationary environment and the concurrent lack of consumer spending.  While Chinese panel producers still have groundbreaking ceremonies and sign both letters of understanding and form new entities with local governments to build out existing or add local LCD or OLED capacity, the realities of the current situation tell a somewhat different story.  Chinastar (pvt), a subsidiary of TCL (000100.CH) has been building its T5 fab since the middle of last year, originally to be a Gen 6 OLED fab, with the possibility that it could change to an LCD fab for IT products and a micro-LED backplane line. 
As the display and CE market deteriorated this year Chinastar, while having ordered a considerable amount of fab equipment form a variety of vendors, seems to have pushed out the delivery dates, some of which were to have been delivered this month.  Two South Korean equipment suppliers indicated that they had seen such delays for contracts with near-term delivery dates, totaling $24.2m US, one of which seems to have been pushed into late 2023 (unconfirmed), and the potential micro-LED project seems to have been indefinitely postponed.  While last year panel producers were competing with semiconductor manufacturers for equipment for the TFT portion of display production, causing unusually high demand and long delivery schedules, display tool vendors are now putting the breaks on those deliveries, causing serious problems at equipment vendors who have invested in materials and labor but cannot claim customer acceptance.
While these issues are devastating to LCD and OLED equipment manufacturers, the postponement or cancellation of potential capacity expansion projects is a positive for the industry, albeit a bit later than hoped.  With little demand expansion expected for the display space over the next year, and the expansion of new product categories, such as AR/VR and Micro-LED still a few years out, there is little need for greenfield capacity, unless it is dedicated, such as has been the case with Apple (AAPL) and LG Display (LPL) in years gone by.  But with a number of OLED panel producers chasing the same potential future Apple business, and the thought that the automotive display business cannot be supported by existing capacity, has pushed some to set capacity goals a bit unrealistically. 
While most expansion plans are rarely fully cancelled (it does happen), most slow considerably or change from one display modality to another as display perspective change, and delays or postponements of new capacity currently serve to tighten the supply side of what is an unbalanced equation currently.  Without a return to the incremental demand seen during the height of the COVID pandemic, or a more conducive spending environment, the display and even the entire CE space must focus on supply, at least for the 1st half of 2023, so we view any delays and postponements as a positive, despite the implications for tool vendors and similar suppliers, as it seems better to take a short-term hit than to live through an extended downturn that could impact the entire industry.  It’s the best of a bad situation.

​Chinastar (pvt), a subsidiary of TCL (000100.CH), celebrated the opening of its T9 LCD display fab in Guangzhou, China last week, with considerable fanfare and the usual ‘glorious’ description of how the new fab, along with Chinastar’s T8 OLED fab that is under construction, will push Guangzhou to become the display capital of the world, generating over $35b US, up from $25.3b that was generated in 2019[1].  The T9 fab however, will not be in mass production until 3Q ’23, running what we expect to be two 30,000 Gen 8.6 sheet/month lines at the onset.  Phase two of the project, another two 30,000 sheet/month lines are expected to become producers in mid to late 2024, while plans for phase 3, another two 30,000 sheet/month lines are a bit too far out for speculation.
The T9 fab will be initially producing IT panels, automotive displays, and PID (public information displays), but is also expected to, at some point, incorporate an ink-jet printing line, along with the T8 fab.  We expect the IJP line will be used for Mini/Micro-LED products at T9, while for OLED materials at T8, although actual IJP based displays at Chinastar are still at the technical demo stage.  Both fabs are expected to be producing IGZO backplanes for the displays they produce and the T9 fab, which is expected to cost upwards of $5b US, will have a module production facility in the complex to take the open cell panels and create display modules that can be sold to OEMs..
Note that Figure 1 shows Chinastar’s large panel sales and Gen 8+ capacity (dotted line), with large panel LCD industry sales scaled to match Chinastar’s January 2019 sales.  Chinastar’s growth through 2021 has been based on the company’s ability to fully utilize the new capacity it has added over that time period, however since the beginning of the year sales have declined rapidly as utilization rates for existing Gen 8+ fabs declined.  The industry has seen sales for large panel LCD displays decline by 32.3% since the end of 2021 while Chinastar has seen sales decline 39.3% over the same period.
While the celebration ahead of actual production is typical, given the current circumstances in the display space, the addition of new LCD capacity, especially Gen 8 type capacity is of little use to an industry that is facing low utilization rates at many Gen 8 and Gen 10 fabs due to weak demand.  Chinastar, now the 2nd largest LCD panel producer in China (19.3% sales share) and the 5th largest (sales) globally (9.3% global sales share) as of August of this year, so we would expect to see sales continue to increase next year as the T9 fab begins production.  That said, a continuation of weak overall display demand next year, T9 could prove to be a significant burden on the company as it will be difficult to fil the new lines along with added depreciation.  Under that scenario, we would expect the phase 2 schedule to be slowed, but with a year between now and the planned phase 2 opening date there are a lot of parameters that could change.


[1] According to Guangzhou Bureau of Industry & Information Technology.

​Samsung Display (pvt), an affiliate of Samsung Electronics (005930.KS), and the world’s largest producer of small panel OLED, has sold roughly 2,000 patents to Chinastar (pvt) a subsidiary of China’s TCL (000100.CH), a company in which Samsung has a 12.3% stake.  That stake was acquired as part of the 8/31/20 sale of its 60% stake in its Gen 8.5 LCD fab in Suzhou to Chinastar for $1.08b US.  In the patent package were 577 US patents owned by Samsung Display and to put that number in perspective Samsung Display has 18,860 US patents and 3,968 US patent applications, with 325 applications and 1,731 with “Liquid Crystal Display” in the title.  The price of the sale, which could have been done piecemeal, was not disclosed, although it will eventually show up in SDC’s financials, and given the company’s new revelation as to compensating those who were responsible for the IP when it is monetized, more detail will eventually show up in the footnotes.
As Samsung Display made the decision to end the production of large panel LCD displays back in 2020 and has slowly sold or shuttered all of its large panel LCD fabs, selling line equipment and converting some to small and potentially large panel OLED production, along with the company’s OLED derivative. QD/OLED, monetizing these IP assets are a logical path for SDC.  TCL/Chinastar will now have a broader IP platform under which it can more conclusively defend itself during IP litigation, while typical agreements call for the previous patent owner to be grandfathered against new litigation.
The question however, is whether Chinastar will use the extended portfolio against Chinese rival BOE (200725.CH), the largest panel producer in China, as a tool to limit BOE’s competitive ability, a practice relatively common in the display space and certainly in the CE space, and one that gains momentum as the financials of panel producers deteriorate.  The problem here would be that litigation against BOE by Chinastar could be taken as a tacit challenge from Samsung Display and potentially from Samsung Electronics, who purchases large panel LCD product from both Chinastar and BOE, given the links back to both Samsung entities.  For now things are quiet, but we expect  TCL’s lawyers are review all of the new IP to see if it pertains to existing litigation and whether it can generate new legal challenges going forward.

​TCL (000100.CH), the owner of display producer Chinastar (pvt), released its annual report, giving some additional insight into both how the company performed and how its display business segment fared during 2021.  The 212 pages was loaded with praise for the company and its leading share in a variety of products and niches, and much about its silicon wafer and solar businesses, which represented 37.5% of sales last year, a 79.7% increase y/y, while the display business, with a 44.1% share of sales, saw a decline of 8.8% in sales y/y.  While all of the positive rhetoric, such as this flowery Kumbaya moment in the financial notes…
“TCL Technology will continue to invest in fields closely related to human life (such as intelligence, health, low carbon, energy saving, etc.), to establish a leading edge in technology and products, to bring people a wonderful experience and a better life. We will uphold sustainable development, People-oriented concept to promote harmonious coexistence. Committed to environmental friendliness, employee love and social trust; committed to people and nature, (and) the harmonious development of man and society. At the same time, we will join hands with stakeholders to jointly build an open and win-win industrial ecology, and adhere to a benign competition and coordinated development, adhere to open cooperation, symbiosis and win-win.”
…were also followed by some less optimistic hints about the display business…
“In the long run, the growth rate of production capacity in the large-size display field will slow down and the competitive landscape will continue to be optimized.  Given the severe situation, TCL CSOT will continue to improve its efficiency and efficiency indicators and go through the industrial development cycle.”
To TCL’s credit, the company was able to show an increase in operating income of 13.6% for the year, with operating costs up 31.8%, due to the strength in the silicon business against the loss in display, although the net loss was $390m US.  While there was certainly an emphasis on the company’s wafer and solar businesses, they gave some updates on the status of the many display projects that TCL/Chinastar has underway, with much of the emphasis on LCD rather than OLED capacity, despite the multiple OLED projects that the company is developing.  There was mention that the company would be starting mass production of a VR product in September, but seemed to intimate that it would be based on LCD rather than the more popular micro-OLED technology.
They did mention that the T4 G6 OLED fab is still in the ‘early cost stage’, which we take to mean unprofitable, while no information on how far along the development of Chinastar’s T8 Gen 8 OLED fab had progresses, which is expected to be on-line in 2024.   They did note that the T5 Gen 6 OLED fab had progressed from construction to equipment move-in, with the delivery of the first lithography system, which would indicate that the first line should be in mass production around mid-year 2023, a step toward increasing the company’s small panel OLED capacity.
All in, TCL was able to offset the weakness in the display business with its exposure to the continued demands of the silicon business, a luxury few other display producers have (other than Samsung (005930.KS)).  We expect 2022 to be similar, albeit with a bit less growth in the wafer business, but most important will be the eventual status of TCL/Chinastar’s expansion projects, including capacity expansion at T3 and the progress on T5, both of which will add to the industry’s over-capacity issues.  While TCL is the leader in ultra-large LCD market (capacity), we expect they are currently working under lower utilization rates at those fabs, which will have an impact on their ability to generate cash from the display business.  With that in mind, the 35.1% decrease in cash from operations and the 74.6% decrease in overall cash & equivalents could slow those expansion projects, at least for the remainder of this year, which we see as a positive, although it is inevitable that they will eventually be completed.

There are no shortages of comments on Samsung Display’s (pvt) newest display technology QD/OLED.  We have mentioned it innumerable times and most recently there has been talk of a 2nd generational QD/OLED product that is being worked on that will reduce the thickness of the original QD/OLED display. (The 55” TV produced by Samsung (005930.KS) using the original QD/OLED display technology is 1.6” thick).  There has been some controversy as to some of the characteristics of the QD/Display, which is used in a Sony (SNE) TV and an Alienware (DELL) monitor, but the general feeling is that the display technology, especially in its first iteration, is a step up for OLED and display technology generally and is a viable contender against LG Display’s (LPL) WOLED TV technology.
Potential technical issues aside, which will likely be addressed by SDC in the second or third generation product, parent Samsung Electronics has been supportive concerning the new product offering but has been a bit hesitant on the prospects for the technology during its development and early production.  It was surprising to see that Sony was first to announce the availability of the technology in its TV line (shipping expected next month) but Samsung is now offering almost immediate delivery (1 day) through Best Buy (BBY) and is said to be scheduled to receive .5m QD/OLED panels from SDC this year.  While that is a small number of units compared to Samsung ~50m units shipped last year, it would reflect more the early production stage of the technology and Samsung’s lack of information as to how the new technology will be accepted by consumers.
That said, Samsung Display, who will be the sole source of QD/OLED displays to Samsung, Sony, and Dell, must also be realistic as to how many panels they are able to produce this year, and we look at the most important characteristic of panel production, yield, to give an estimate of the number of panels SDC will be able to produce.  As the SDC QD/OLED fab is configured as a Gen 8.5 15,000 sheet/month line, we have to make a few assumptions before walking through the actual estimates.  First, we assume that the fab was built to accommodate MMG (Multi-mode glass), which allows the lines to mix different size panels on the same Gen 8.5 substrate, however most Gen 8.5 OLED lines process a half sheet at a time.  Using MMG would make it impossible to process a half sheet because of the configuration (3 65” & 2 55” panels/sheet or 3 65” panels & 3 34” panels/sheet), so we did calculations for both MMG and non-MMG configurations.  
We also have to make some assumptions as to how many of each panel size Samsung Display is producing[1], which would be based on consumer demand, which is still an unknown, however we build in a roughly two to one ratio for 65”/55” as the price differential between the two is ~35% and the screen size of the 65” model is ~40% larger, with roughly 15% of production going toward the 34” (monitor) size. 
The most important metric in the calculations is yield, as QD/OLED is a new technology and has a number of process steps that are different than typical OLED display production.  Typically yields are quite low when production begins as tools need to be tuned to mass production levels, however it has been rumored that SDC was having trouble with yield and had been moving into mass production with yields in the 50% range.  We expect this was a reason for parent Samsung Electronics’ reticence about promoting the technology late last year, however a recent internal memo from SDC management to employees indicated that yields are now 75% with a target (timeframe?) of 90%+.  It is rare for any company to publish actual production yield, especially for a new product, but it seems that SDC wanted to encourage the fab staff to have an optimistic view of the potential for the product and the prospects for their continued employment on the project.  This gives us some clarity as to where the production yields are currently, which we build into our model below.  As noted, while we are less sanguine about the use of MMG at this fab, we present both MMG based and non-MMG based estimates.


[1] Available to SCMR LLC clients.

​Based on our estimates Samsung Electronics will take ~85% of SDC’s QD/OLED TV panel production this year, with the remainder going to Sony.  As part of SDC’s 2022 QD/OLED production we expect ~110,000 monitor panels to be produced, but we expect there is some flexibility in that figure.  If SDC were to lower the percentage of capacity dedicated to monitor panels, it would lower the total number of panels produced, but increase the number of 55" and”65”, which would boost the number of TV panels it could offer to Sony.  That said, for SDC to be ultimately successful with its QD/OLED project, the company will have to build new capacity to increase production, which would likely take a year if they were to build in an existing location.  In order to meet the 2023 holiday season they would have to make such a decision by mid-year 2022, which would leave little time for Samsung and Sony to evaluate consumer reaction to the product, which puts SDC in the unenviable position of having to make that decision with relatively little customer data. 
If they decide to expand, equipment suppliers will be pressed to also meet such deadlines, which can complicate such timelines.  All in, QD/OLED, or at least Samsung Display’s version of the technology is just beginning to emerge but there is little time to make educated decisions as to expansion plans or SDC will be limited to current production levels until 2024.  While this would certainly give the technology a chance to mature a bit, other display technologies will also improve and QD/OLED will face a stronger challenge from competitive TV display technologies.  Decisions, decisions… 

​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.

While we already have a production schedule for Chinastar’s (pvt) T9 LCD fab in our model, sources in South Korea confirm that the company has placed orders for the equipment necessary for the new Gen 8.6 fab, which was announced las June.  The construction part of the project, which will have a capacity of 180,000 sheets/month when fully built-out, is expected to cost $565m US, with a total fab project cost of ~$7.2b, which we believe also includes a 60,000 sheet/month Gen 8.5 ink-jet printing OLED fab that will be built next to this new fab at a later date.  Charm Engineering (009310.KS), a South Korean company that produces inspection equipment (AOI) for LCD, OLED, and LED displays, and laser repair and die transfer tools (LIFT), has acknowledged that it has received a $11.2m order from Chinastar for the new fab, along with Top Engineering (065130.KS) and DMS (068790.KS). 
Based on the timing of the construction and the equipment orders and lead time, we pull in our Chinastar phase 1 production expectations for 2024 and push out expectations for production in 2025, although the amount of the change is relatively small.  Given the plans to begin construction of the T8 IJP OLED fab after the T9 project has begun commercial operation, and the fact that T8 will be using IJP instead of typical deposition methods, we keep a production date for T8 open for now.