As we have noted in the past, while Taiwan represents ~27.4% (Fe. ‘22) of large panel display industry revenue, the three Taiwanese panel producers are required to report monthly sales figures while panel producers in other regions and countries typically report those figures quarterly.  This gives a bit of granularity to shorter-term trends in the display space and justifies tracking those results.  As February is an unusual month for the display space given that it is a short month and also contains the Chinese New Year holiday, March tends to even the quarter out, making it a bit more comparable to other years.  Such is the case this year, although the total quarterly result is a bit less positive than last year.
AU Optronics (2409.TT) reported March sales of NT$28043 ($829m US), up 9.3% m/m but down 8.7% y/y, while Innolux (3481.TT) posted sales of NT$23.92b ($825.74m US), up 9.0% m/m but down 22.8% y/y, while Hannstar (61116.TT) generated sales of  NT$1.74b ($59.57m US), up17.4% m/m but down 42.6% y/y.  While the m/m performance looks strong, as we noted, March tends to be a recovery month for panel producers after a slow January and February, however, in the table below, we also show the 5 year averages for March m/m and y/y, which indicate that the gains seen this March are below the averages, particularly when comparing y/y metrics.
Preliminary quarterly sales results, as shown in Table 2, paint a similar picture, although not quite as negative, with the 1Q results being a bit closer to 5 year q/q averages, while 1Q y/y results are a bit further from the averages.  The charts below show that 2022 is starting out more similar to 2018 – 2019, which makes sense given 2020 was certainly not a typical year, nor was 2021, but based on the sales data thus far for the three Taiwan based panel producers, it looks like 2022 will be a more typical year than the last two, but at a higher sales level than 2018 – 2019.  This would be a good indicator of full year panel producer results, however we expect TV panel pricing to remain relatively flat for 2Q and IT panel prices to decline further, which would pull down full year sales and make the 2022 full year chart look a bit less typical than it does thus far.
All in, the best case in our view would be a typically seasonal 2022 for panel sales, at a higher level than 2018 – 2019, but a lower one than the ‘COVID-19 years’ of 2020 and 2021.  The worst case would be a rapid decline in IT panel prices with no increase in TV (large) panel prices, which would set up potential q/q declines during what should be sequentially better quarters.  Y/y results will likely be down in 2Q and possibly 3Q as last year’s large panel price decline began late in the year.  While not a disastrous year for panel producers 2022 is shaping up to be far more difficult than last year and we expect valuations to continue to remain constrained for most generic panel producers.

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 far back as 6/24/20 we noted that strained relations between Japan and South Korea has pushed the South Korean Ministry of Trade to sponsor a Fine Metal Mask ‘bakeoff’ pitting a number of South Korean companies against each other to find the best production methodology to develop an in-country supply chain, allowing South Korea to become less dependent on Japan for this critical part of OLED production technology.  The South Korean Ministry of Trade chose APS (054620.KS) (laser patterning) and Poongwon Precision (pvt) (etch) as the winners in the project, leaving Philoptics (161580.KS) and Olum Materials (pvt) to work on their own. 
Much of the momentum behind the South Korean government’s interest in Fine Metal Masks is due to the fact that the world’s largest producer of OLED displays, Samsung Display (pvt) buys almost all of its masks from Japanese suppliers Dai Nippon Printing (7912.JP) and Toppan Printing (7911.JP) who dominate this market.  The masks, which must meet extremely fine tolerances in order to correctly pattern OLED materials, must be cleaned and replaced regularly, and any disruption in mask supply could slow or halt OLED display production, regardless of whether the reason is political or production related. As the material used to produce such masks is made from Invar, an iron/nickel alloy (36% - 42% nickel) and the price of nickel has increased from $20,912/ton at the end of last year to $35,500/ton now (with a peak of $48,196 in the interim), as Russia is a top 5 producer, the sensitivity toward ensuring mask supply and proper pricing has returned.
To make things even more difficult, there are a number of ways in which the masks can be made, with Dai Nippon and Toppan using an etch method while APS uses laser patterning and Philoptics uses electro-forming, a method that deposits the metal on a mandrel.  When the South Korean government created the ‘bake-off’, much was to see which technologies would be most practical, with laser patterning and the more standard etch winning out.  That said, Philoptics has continued to refine it electro-forming process, despite its bakeoff loss, and has been supplying evaluation product to a Chinese OLED panel producer.  The company expects that the evaluation process, which began late last year will take roughly a year and will begin to generate sales (if accepted) in 2023.  The Chinese OLED producer is looking to add a mask supplier as it depends entirely on Japanese mask producers and Philoptics also hopes to sell to Samsung Display as well, although a similar qualification process would have to be completed.

LCD panel pricing in March continued its downward slide but with IT panel pricing taking the biggest hit, down 4.7%, above the high end of our expectations.  TV panel prices also declined 1.3%, which was a bit above our range but has passed, at least for now, the period of upper single digit monthly declines seen in 2H last year.  As we have noted previously, panel producers shifted production away from LCD TV panels last year, given the rapid price declines and moved that capacity to IT panels (notebook, monitor, tablet), however as TV panel prices reached cash costs this year there was little incentive for panel producers to continue to offer TV panels at lower prices and TV panel pricing (Figure 4) and shipments Figure 5) began to level off.
IT panel shipments (Figure 6) began to decline at the beginning of this year as demand began to return to more normal levels and IT panel prices (Figure 1, Figure 2, Figure 3) also began to drop, and while few panel producers expected the same steep monthly price declines for LCD IT panels that had been seen for TV panels, the rate of monthly IT panel price declines has been increasing (Figure 7) and given the increased sensitivity to IT panel prices at panel producers (Figure 8), the effect on panel producer profitability is considerable.
Heading into 2Q, we expect April to see continued IT panel price declines and more moderate TV panel price declines.  While large panel shipments are seasonal, with 2H averaging ~52.6% of full year shipments, panel pricing is not, so we have little cause to expect large panel pricing to change direction unless real demand changes.  We believe that some of the demand seen for IT products last year was real demand that was a result of the global economy beginning to right itself as the COVID-19 pandemic began to abate, which leaves us to question what might stimulate demand for IT products this year, a more difficult question to answer.
While TV set demand on a long-term basis has not been growing rapidly, given the LCD panel price declines seen over the last eight months, TV set prices should reflect those declines, making LCD TV set prices more palatable to potential; buyers.  That said, inflation, both for raw materials and for components, has wiped out a portion of that gain, so we see some TV set demand improvement throughout the year.  IT products however are facing lower demand (other than seasonal), increased competition, and the same cost inflation that TV  set brands face, while IT panel prices continue to decline.  While as noted, the IT panel price declines have seen less negative momentum than was seen with TV panel prices, but given that most panel producers have concentrated their capacity toward IT panel production, that market will see increased competition as that capacity must be filled, even for less profitable prices.

Samsung Large Panel LCD Phase Out
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Samsung Display (pvt) has been working toward ending its production of large panel LCD displays for a number of years and is now likely to close its last remaining large panel LCD production fab this year, likely by the end of 2Q.  Samsung Display’s decision to shut down large panel LCD pricing began a number of years ago as a result of the competition from Chinese LCD panel producers, who were both extremely aggressive in building out large panel capacity and had the backing of the Chinese government, who saw the necessity to change the balance of power in the display business from South Korea and Taiwan, who had long dominated the large panel LCD display business.  At the same time Samsung Display found itself the dominant player in the small panel OLED display business, with its parent Samsung Electronics a very strong supporter of OLED technology for small panel devices, and from the standpoint of profitability, SDC could make a higher return on small panel displays on a m2 basis than it could on large panel LCD displays.
In 2016 SDC began converting some of its older Gen 7 LCD capacity to OLED and in 2017 shut down additional older fabs in South Korea, sold equipment to Chinese panel producers, and leased the facilities to affiliates.  As SDC added small panel OLED capacity it found interest continued to build for small panel OLED displays with Apple (AAPL) releasing its first OLED iPhone, the iPhone X in late 2018.  Firmly convinced that Chinese large panel LCD producers would continue to build capacity regardless of short or mid-term demand, SDC continued to push forward with its large panel reduction plans, culminating in 2020 when it sold its remaining large panel LCD plant in Suzhou, China to Chinastar (pvt) for over $1b US.
SDC has been converting its larger (Gen 8.5) LCD fabs in South Korea to OLED over the last two to three years to small panel OLED and one for its new QD/OLED large panel production line, and has additional idle capacity for QD/OLED expansion should the technology become in demand.  What remains is SDC’s last large panel line in Asan, South Korea, and that was kept open at the request of parent Samsung Electronics when large panel prices increased as the COVID-19 pandemic began to spread.  While the operation of the fab was likely profitable for Samsung Display during the large panel price increases that began in July 2020, those prices peaked a year later and have fallen quickly to pre-pandemic levels.
This puts SDC back in the same position it was in in 2020, that of competing against the Chinese in the large panel market, and likely making only a small profit or no profit while doing so.  As the aggregate price of TV panels is only 7.5% above the lowest point during the last 5 years, SDC sees little need to continue to compete in that business and will likely end that last production fab this year.  Samsung Electronics buys all (other than what it still gets from SDC) of its TV panels from other suppliers and while faced a difficult times during the pandemic related price increases, is now taking advantage of the price declines, without the burden of the losses at SDC that such declines caused in the past. 
While there will always be large panel LCD price cycles, Samsung Electronics can use its buying power to exert price pressure on outside panel producers, who clamor for Samsung’s business to fill their capacity, while SDC operates in the OLED world that has completely different demand characteristics.  While it has been a bumpy road over the last year for both Samsung and Samsung Display, the logic behind SDC’s original decision to exit the large panel LCD space seems to be proving out, leaving them little need to remain in the large panel business.
 

For the first month this year large panel sales were down 3.9% m/m and down 0.8% y/y, better than the 5 year average of -6.0% m/m.  Large panel display industry shipments were down 4.6% m/m for January and up 3.8% y/y but better than the 5 year average of -8.7% m/m.  Shipments for all product categories were down m/m in January, which follows both the aggregate shipment trend and the large panel sales trend for the month.

As we have large panel pricing data and a forecast for March pricing, Figure 1 overlays LCD large panel pricing over large panel sales, which gives an indication as to the expected trend in large panel sales through the end of March.  While the projection also depends on the accuracy of the March forecast, it would seem that we should continue to expect the industry to see declining sales in February and possibly in March.  While each panel producer has its own sales characteristics, we can see monthly sales data for AU Optronics (2409.TT) and Innolux (3481.TT), (Figure 2) which reinforce the downward trend scenario, given the release of negative m/m sales in February.
A bit more concerning is Figure 3, which shows the y/y change for each LCD large panel production region.  While South Korea has been negative for over a year as Samsung Display (pvt) winds down its large panel LCD production and LG Display (LPL) reduces same, Taiwan producers are now seeing revenue lower than one year ago and the trend for Japan and China large panel display revenue remains negative.  China has been the fastest growing region in the large panel display space, averaging 48.9% y/y growth (monthly average) last year, but saw only 10.7% y/y growth in January, bringing the region bringing February into the possibility of being the first month that China has not seen y/y growth in large panel display revenue since February 2018.
 

COVID-19 is out of the news a bit as the Russian invasion of Ukraine takes precedence, but while mask mandates come off in the US and the new case rate declines after the spike seen earlier this year, China maintains a very strict lockdown policy toward COVID-19 outbreaks in order to keep the virus contained in the country of 1.448b people.  Major Chinese cities are particularly sensitive to outbreaks and Shenzhen is no exception, as the 6th largest city in China and has been given the name’ “China’s Silicon Valley” due to the large concentration of technology companies that have headquarters or operations in the city.  Huawei (pvt), Oppo (pvt), TCL (000100.CH), Tencent (700.HK), and ZTE (000063.CH) are all based in Shenzhen and Taiwan based Foxconn (2354.TT) has its 2nd largest manufacturing campus in the city.
On Monday the Shenzhen government imposed a one week lockdown across the city, shutting down production at plants for what is expected to be a week.  Many of the companies have instituted production shifting plans to compensate for such draconian COVID responses from local governments in China, but even well planned shifts to production facilities outside of the area or the country take a toll on production goals.  The good news is that the first quarter is usually the weakest for the CE space, which means there is time for any shortages that might occur to be made up before the busy 3rd quarter, but drilling down in the display space, there is one panel producer that would be exposed to such a shutdown more than any other and that is panel producer Chinastar (pvt).
Chinastar has five LCD lines in Shenzhen, which represents 75.5% of its current monthly LCD panel (m2 basis) output.  Tianma (000050.CH) also has a fab in Shenzhen but is only a small part of global LCD production while Chinastar’s Shenzhen fabs represent 36.9% of global monthly LCD panel output.  Assuming 7 days of shuttered production and a day on either side to bring lines up and down, that would represent ~10% of Chinastar’s 1Q Shenzhen production, or 3.69% of LCD capacity in 1Q as a worst case scenario.  While we expect the fabs are not completely shut down, but Chinastar only has a Gen 8.6 fab in Guangzhou and the one it purchased from Samsung Display (pvt) in Suzhou as alternatives, so it will be difficult for Chinastar to move much of its large panel production to other fabs outside of Shenzhen.
While looked at across the 2022 year, this will be a small bump in the road, however it could influence large panel pricing if panel buyers are caught short in the near-term.  Large panel prices have been declining but those declines have been slowing as large panel prices neared pre-pandemic lows and cash costs.  With Chinastar’s issue, there is the possibility of a bump in LCD large panel prices that would not be based on long-term demand and could give a false sense of a potential recovery in large panel prices.  We certainly don’t rule out a large panel price recovery this year, but it would have to be one based on real demand rather than one based on a short term perturbation in the LCD production cycle of a single city.   According to the Taiwan tech press, most of the Taiwanese companies operating in Shenzhen will see little effect from the lockdown, although we take much of that as a bit of nationalism toward China given they will not recognize Taiwan as a sovereign country.

As we have noted in the past, while Taiwan represents ~27.6% (4Q ’21) of large panel display industry revenue, the three Taiwanese panel producers are required to report monthly sales figures while panel producers in other regions and countries typically report those figures quarterly.  This gives a bit of granularity to shorter-term trends in the display space and justifies tracking those results.  We note however that February is an odd month for panel producers generally, as the month is short and contains the Chinese New Year holiday, which is a time when factories run at low levels as workers travel home for the holiday.  As a result February seasonality sales and shipment data varies considerably between producers, as AU Optronics’ (2409.TT) 5 year average m/m February sales are down 0.9% while Innolux’s (3481.TT) February average is down 13.5%.  We believe looking at the chart trends is a better way to see how Taiwan panel producers are performing during the early months of the year as seen below.  We note that AU Optronics reports only total sales while Innolux and Hannstar (6116.TT) report sales and shipments.
In the case of AU Optronics and Innolux, sales have fallen to levels at or below February 2021.  Both panel producers generate considerable revenue from TV panel sales (generally between 30% and 35%) with the remainder from IT products (notebooks, monitors, tablets) and small panel (smartphone, watches) sales.  As large panel prices have declined steadily since last July, the effect has been obvious on sales, but only within the last 2 – 3 months have panel prices for IT products begun to decline.  Those panel products had helped to offset the decline in TV panel prices until recently and now have begun to pressure overall sales as those panel prices weaken.  As this trend has continued through February, first quarter results are likely to be under pressure, although the declines in TV panel prices have slowed somewhat as IT panel price decreases increased.  As panel producers spent much of last year shifting production away from TV panels and toward IT panel production, this makes the industry more sensitive to IT panel price declines.  Hannstar is primarily involved in producing small panels so the effect of TV and IT panel price declines is less obvious however component shortages and weak demand for smartphones has also affected Hannstar’s monthly sales trends this year.

​While Chinese panel producers continue to add Gen 8 and Gen 10 LCD capacity, Taiwan’s two large panel producers have differing opinions as to how to meet that competition.  Both are relatively conservative, with both AU Optronics (2409.TT) and Innolux (3481.TT) not having added new or additional fab capacity since 2018.  They differ however in their forward plans as AUO is adding capacity to its L6 line in Kunshan, and has announced plans to build a new Gen 8 LCD fab at a later date, which we expect will be in 2025, while Innolux has taken another path and decided not to build any new LCD fabs, but to modify its older fabs to produce higher margin products such as fingerprint sensors and mini-LED backlights.
Innolux has been using its F1 – TPO (2002) Gen 3.5 fab to produce capacitive fingerprint sensors and is expecting to expand that production to biometric identification sensors for credit cards and has announced a collaboration with Super-C Touch (pvt) and Starttek Engineering (pvt) to develop Innolux sensors for the Indian market in 2023.  India has plans to have 80% of its 1.2b inhabitants register their fingerprints over the next five years in order to boost the mobile payment industry.  Innolux says it has also converted another Gen 3.5 LCD line toward the production of Mini-LED backlights and plans to release its first 75” LCD panels using its own Mini-LED backlights next quarter.

Having a single supplier of a key component is a dangerous position to be in any industry, but when it comes to OLED displays it is even more dangerous.  The most important process step in the production of OLED RGB displays, the type used in almost 750m small panel OLED displays last year, is the deposition of OLED materials which need to be precisely patterned across the display.  With pixel densities averaging almost 400 pixels/inch in recent smartphones, and each pixel being composed of at least three sub-pixels, the placement of each ‘dot’ of OLED materials is done by depositing materials through a FMM (Fine Metal Mask), a thin sheet of INVAR, a nickel-iron alloy that is very stable during temperature changes.  The mask can be thought of as a screen, although the accuracy of the space between the ‘holes’ has to be <±15 µm and the position accuracy is <± 2µm.
The masks (called ‘sticks’) are arranged in a frame that that covers half of a substrate, usually 4.9’ x 6.1’ (29.9 ft2), which enters the deposition chamber.  The OLED materials are heated in a vacuum until they vaporize and are pushed into the chamber and settle on the substrate wherever the FMM holes occur.  Given that the temperature inside the chamber is similar to the temperature needed to vaporize the materials (as high as 500⁰F), the mask material must be able to remain rigid, however while the OLED material is deposited through the mask holes onto the substrate, it also clings to the chamber walls and the mask itself.  This means the chamber must be cleaned periodically to avoid collected materials falling on the substrate and the mask must be replaced after ~1,000 uses.  As a 15,000 sheet/month OLED line runs ~500 sheets/day (1,000 half sheets), such a line would use ~30 masks each month at a cost of between $50,000 and $125,000/month/line depending on the mask’s precision.
More important than the cost of the masks is the fact that there are few manufacturers that can produce such masks at the tolerances needed, with the industry being dominated by Japan’s Dai Nippon (7912.JP), the sole supplier to Samsung Display (pvt), the largest small panel OLED producer, which leaves SDC beholden to Dai Nippon’s material sourcing, production, and pricing.  There are a few other suppliers, such as Toppan (7911.JP) and Darwin Precision (6120.TT), but they tend to deal with Chinese OLED producers and do not meet SDC’s quality standards.  It seems that SDC has decided to evaluate FMMs from a local South Korean firm, Poongwon Precision (371950.KS) to see if their masks can qualify as an alternative to Dai Nippon’s product.  Not only will the quality have to be matched but the price will have to be low enough that SDC will risk its relationship with Dai Nippon by adding a 2nd supplier.
While such qualification processes take time, we expect that even with commercial level qualification SDC will limit a new FMM supplier to a single line or fab in order to make sure the product stays consistent, while using that leverage to negotiate price with Dai Nippon.  Given that the mask business is one with high barriers to entry and Poongwon has been producing same for roughly 5 years, there are few alternatives for SDC if this relationship does not pan out and the company will remain constrained by a single supplier relationship for all of its small panel OLED production.