​Last month TV panel prices were the focus of attention as prices fell for the 2nd month by over 10%.  We expected a continuation of that decline in October, which was the case, although a bit less than we had expected.  IT panel prices (Monitors, Notebooks, Tablets), which we had expected to be flat, were weaker than our estimates, which is concerning considering that panel producers have been shifting capacity toward IT for the last few months.  The panel price reductions in IT were relatively small, especially when compared to TV panel price reductions, but without price increases in IT to offset some of the weakness in TV panel pricing, the industry must see increasing overall demand or face declining sales.  Some panel producers have cut back large panel production to match lower TV demand which will help to alleviate some large panel pressure but will also impact margins in 4Q.  We expect a continuation of weaker TV panel prices again in November, which are now down 35.3% from peak but still up 40.5% from the late 2019 low.

​On an overall basis the large panel display segment, which includes both TV and IT products (excludes smartphones and wearables), which saw a 2.4% decline in sales in September, will likely see weaker results again in October.  Strength from Apple (AAPL), which has helped buoy the small panel OLED space will not do much for the large panel LCD market, so both utilization cuts and weaker panel pricing will continue to pressure October large panel display results.  The one positive for the display industry that comes from weaker demand would be logistics, and while costs continue to rise, the necessity to use higher cost transportation to meet delivery deadlines will be reduced.  While this would normally be beneficial to display margins, the increasing absolute cost of all transportation, regardless of type, might offset much of that benefit in the current environment, so we expect the net effect to be minimal.
 

​In a not-so-surprising move, Samsung Display (pvt) has begun the process of building out additional small panel OLED capacity with a new line that will become part of the A3 and A4 lines that are the mainstay of the company’s OLED mobile display production lines.  The new Gen 6 lines are expected to be built in the former L7-2 fab, a former LCD production line in Asan that SDC closed last year.  These new lines, which will be built out in two phases, will add to capacity provided by A4 and A4-1, with A4-1 being another line that was built in the shell of the former L7-1 LCD line.  The reason for the new fab is to supplement the production of small panel LTPS OLED displays (and some LTPO), which SDC had been producing on the A3 and A4 lines, however when those lines were updated to LTPO backplanes, those used by Apple, the production capacity was reduced.  When the new lines are completed, SDC’s combined A3 and A4 capacity is expected to be 165,000 sheets/month. 
The first line (15K) is expect to see equipment move in next year, which puts our production start in 3Q ‘2022.  The 2nd phase is estimated to start ~ one year later.  SDC is expected to spend ~$850m on equipment for the first line, which will also use some of the tools removed from the upgraded A4 lines, but as LTPO tools are more expensive than those for LTPS, the cost of the fab will likely be higher than a typical LTPS Gen 6 line.  SDC is pushing to capture as much of Apple’s iPhone business as possible, despite competition from LG Display (LPL) and BOE (200725.CH), and with the expectation that Apple will increase the number of iPhone models using LTPO next year, SDC must be able to guarantee Apple that it has the capacity to be the dominant supplier of LTPO OLED displays going forward.

​In a Q&A with investors, Chinese panel producer BOE (200725.CH) was posed the question below:
“The recent continuous decline in panel prices has fallen by more than 30%.  What is the impact of the panel price reduction on the company?  How does the company face the decline in panel prices?”
The answer is about as close to pure ‘company speak’ as is possible, with little direct information as to the impact of the panel price declines on the company’s financials.  Most entertaining was “structural adjustments” as a euphemism for panel price reductions, and the phrase, “The company maintains its judgement on the weakening of the panel cycle…” which gives little indication as to any adjustments to production, product development, etc. that the company might be making, falling back on the typical platitudes of ‘good products, customer structure, etc.’ and emphasizing that the company “still maintains a good level of profitability.”  In a follow-up question that phrase changes a bit to “believes that BOE can still maintain good profitability and strong elastic recovery even in a weak market.”
While BOE tends to be a bit more ‘talkative’ than most Chinese panel producers, when things get a bit more difficult, they rely on the same carefully worded corporate answer evasions that most companies fall into.  Here is the company’s answer to the question above:
“Hello!  After the semiconductor display has experienced a long period of prosperity, there have been some fluctuations in the current structure, which is mainly reflected in the TV field.  Entering the third quarter, due to congestion in shipping and rising logistics costs, which affected the willingness of downstream customers to stock up, the prices of TV products have undergone structural adjustments;  IT products have remained relatively stable thanks to better demand and supply concentration.  The company maintains its judgement on the weakening of the panel cycle, relying on good products, customer structure, and leading technology and product capabilities, and still maintains a good level of profitability. Thanks!”
Our point here is that during the upcycle in the display business the virtues of Chinese display companies were constantly extolled with adjectives like ‘glorious’, ‘wondrous’, and ‘triumphant’, essentially taking credit for what was by any measure, a singular set of circumstances that bailed out a cyclical industry that was doing little to plan for the future other than domination of an industry that more experienced participants were looking to move away from.  While the Chinese display industry might seem to have a coherent plan shaped by a government that is interested in promoting long-term growth and sustainability after spending many billions to grow capacity, in reality there is considerable competition between Chinese display producers, as well as provincial and local governments, with financial carrots held out to display producers who are looking for both a home for capacity and a reliable source of funding.  With the motivation of growth, usually led by increasing capacity, the driver for the industry, we wonder if China’s display industry is able to respond to changing conditions as easily as it responded to an increase in demand last year.
Rumors that BOE has cut large panel LCD production have surfaced, with what we calculate as an 11.1% capacity reduction against maximum stated production capacity in October, and while the company will not confirm or deny such production changes, when queried about such production cuts, BOE’s response was as indicated below, which seems to be a tacit confirmation, or at the least an indication that some response to the decline in panel prices has been made.:
“With the increase in new technologies of the company’s production lines, investment in new product research and development, and product structure adjustments, it will lead to changes in the volume of production (to) enhance competitiveness to ensure that the company’s overall profitability is maximized.”
We admire Chinese panel producers for their drive and focus, but once the projects have been completed, factories built and local workers employed, there seems to be little planning as to how companies would deal with anything other than an ever increasing demand cycle, and only when things are near collapse does the state government step in with plans for absorbing weak entities into state monoliths.  The constant push to be the biggest, produce the most units, and unseat whoever is the dominant player is a worthy goal if it is based on building a profitable business that can remain profitable in all or most parts of typical cycles, but we see little in the way of anticipating the possibility that demand might not always be growing and while we do not expect companies such as BOE to readily reveal how they might be dealing with a reduction in demand for a substantial portion of their business, we hope that somewhere there is a playbook for how the company (and others) will deal with the down-cycle.  

Displays are devices that rely on electronics to refresh the image on the screen fast enough that raid changes in the image do not appear ‘jerky’, leave ‘trails’, or ‘smudges’.  This is especially important when watching fast moving images, such as in gaming or sports, and in the past the electronics in most displays refreshed 60 times each second, which seems like it should be sufficient.  However as the quality of images increases under 4K/UHD, those potential artifacts become more obvious, giving smartphone display designers the task of improving those types of images.  In order to do so, some display producers have doubled the refresh rate so that the screen is completely redrawn twice as fast as before, at 120 Hz.  This means that the movement of an object across the screen will be redrawn twice as many times as before, filling in the potential spaces that might have caused blur or other artifacts at 60 Hz.
This is an ideal solution in that it directly addresses the problem, however it does come with a negative.  Since the electronics is now drawing the screen twice as often as before, it consumes more power, and in mobile devices this means it reduces the time between battery recharging.  There are tricks that can help, such as ‘adaptive refresh’, which looks at the resolution of each image and adapts the refresh rate to that resolution, meaning that a higher resolution image would refresh at 120 Hz, while a lower resolution image, such as a static one or a news feed, would refresh at a much lower rate.  By adapting to the image quality, the display can conserve power, rather than being at 120 Hz for all resolution images.
This is a big selling point for displays, especially smartphone displays, as increasing battery capacity (usually along with size) is a difficult function is compact smartphones, so any way in which a smartphone can increase the time before charging is a big plus to users.  While 120 Hz refresh and adaptive displays are available from a number of smartphone brands, along with squeezing in bigger batteries, Apple has been particularly enamored with the idea of 120 Hz displays, and has employed then m in the iPhone 13 Pro  and the Pro Max.  While Apple did not detail test results, we have just seen the results of a test of the iPhone Pro Max as to how it would perform against other similar type phones as to battery life and the results are positive.  Here are the top contenders according to Anandtech.com:

​All in, even with differences in battery size, it seems that Apple’s processor, which is responsible for sampling the images and setting the refresh rate, does a better job at power efficiency than others, and Apple will eventually convert all of its iPhone displays to LTPO backplane technology which will add to the display’s power efficiency, as Samsung has begun to do, but the Apple hardware, despite a 13.1% drop in battery life vs. operating only in the 60 Hz mode, has already offset much of the higher power draw.

​We have mentioned the expansion of OLED into notebooks and monitors often over the last year as Samsung Display (pvt) and parent Samsung Electronics (005930.KS) try to stimulate that business into one with dedicated capacity and high volume customers.  Both can see that the growth of OLED in the smartphone business, while robust in terms of units and share, will slow overall as penetration rates reach almost 60% next year and competition continues to increase, particularly from Chinese small panel OLED producers.  While the share for individual Chinese small panel OLED producers is relatively small compared to Samsung, China’s largest LCD producer BOE (200725.CH) has been relentless in pursuing Apple (AAPL) to enter their small panel OLED supply chain, and has recently been given preliminary status, and in the OLED wearables market, primarily watch displays, almost every OLED producer has a few offerings, including a number of producers that are passive matrix OLED display suppliers..
Given that Samsung Display is essentially out of the large panel OLED business currently, the logical extension of their OLED business would be into what would be called medium panel sizes, the home of notebooks, monitors and tablets, otherwise known as IT.  Samsung is the dominant producer in the OLED IT space, and at the distribution level faces competition from China’s Everdisplay (688538.CH) and Japan’s JOLED (pvt) (monitors), and in the tablet space comes up against BOE, Chinastar (pvt) and EDO, but Apple’s adoption of OLED display technology in the Apple Watch in 2016 and its full adoption of OLED across the iPhone line, lead many to believe Apple will continue to push OLED technology further up the product line into the iPad and eventually to the Mac line.  That said, Apple is certainly not one to rush into a technology change and rumors about plans for Apple’s continued display transition to OLED are fraught with delays, technical considerations, and capacity issues, so in the interim Samsung is the leading voice in pushing OLED further into the IT space.
2021 has been a good year for OLED laptops, albeit a good year (thus far) for laptops in general, but there are a number of notable brands, particularly Asus (2357.TT) and Lenovo (992.HK), that have been marketing OLED laptops, and to a lesser degree, with a number of brands offering OLED displays as an option in a number of products.  The biggest issue for OLEDs in laptops is price, although we expect to see a number of models fall below $1,000 before year end, as on a general basis OLED displays are more expensive than LCD displays, particularly for sizes where volumes are relatively low, however that gap has been narrowing as LCD panel prices have been increasing through much of this year.  Samsung is evaluating its expansion plans for medium size OLED panel capacity and could add Gen 6 or Gen 8 dedicated IT capacity that would help to lower the cost of OLED IT panels, with the biggest risk to that scenario being the rate of Apple’s adoption in products larger than smartphones. 
Samsung certainly has been known to build capacity in anticipation of market growth, and can absorb some of that potential capacity itself (expectations are for 6m to 6.5m units this year and 10m in 2022, with 80% going to laptops this year), but Apple is not going to make a large jump until it is assured that its specifications can be met, and that could take time.  LG Display (LPL) is also a supplier of OLED displays for the iPhone and has built out dedicated capacity for Apple in the past, so there is competition for Samsung right from the start, but Samsung’s massive promotion machine seems to have been able to gain traction this year, and we expect will be working at full steam as we get closer to CES 2022.  There are competing LCD technologies, particularly quantum dot films used to enhance LCD displays and potentially Mini-LEDs, but Samsung is a leader in the QD space and can offer a wide variety of IT products that will satisfy almost any user without having to take a singular stance on any one technology.  Sometimes its good to be Samsung when you want something to be noticed.

More on OLED Laptops:
http://scmr-llc.com/blog/oled-laptops
http://scmr-llc.com/blog/notebook-whos-who
http://scmr-llc.com/blog/the-price-of-an-oled-notebook
​

As we have noted in the past, Taiwan companies are required to report sales results monthly.  There are two large panel LCD producers in Taiwan, AU Optronics (AUOTY) and Innolux (3481.TT) and one small panel producer, Hannstar Display (6116.TT), all three of which we have been tracking for many years.  Given the complexity of the current consumer electronics cycle, while we are most concerned with quarterly results from the panel industry, we are even more focused on monthly trends.  We do gather monthly data on all panel producers, but that data becomes available after the month is over, while the Taiwanese data is reported only a few days after the month ends, giving a fresher look at results, albeit limited to a small number of companies.
Both large panel producers, AU Optronics and Innolux have seen strong sales increases through the June/July period this year, and while results are still positive on a y/y basis, the momentum has slowed in 3Q.  AUO saw both a q/q and y/y increase in sales in 3Q while Innolux saw essentially flat q/q results but positive y/y comparisons.  We expect 4th quarter y/y comparisons to still be positive, but q/q might be more difficult as panel price increases for IT products have stalled and panel prices for TV panels have declined.  October is typically a flat month for panel industry sales (-0.6% 5 year average) and the 4th quarter is typically down less than 1%, but we would expect a bit more volatility this year.  While Hannstar is essentially small panel production only, the site is currently down so we will have to update full September and 3Q performance at a later date.

As the CE space heads into the 4th quarter CE brands are beginning to face the reality that TV sales and shipments might not meet the goals that were set for 2021 late last year.  Some brands face the realities of the CE space more quickly than others, but brands must adjust such goals with OEMs and assemblers, who have to make sure they have enough inventory to meet such goals, whatever they are.  This year has presented even more problems for brands, given the semiconductor shortages that have extended component lead times and pushed component ordering to a higher level than might be considered normal.
While demand in the IT space (notebooks, monitors, and tablets) has been strong for most of the year, recent weakness in notebook and Chromebook demand has some brands thinking twice about how they will order for the remainder of the year, but nowhere in the CE space has there been more volatility than with TVs.  A strong 4Q 2020 and a record 1Q 2021, seemed to set the tone for the TV set industry earlier this year with North America being the generator of much of the unit volume and sales growth, but much of that TV enthusiasm came from the 2nd (December 2020 – January 2021) and 3rd (March 2021) stimulus checks paid to US taxpayers. 
However between May ’20 and June of this year, TV panel prices increased rapidly as South Korean panel producers Samsung Display (pvt) and LG Display (LPL) began a program to lower or eliminate LCD large panel production.  While these plans were curtailed to a degree by the rising prices, component shortages gave TV set brands a reason to ‘pad’ orders, for fear that they would be given a smaller than normal allocation from capacity constrained panel producers.  TV set brands continued to be encouraged after the strong 1Q this year, but without a new US economic stimulus in 2Q, things started to unravel quickly.
Panel prices had risen so much at the panel level that set manufacturers could not keep from raising prices at the retail level, and while this was done slowly the cost differential was eating into margins. In 2Q TV panel shipments began to decline, with the industry blaming component shortages, although panel producers still insisted they were not significantly affected by such shortages, leading to our conclusion that ‘real’ demand was waning.  We believe there were two factors that led to the demand slowdown.  Panel price increases that led to consumer facing TV set price hikes, and the COVID-19 vaccine, which began to give consumers the ability to return to a degree of a normal lifestyle and reduced the need for TV viewing and replacement/upgrading.
TV brands however continued to hope that momentum would pick up in 2H as is typically the case, with only Samsung (005930.KS) lowering its expectations for full year shipments from 48m units to 45m units (6.25%).  TV panel shipments continued to slow, yet panel producers were still raising prices up until mid-year, when things began to deteriorate more quickly, with TV aggregate panel prices declining 27.2% (through September) from their peak in July, with expectations that further declines would add to that this month[1].  Shipments have also declined, and while final September data is not yet available, the trend line projection would continue that trend.
It seems TV set brands have now come to the realization that they might not meet the goals that they set for themselves late last year and have begun lowering expectations.  This sets off a reaction across the industry with panel producers first offering volume deals to maintain high utilization rates and then lowering production rates avoid overproduction.  Samsung has again lowered it’s TV set expectations for the year from 45m to 43m units (6.7% and 10.4% from original estimate), while other brands have made larger cuts after holding out for much of the year.  Not all TV brands express their target changes publicly, but just the four in the table below represent over 50% of TV unit volume currently.


[1] Preliminary expectations for October would indicate aggregate TV panel prices would be down 38.5% from the July peak by the end of this month,

The industry will redirect focus on any weakness by shifting attention to ‘premium’ or ‘advanced’ TV products like OLED, Mini-LED, or quantum dot set growth, but it looks like the inevitable result of returning to a more normalized demand cycle is lower expectations for the remainder of the year.  That said, there is some hope for at least a little help during the holiday season, and that would come from the lower panel prices that we have seen during the last 2-3 months.  While higher cost inventory will prevail, if TV panel prices continue to decline at the same rate as they have in August and September there might be a little room for holiday discounting at the end of the year, but much will depend on how quickly the high-cost inventory can be sold through (we are not overly optimistic) and lower priced inventory can be produced.  In order for this to make a significant difference to overall TV sales lots of other parts of the supply chain will also have to cooperate (silicon electronics, transportation, etc.) which is why we are not optimistic, but we thought it worth a mention.
“Change always seems impossible until it’s inevitable.” – Sarah McBride

Composite Small panel OLED display shipments for 2Q came in 7.9% better than expectations, led by stronger than expected shipments from Visionox (002387.CH) and Tianma (000050.CH).  Expectations for 3Q are for a 16.0% increase in composite shipments, led by a large increase in flexible panel shipments (+53.4% q/q) by Samsung Display (pvt), which is likely based on production for Apple (AAPL) and to a lesser degree at LG Display (LPL) likely for the same customer.  3Q on a y/y basis is expected to be up 16.5%.. 
We note that while Chinese small panel OLED suppliers are certainly gaining share this year, they are expected to lose share in 3Q as production for Apple at South Korean producers dominates the quarter.  While BOE (200725.CH) is producing small quantities of panels for the iPhone, we see only a small (8.1%) increase in volumes in 3Q.  That said, while Chinese small panel OLED volumes are still small, they continue to grow as yields improve and capacity is added, and while Korea still dominates the small panel OLED space, there are 5 small panel Chinese OLED producers, with almost all increasing capacity into 2022.

​As we have noted previously, there has been a shortage of driver and timing ICs for display panels.  This has limited panel shipments slightly but has built on itself with panel producers accumulating inventory levels that are above normal as a safety net for further potential driver/TCON shortages.  While this has proved to be a good solution for much of the year, the current slowdown in demand for notebooks and TVs would be a point where panel producer demand would slow, especially as foundry costs for such products continue to rise in 4Q, however monitor demand is still robust that panel producers have continued to place driver orders, which is expected to push driver prices up a bit again in 4Q.  With relatively high driver inventory levels at LCD panel producers going into 2022, we expect demand to slow a bit further and LCD driver prices to stabilize or weaken. 
At the smartphone level the situation is a bit different, with LCD smartphone demand waning and small panel producers working out of inventory.  Small panel OLED producers face similar demand challenges, however OLED drivers are limited to a smaller production base, which is expected to keep OLED driver demand strong and prices high for the remainder of the year.  While OLED smartphone expansion will continue next year, unless there is a resurgence in smartphone demand, we expect flat OLED driver pricing in 1Q ’22 and weaker LCD driver pricing during the same period.

​As we have noted in the past, while China’s stock markets are both volatile and in some cases a bit sketchy as to what passes for financial review, there are a number of systems where investors or potential investors can directly pose questions to listed companies.  Not all companies participate in such public programs and among those who do, not all participate as actively as others.  The larger companies tend to have someone (CFO, Board Secretary, IR, etc.) who answers the questions, but there is not requirement as to response time or depth of the answer, with many answers copied from earlier, similar questions.  That said, while the answers can be telling, both from a content standpoint, and from how carefully they are worded, the questions, even before they are answered, can give some indication as to the level of comfort or discontent that investors are feeling.
China’s largest panel producer BOE (200725.CH) is a company that is responsive to its investor questions, although they can accumulate for over two weeks until a response is given.  While we have reviewed some of BOE’s Q&A in the past, we always check to see what ‘state’ the current crop of questions is in, which gives us some indication as to how investors are feeling toward the stock and the industry.  Here is a sample of the current open questions to the company (We note that these are translations from the Chinese via Google (GOOG):

• “Your company has spent huge sums of money to build a factory, are there enough orders at present?  Are there any new breakthroughs in technological development?”
• “Hello Secretary of the Board.  Will panel prices rebound and rise in the fourth quarter?”
• “It is rumored that BOE’s performance in the third quarter fell sharply, which was less than expected and there are major risks.  Is it true?”
• “Power cuts have occurred across the country.  Has the company’s current production and operation activities been affected?”
• “Research and research institutions will release TV panel price forecasts for the next month that month.  I would like to ask: 1) Does the company’s TV panels produce according to orders, or do they produce first and then strive for orders? 2) Has the company’s TV panel shipping price been finalized in the same month? 3) How much TV panel production will the company reduce from October?”
• “I hope that the company can interpret the impact of power curtailment on the display business: 1) Are the panels, modules, and complete machine factories included in the power curtailment? 2) What are the impacts of the panel raw materials, the materials of the module section, and the complete machine section? 3)  What is the impact of power curtailment on the company’s overall display panel business?  Thanks!”
• “What does the company think about the transfer of the TV screen production line to the IT screen by the panel factory production line, will it cause the TV screen to stabilize, which will lead to a substantial price reduction of the IT screen?”
• “The company’s three OLED production lines have invested more than 130 billion yuan, but it seems they are still in a state of loss.  When will they be able to make a profit?”
• “The company has been deeply involved in the panel industry for many years and has accumulated more than 70,000 useable patents, with an annual R&D investment of 10billion yuan.  But where is the company’s technical moat?  Don’t expect BOE to become a patent hooligan, at least it can use patent barriers to prevent disorderly expansion of domestic production capacity, right?  Patents are not only used to ensure that they can produce, but also to hope that BOE can also pay attention to patent protection.”

While we left out the simplistic questions like, “Will you be profitable in the 3rd quarter?”, these questions, which are in some cases more sophisticated than might be expected, seem to indicate a growing concern among investors that the industry, and therefore BOE to a degree, is in turmoil as continuing panel price declines put pressure on sales and earnings while many panel producers are still expanding capacity. 
The last question, which was a suggestion that BOE use its patents to rein in other Chinese panel producers expansion plans was quite unusual in that it was asking BOE to be the ‘watchdog’ for the Chinese panel industry, rather than the state or local governments, who are still funding expansion plans and operating budgets.  We doubt BOE would take up such a roll, but local governments, which should more closely oversee provincial and regional expansion, have a vested interest in funding capacity in that it creates jobs and tax revenue, and do not have the expertise or insight to look at the industry as a whole.  While BOE has more of that expertise and insight, they have their own vested interest in promoting the industry and would likely be looked upon as a pariah if they began forcing competitors into court just to limit their ability to compete. That leaves the panel industry in China to police itself, and that has not worked all that well in other industries.