​Chinastar (pvt), a subsidiary of parent TCL (000100.CH) has indicated that it expects its latest LCD fab project, T9 to achieve mass production earlier than expected.  The original plan for the fab was to begin mass production in early 2023, which the COO now believes will take place before the end of 2022, a pull in of at least three months based on their schedule.  The new fab has a planned capacity of 120,000 sheets/month using a 2250 x 2600 sheet format (Gen 8.5) and has been designed to produce IT products using an IGZO backplane, a technology that Chinastar has considerable experience with.
While we had originally modeled April 2023 at the start date for the fab, we had planned for only relatively small production until July ’23.  With the expected pull-in, we move the start date to October 2022 and a serious ramp beginning in January 2023. , and additional lines scheduled in 2023 and 2024.  While pull-ins and push-outs are fairly common in the display space, we expect the optimistic view that panel producers have developed over the last year, a result of the rapid increase in large panel prices, will push timelines on new capacity projects further.  While large panel prices may flatten and even decline, most panel producers remain in a profitable position, and the mindset does not change easily when profits are accumulating.
That said, big capacity projects like T9 can have a significant impact on the supply/demand curve and as such projects enter production overall production utilization can take a hit.  If the IT panel market shows any signs of a real demand slowdown, and not one caused by shortages or the end of a shortage cycle, it will take some time before panel producers are willing to change their capacity increase schedules, and the industry could easily settle back into its more typical boom/bust pattern.  Many panel producers believe its different this time due to COVID-19, which we admit has been true, but human nature is such that it reverts back to norms as soon as possible.  Whether that is later this year or next will impact those decisions but not until it is likely too late to make substantial changes.  Alea iacta est – loosely translated, passed the point of no return…

Suddenly display prognosticators have changed their tune.  While panel price increases have lessened over the last few months, August is shaping up to be the first month where some panel prices will decline, although there seems to be considerable disagreement as to by how much.  Monitor and Notebook panel prices are still likely to increase, but TV panel prices will not and again with considerable differences between the amounts, the trend is decidedly different than in previous months, and while negotiations between panel buyers and panel producers continue, we notice that even over the last week, TV panel price estimates have declined a bit further.
Accurate panel prices are almost an impossibility as there are so many types in each panel size category, so our angle has always been to average as much of the data as possible to come up with a more normalized price.  This is especially helpful when the spread between low and high panel prices for each size increases, a result of both customer allocation at the producer level and double ordering.   While the spread had narrowed for many panel types and sizes in 2Q, the spread is beginning to widen again, indicating less buyer willingness to accede to the price demands of panel producers. 
That said, experience says when panels have been in relatively short supply, smaller purchasers tend to get allocations below targets, so when demand from large customers begins to slow, panel producers can fill those smaller customers and extend a high level of utilization despite lower demand.  We expect this was the case in July and could help to insulate panel producers from the effects of weaker demand for a month or so, but the sustainability of such a situation is poor and those producers focused on TV panel production will take the hit relatively quickly.
As this month there seem to be an inordinate number of panel price prognosticators willing to share their thoughts as to August panel pricing, we have put together early averages, although we expect they will change quickly as rumor and innuendo about orders circulate further.

In March (3/15/21), (3/16/21) we noted a number of supply/demand scenarios that built out our data on unit volumes for a number of CE products.  While this exercise was more of an attempt to correlate a number of data sources, it turned out to be far more focused on demand than supply, given the unusual circumstances that the COVID-19 pandemic has caused.  Now that we have actual data for the first two quarters of the year, we went back to see how each of the four scenarios performed, with the purpose not of proving whether we were right or wrong but to try to assess whether the 1st half results actually fit into any ‘normal’ scenarios.
The demand data was constructed from four CE categories, notebooks, monitors, TVs, and tablets, which encompasses almost all of large panel display production.  Smartphones, AR/VR, watches, and most foldable devices are not in the calculations as they are considered ‘small panel’ devices that are produced under their own demand characteristics.  Small panel production in terms of units, represents between 65% and 72% of the total, but between only 16% and 19% of panel revenue, and despite the high unit volumes, is a small part of total panel area, with TV representing ~70% of panel production area.
Each of the supply/demand scenarios was based on 2020 data and seasonal norms and then tweaked by adjusting the ratios.  The four scenarios were named according to the balance between supply and demand and the outlook each schema had on a quarterly basis.  In this note we are only looking at the demand side of the scenario, although the results below reflect the performance of the entire scenario.

In terms of unit volumes, the best of the four scenarios was low by 3.7% and the worst low by 21.3%, with all four predicting unit volume lower than actual 1H unit volumes.  There was no consistency in 1Q/2Q results in the scenarios, with two performing better in 1Q and two in 2Q.  Scenario 4 (Avalanche), which represented a steep drop in demand resulting in a substantial capacity oversupply, performed the worst across the board, but performed the best in the TV category specifically, predicting shipments within 1% and 2% of actual results in 1Q and 2Q respectively, while seriously underestimating shipments in all other device categories.  Scenario 1 (Slow Burn), which represented slightly weaker demand and modest oversupply in capacity, predicted monitor unit volume the most accurately, within 2.5% to 3.2% of actual, but joined all three other scenarios in mis-forecasting notebook unit volume.  The table below summarizes the results with each scenario.

​In terms of these scenarios, while we certainly look at the monthly and quarterly results, these scenarios were built around full year results, and we expect 2H to be both different from 1H and different from the ‘typical’ 2H, so we reserve judgement on how well the scenarios performed until we have full year data.  That said, on a general basis we underestimated the strength of demand in the 1st half, particularly with notebooks, which have continued to outperform our expectations as to unit volumes, but the 2nd half presents its own challenges, some of which are a continuation of those seen in the 1st half and others are new, such as the potential for declining TV panel prices.  We will update again after we have actual 3Q data, but being off by 16.4m panels out of 441.4m is not too bad…

There was one statistic that stood out in June concerning the large panel display market.  June was the first month that saw negative y/y large panel shipment comparisons since March of 2020, 15 months ago.  While this is not something unexpected, as we have noted the potential for this occurrence a number of times, we had been expecting such comparisons to go negative first in July.  June display industry sales came in at $7.47t US, 3.25% lower than our expectation but still up 42.6% y/y, and while large panel ASP’s have been rising since last May, June was the first month where they saw a decline, albeit a small one, down 0.1% with the average large panel ASP monthly increase being 3.6% this year and 3.2% over the last 12 months. 
We expect panel producers will pass off the shipment and ASP issues as a function of component shortages which have limited shipments, but while we believe there are certainly component shortages that are limiting panel shipments, it is very difficult to discern whether a change in demand has also affected both industry characteristics in June.  As we noted above, we would have expected slower shipments in July, but not a lower ASP as we had expected overall panel prices to continue to rise, albeit at a slower rate than in the past year.  

Panel prices rose in June, as we previously noted, but are expected to see more modest increases this month, as indicated below, with TV prices almost flat.  We expect large panel shipments to be flat to down in July, which will put additional pressure on panel producer results, particularly TV panels.  While there could be an improvement in shipments in August as back-to-school inventory buys might be needed, both component shortages and seasonally slow summer sales will likely keep the potential increase to a minimum.  That said, we do expect modest price increases for notebooks and monitors, in August but not for TVs, which would keep large panel display sales flat for many panel producers.
In June many large panel producers saw negative m/m sales growth, with AU Optronics (AUOTY) in Taiwan, and Chinastar (pvt), HKC (0248.HK), and CHOT (pvt) in China, the exceptions.  The purchase of Samsung’s (005930.KS) Suzhou LCD fab is helping Chinastar’s sales, and both HKC and CHOT are expanding capacity, however BOE (200725.CH), China’s largest LCD panel producer saw negative m/m growth in sales, similar to South Korean and Taiwan large panel producers, and we would expect those trends to continue into this month.  We exclude those panel producers that are primarily small panel focused.

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.”

All three primary Taiwan panel producers have released June preliminary results, which finalizes 2Q sales and shipments.  For the two Taiwanese panel producers that have broad offerings in large panel products (AU Optronics (AUOTY)) and Innolux (3481.TT)), total sales were up 5.7% and 0.4% m/m, while still showing strong y/y results in June, up 57.1% and 30.3% respectively.  Hannstar (6116.TT), which is primarily a small panel producer, saw its sales for June decline by 11.1% m/m but are up 81.6% y/y.  For 2Q AU Optronics and Innolux saw q/q gains of 15.3% and 11.2% while Hannstar saw a smaller gain of 2.3%.  All three saw substantial 2Q y/y gains of 50.6%, 39.5% and 120.6% respectively.

Panel prices, particularly large panel prices continued to rise through June and for the entire quarter giving panel producers sales momentum regardless of unit volumes, and as the quarter progressed, panel producers continued to shift production toward the categories seeing the most rapid increases and the highest demand.  Given that capacity at the three panel, producers in Taiwan did not change appreciably during 2Q, price increases and mix were the two significant variables.  That said we calculated weighted averages using industry mix norms to calculate the average price increases seen for those with more typical mix, which would exclude Hannstar in this case, given its focus on small panel production.  Based on the weighted averages for 2Q, sales should have increased by 13.2% q/q, which indicates that AU Optronics outperformed what would be our ‘industry norm’ while Innolux was a bit shy.

As panel producers head into the 3rd quarter however, there are questions as to how panel demand and panel pricing will play out for the remainder of the year.  As we believe large panel sales make up over 85% of total industry panel sales, the real focus is on panels for monitors, notebooks, and TVs, which have seen very significant price increases over the last year as noted above.  As June large panel total panel industry data is not yet available, we make an estimate of $7.72b for June, which would put 1H at $42.894b.  Based on share of total sales averages for 1H and 2H, 1H sales should represent 47.6% of full year sales, leaving 2H to generate 52.4% of total yearly large panel sales.  This would imply 2H large panel sales of $47.22b, and put the year at $90.113b, and almost 42% increase over last year. While this is certainly not an impossible scenario, especially given the compounded effect of large panel price increase over the last 6 months, it would entail a continuation of those price increases throughout the year and that is a bit more of a problematic assumption. 
While demand on an overall basis is certainly better than last year’s 1H, when COVID-19 lockdowns were in full effect, we expect overall CE demand will slow in the 2nd half.  The basis for this supposition comes from an improving global COVID-19 contagion rate due to vaccines, leading to less onerous social practices, the higher prices of CE devices generated by rising panel and component costs, the demand pull-in that has been driving increased volume, and some inventory over-stocking that has inflated demand.  This is offset by component shortages, which can allow panel producers to maintain progressively higher panel prices, but in the face of slower or no demand growth, we expect some of those shortages to lessen as the year progresses. 
As we have noted previously, we are beginning to see anecdotal evidence of slowing CE demand and perhaps a less frantic inventory management philosophy from brands and while we expect this will take some time to filter through the CE space, we note that even assuming typical seasonality, y/y comparisons will become progressively more difficult and we expect investors to look more closely at individual CE companies, rather than make assumptions that a rising tide lifts all boats.  Of course timing is everything and COVID-19 is still a significant variable, but the CE space looks more like shades of gray rather than black and white today.
 

​The Board of Directors has approved a plan to add 30,000 sheets/month of capacity to Hannstar’s (6116.TT) Gen 5.5 fab in Tainan, Taiwan.  The fab, which currently has capacity for 140,000 sheets/month is Hannstar’s only fab, which produces primarily small to medium panels for smartphones, tablets, automotive, and industrial applications.  While this is a relative small project considering the global scope of small panel LCD production, it is the first time Hannstar has added capacity since they began LCD production in 2005 and represents a 23.1% increase in capacity when completed.
The project is expected to cost a bit over $600m and will be self-funded, with construction beginning this month.  While no specific completion date has been given we expect the fab to be open in 1Q 2023 and given that the current lines are what could be classified as Gen 5.3 (a bit smaller than typical Gen 5.5), rather than the more typical Gen 6 that is used for most small panel OLED production.  Hannstar will likely see less competition for TFT tools than might be the case if competing directly with OLED TFT expansion demand.
Hannstar is primarily a small panel producer with an emphasis on displays 10” or below, but over the last 18 months the company has been able to increase its production of larger panels, with some falling out of the small panel category into what would be large panel production.  Hannstar has been increasing the number of products between 10” and 19”, although most are 15.6” or less, with automotive and industrial displays being the biggest application for such panels.  Hannstar is looking to increase its production of larger panels to reduce its dependence on smartphone applications, which have seen less growth than IT (10”+) applications over the last 18 months.  While Hannstar’s large panel revenue has varied from ~$33m/month to $17m/month this year, likely driven by specific order flow, the company believes it has the ability to expand its IT panel customer base and generate more revenue through this capacity expansion.
While we understand Hannstar’s desire to reduce its dependence on smartphones and feature phones, the overarching question remains as to whether the expansion in IT products seen as a result of COVID-19 will remain as robust as it has been, and given that the new capacity will not come on line until 2023, will Hannstar be able to fill the new fab at  that timeHannstar be able to fill the new capacity at that time?    OLED has been a growing part of the small panel display market and while much of OLED’s impact has been with smartphones, the penetration of OLED into IT products has been increasing rapidly, with Samsung and Apple as the drivers.  There will always be a market for LCD displays below 25”, as industrial displays do not always need the higher specifications that OLED displays would bring, but there are some very viable small/medium sized competitors and as can be seen by examining Japan Display, a former leader in the small panel display field, that is struggling to remain viable after its primary customer, Apple, shifted iPhone displays from LCD to OLED.  After 15 years of facing the ups and downs of the small panel space, Hannstar is taking on a higher risk profile than in the past.

​Japan Display (6740.JP) has agreed to sell its KOE Taiwan based automotive module business to Taiwan based Wistron (3231.TT) for $72.2m (tentative) in order to reduce its fixed cost burden.  Japan Display will continue its manufacturing relationship with Wistron, who has been the company’s mobile display module manufacturer for over 10 years, and through the sale will now outsource the manufacturing of its automotive and industrial display products, although the design and sales of those products will still be done by JDI.  We believe JDI’s automotive business represented ~25% of sales in fiscal (March) 2021, with the company’s expectations for that to increase to over 40% in fiscal 2022.  As we believe JDI’s automotive design and sales business will remain with the company, that goal still seems within reach.
Wistron is a top 5 EMS that was spun off from Acer (2353.TT) and will easily absorb the JDI module business, continuing JDI’s plans to reduce fixed costs under the company’s 2020 restructuring plan.  That plan included the sale of its Hakusan LCD production plant to Sharp () and an ‘unnamed’ JDI customer (assumed to be Apple (AAPL)) for $675m last October, in order to push the company toward positive operating results, which it has not seen since 2014.

For the Month of May large panel LCD sales rose 4.4% m/m and are up 55.5% y/y.  Large panel LCD shipments declined by 0.3% but are up 2.7% y/y.  Among panel producers there were some standouts in May, with AU Optronics (AUOTY) seeing a 10.7% jump (m/m) in sales, and both HKC (248.HK) and CHOT (pvt) seeing a 13% m/m increase in sales, however larger players, such as BOE (200725.CH) and LG Display (LPL) were flat and up 4.3% respectively, weighing a bit on the totals.  Samsung Display (pvt) was flat for the month but is operating only one large panel LCD fab currently. 
Large panel unit volumes have been relatively flat this year, with only a 2.6% spread between high and low, excluding the one month unit volume spike in March, which increased the spread to 8.5%, however sales have increased 12.9% across the industry, with rising panel prices accounting for much of the sales outperformance.   In Fig. 1 we show large panel unit shipments, and while the scales are not the same for both, it does illustrate that sales are becoming increasingly dependent on price increases this year, which is further illustrated in Fig. 2 which shows that price and sales trend lines are converging. 
We note that 2H shipments are typically 13.0% (5 yr. avg.) higher than 1H, although removing 2020 (COVID-19) brings the average down to 10.2%, so one would assume that large panel sales will increase in 2H by considerably more than that amount, making the assumption that large panel prices continue to rise.   While we do expect large panel prices to continue to rise into 3Q, we believe the rate of increase is slowing as demand, particularly for TV slows in North America and China.  Fig. 3 shows TV panel pricing and ROC, with the ROC trending down and actual aggregate pricing falling below the trend line.  We expect that lower panel pricing ROC trend to continue in 3Q as demand for TV slows and demand for IT products levels off.  While there will be short-term anomalies, we expect that trend to continue through the end of the year.