We have read a considerable amount of Chinese tech propaganda concerning China’s push into the OLED display space and how, ‘with hard work and an undying devotion to China’s persistence and manufacturing expertise’, they have unseated the South Korean ‘dynasty’ and are poised to take over the OLED space, and while China’s OLED producers have made considerable progress toward becoming major contenders in the OLED display space, there are some points to be made.

• First, no matter who was the market share (units of dollars) in the early days of OLED display production, they faced a loss of share as others began to enter the niche.  With Samsung the leader in the small panel OLED space, especially the small panel flexible OLED space, the company was bound to lose share over time, which has been the case.  If China’s BOE, Visionox (002387.CH), or Tianma, had been the first to market, they would have faced the same fate.
• Second, on a unit volume basis, Samsung is still the leader in terms of unit shipments for small panel flexible OLED displays. In fact in only one quarter over the last 3 ½ years did Samsung’s unit shipment ratio fall below 2x that of the producer in 2nd place. 
• Third, while panel producers that produce both LCD and OLED displays rarely break out segment profitability, we expect there have been only a few instances when Chinese OLED producers were profitable for two consecutive quarters.  Samsung Display (pvt), at least on an operating basis, has been profitable for the last ten quarters, although we note that what remained of Samsung Display’s large panel LCD business likely had a negative effect on the early quarterly numbers and the most recent quarters would be influenced by SDC’s QD/OLED large panel business to a degree.

All in, yes, Samsung Display will continue to face increasing competition in the small panel flexible OLED space but remains the overall leader.  Perhaps in the future, one or more Chinese OLED producers will overtake SDC in terms of unit volume, but we expect it will be some time before any Chinese small panel OLED competitor becomes more profitable than SDC over more than a quarter or so.  With 1 new small panel OLED fab and three large panel OLED fabs under construction in China (one additional fab in planning stage), and 2 large panel OLED fabs under construction in Korea, it will be a race to see who can fill those fabs profitably, especially given the current weak state of demand for CE products, but we doubt SDC will lose its position as the most profitable small panel OLED display producer in the near-term.

China has proved to be a tough competitor in the display space, over time, replacing South Korea as the largest producer of LCD displays, however much of that competitive success comes from the fact that the Chinese government has been a very substantial supporter of the Chinese display industry through subsidies that have covered both construction and operating expenses.  We do give credit to Chinese display manufacturers who have taken full advantage of said subsidies and used it to expand capacity when given the opportunity.  As the subsides reduce construction costs, therefore reducing interest costs on loans, reduce operating costs, along with a substantial lower wage base and cost of living, have given China’s display space the ability to outgrow and out-compete South Korea’s LCD display industry.
South Korea’s response, going back a number of years was to reduce its exposure to the generic LCD panel market and emphasize OLED displays and any product that might be considered ‘premium’ or even ‘non-generic’, which has helped Korea to maintain leadership status in the OLED display space.  The US however has no display manufacturing, although it is the world’s 2nd largest consumer (North America) of products that contain display panels (LCD or OLED), and while APAC consumes 54.7% of products with display panels, North America accounts for 22.9% of that market (2022), with Europe at 11.6%.  That said, we do not believe that the US is well suited to host generic LCD display manufacturing, given the salary and cost of living differential with China.

​While the US has made very significant attempts to curtail China’s semiconductor industry growth through onerous trade restrictions and licensing, as the US does not compete directly with China in the display space, there has been little effort by the US to step on China’s dominance of the display industry.  In fact, in July of 2018 the Trump administration targeted $34b worth of Chinese goods, including TVs, laptops, and smartphones, and in September of the same year added tariffs on an additional $160b in Chinese imports that pointedly expanded the range of tariffed CE products.  In January 2020 $120b of those tariffs ended with the signing of the Phase One Economic & Trade Agreement in January 2020.
More recently, there has been talk on Capitol Hill of restoring tariffs on TVs and possibly TV panels that are made in China and considering that China has ~57% of the world’s LCD display capacity, any new tariffs on LCD display panels would add to the price burden already imposed on consumers due to the rising prices of LCD panels themselves.  With ~80% of TV sets (global) produced in China, new tariffs on TV sets would have a similar, if not greater effect on CE prices.  Our issue is that there is no benefit to placing tariffs on Chinese LCD panels or TV sets other than from a political standpoint, and the US consumer will bare the burden of the fiscal cost.  Perhaps it will put the US in a stronger negotiating position with China that will potentially reap other benefits, but especially during a period of inflation and rising panel prices, it is hard to justify same, especially as the US has no generic LCD production industry.
Last year both houses of Congress passed legislation known as the American Competition Act of 2022, a bi-partisan bill that would allocate $250b over 5 years toward R&D, manufacturing, workforce development, and the development of a local supply chain, with a key provision being a 40% tax credit for investments in domestic manufacturing of advanced display technologies.  While the bill passed both houses, it was never enacted as the differences between the bills passed in the Senate and the House could not be ironed out, and the definition of advanced display technologies was left unspecified.   As tax credits are involved, it would eventually be up to the IRS to set the legal definition, but the bill still sits in committee as both sides try to come to terms on the details. 
It would seem more productive over the long-term to use the same subsidies that have been used in China (at least for construction), rather than the financial burdens imposed by new tariffs, but we are but lowly taxpayers and consumers who have little knowledge of the inner workings of the government, especially when compared to the career politicians that remind us regularly that “it’s not as easy as you think.”
Here's the relevant section of the Act:
Section 1002. Advanced Manufacturing Production Tax Credit.
(a) In general—Chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:
(f) Advanced manufacturing production tax credit--
(1) In general—In the case of a taxpayer who manufactures an eligible component in the United States and sells the eligible component to an unrelated party, the taxpayer shall be allowed a credit against the tax imposed by this chapter in an amount equal to 40 percent of the cost of production of the eligible component.
(2) Eligible component—For purposes of this subsection, the term ‘eligible component’ means any component that is--
(A) manufactured in the United States.
(B) used in the production of an advanced display technology; and
(C) not manufactured in the United States by a related person of the taxpayer.

Chinese panel producers tend to be an optimistic lot, at least publicly, likely somewhat influenced by the fact that much of their funding comes from the state and local governments, who need to remain positive about their investments.  As listed Chinese companies are required to post at least a summary of conversations they have with analysts and investors, and maintain an on-line Q&A presence, there are times when one can get some insight into what the company is saying publicly, and at times a bit of nuance toward what they are really thinking.  Two weeks ago China’s largest LCD and OLED panel producer BOE (200725.CH) posted its analyst and investor meeting summary, which, if nothing else, gives some indication as to what the company’s near-term plans are based on.  Here is a summary of BOE’s most recent meeting with analysts and investors (139), and a few comments.

Industry Overview

• In the 1st quarter the market supply and demand gradually stabilized.
• LCD TV panel prices started to rise, driven by increased demand and promotional activities.  We would say ‘seasonal demand’ and an emphasis on promotional activities.
• Panel manufacturers adjusted production rates based on demand and focused on healthy development and dynamic control.  Not sure that ‘dynamic control’ is anything more than ‘build to order only.’
• Overall inventory levels were normal, and the industry is expected to gradually recover.  At least back to where it was before the pandemic.

Company Performance

• The company maintained its leading position in the semiconductor display industry across various applications.  BOE holds the largest share (31.5%) of global large panel LCD sales (March) and represents 57.7% of China’s large panel LCD sales.  With LG Display (LPL) #2 at 18.5% global share, BOE is certainly the leader in the large panel LCD space.
• The flexible OLED business showed steady growth, with a target of over 120m shipments for the year. Here is where BOE shines.  The company saw ~4% q/q flexible OLED unit growth in 1Q against an 18.4% decline for the industry and saw an 81.4% y/y unit increase in flexible OLED volume, against industry y/y flexible OLED growth of 27.2% (units).  For perspective, Samsung Display (pvt), the industry leader saw a 20.6% decline q/q and a 2.9% decline y/y.
• Short-term performance was affected by industry and macroeconomic conditions, but the company maintained resilient operations.  On a relative basis, yes, as BOE large panel LCD sales were down 2.7% q/q and down 30.0% y/y while the industry was down 15.9% q/q and down 36.1% y/y in 1Q.
• The company implemented lean management, resulting in improved capital structure and reduced expenses.  Companyspeak

Q&A

• Regarding industry production rates, the industry has been adjusting production rates to achieve a heathier supply-demand balance.  LCD TV panel prices have rebounded, and the production rate is expected to gradually recover.  Based on current estimates for demand and LCD panel capacity, and using an overall 85% utilization rate, there remains considerable overcapacity in the LCD space, so it is hard to call such a situation ‘a healthy supply-demand balance’.  We understand that demand estimates are likely at their lowest at this time of year and in current economic circumstances, but even with some demand improvements, LCD overcapacity will likely remain an issue this year.
• The company’s flexible OLED business has shown significant growth, and the shipment volume is expected to continue to increase.  The company aims to improve the proportion of high-end products and expand into new areas.  We give credit to BOE here as they have done a good job increasing OLED display volumes, particularly with Chinese brands.  They will have to push hard to challenge Samsung Display’s Gen 8 OLED push and a similar one from LG Display, but if nothing else, they are persistent.
• The MLED business is positioned as an important platform for the company’s next generation display development, focusing on various applications in backlighting and direct display.  BOE produces a number of LCD modules with it own Mini-LED backlighting, which puts those panels in the premium category and at a higher-than-average ASP, so we expect this segment will grow throughout 2023, but will also be somewhat dependent on the Chinese economic picture, which is a bit less vibrant than expected late last year.  It’s good business for BOE but higher-end products are in the sights of almost every panel producer and that leaves a concern over the necessity to compete on price to gain a foothold against SDC, which could impact MLED margins.
• The company’s financial performance in the first quarter improved due to cost reduction measures, lower asset impairment losses, and increased product prices.
• The company’s future capital expenditures will focus on strategic planning including enhancing OLED competitiveness, IoT solutions and upgrading manufacturing capabilities.  While BOE has been a bit more careful about capex, despite continued funding from the government, they will have to start spending on Gen 8.6 OLED capacity before the end of the year if they want to get a place in Apple’s OLED IT conversions in 2024.  The company has been working toward the development of Micro-LED displays for wearables, which could become a selling point for the Apple watch down the road, but in the interim they will have to continue to spend on LTPO small panel capacity and IT OLED.

All in and corporate speak aside, BOE’s investor meetings gave only an indication of what management is thinking about the prospects for the current year, particularly for the LCD display business.  Seemingly more confident about the growth of their OLED business, likely as Chinese brands see the company as an alternative to more expensive Samsung displays, and a growing relationship with Apple, albeit with the drama associated with that relationship.  As BOE learns more what it can and cannot do as to its Apple relationship, the company should see its small panel OLED business expand, but the OLED IT space is more of an open field, giving BOE the opportunity to gain an early foothold if it both has the expertise to build out a Gen 8.6 OLED fab that has a reasonable yield and that they can meet Apple’s typically stringent specifications, which have proved challenging for BOE in the past.  That said, they are certainly the most successful Chinese panel producer and have a dominant share of the global large panel LCD space.  Whether that proves ultimately the correct positioning over the next few years, however, is still an open question.

We have mentioned a number of times that over the last few quarters Samsung Electronics (005930.KS) and LG Display (LPL) have been negotiating over a panel supply deal for OLED displays.  Samsung, whose display affiliate Samsung Display (pvt) has exited the LCD TV panel business, has been looking to expand its premium TV offerings, and while it offers its own Quantum Dot/OLED TVs, production is limited to one 30K fab, leaving Micro-LED TVs at the top of the line, albeit far out of reach for almost all consumers, the company’s Mini-LED/Quantum Dot lines, a small QD/OLED line, and Samsung’s Quantum Dot only LCD TVs.  With the premium Tv market the only TV segment expected to show positive y/y growth this year, building out that segment is quite important currently and likely necessary for the next few years.

While the definition of ‘premium’ in the Tv market varies, we define the ‘premium’ TV market as sets that are 55” or larger and cost $1,000 or more, and the lines shown in the graphic above all fall into that category, with a few models just below the ‘premium’ cut as shown in the table below.  As the Micro-LED line is not really a consumer-friendly priced item. We would expect Samsung, if a deal were concluded, to insert the ‘New OLED’ line at the same price points as the QD/OLED line to increase the volume of OLED offerings at those price points, and consequently, those price points are roughly equal to LG’s (066570.KS) own G3 OLED TV line, so price competition between the two rivals would not create further friction.
The big question however is Samsung’s margins on the new OLED line, much of which would be determined by the agreed-on price for the panels, which was said to be the contention throughout the earlier negotiations.  As Samsung is expected to purchase ~2m units next year, increasing to 3m and 5m in the following years (unconfirmed), and perhaps up to 1m panels this year, they are looking for a substantial discount to LGD’s normal transfer price.  LG Display has been running its WOLED fabs at less than full utilization so far this year, and such a deal would give a needed boost to OLED utilization rates that have dragged down profitability in recent quarters.  However rumors that Samsung is demanding prices below those offered to LG Display’s parent, which would likely cause a bit of bad blood between parent and affiliate.  That said, LG owns almost 60% of LG Display, so it’s an odd situation for LG.
While news services have picked up the supposed ‘movement’ in the negotiations, this would not be the first time a ‘deal done’ signal was given (or assumed) from local South Korean media.  While such a deal will have benefits for both parties, there is considerable emotional skin in the game for Samsung, who decided in 2013 that producing large RGB OLED panels was not a viable process.  In fact, they were correct in that assumption, as LG Display does not use and RGB patterning process in its OLED panels, but one encompassing creating a white light with a combination of OLED emitters and using a color filter to create the necessary red, green and blue sub-pixels., which reduces the brightness of the display.  Over the years LGD has adopted a number of improvements that have offset some of that issue, but the current-day management at Samsung must bow to the fact that the 2013 decision has given LGD a distinct advantage in the OLED TV space, as both the sole OLED TV panel supplier and LG’s over 50% share of the OLED TV set market.
It will be challenging for Samsung to come up with a marketing plan that continues to sell its QD/OLED technology while extoling the virtues of LG Display’s OLED TV panel vision, and not degrading the company’s Mini-LED/QD technology, which Samsung has been championing since 2021.  Of course that is what the marketing guys get paid for, so we expect rounds of advertisements providing little empirical information about the pluses and minuses of each technology, and more on why whatever the technology is, Samsung’s is better than others.  Samsung’s smartphone and TV divisions were ‘ordered’ to find solutions to improve earnings after 1Q results led to an 18% decline in sales and the lowest operating profit the company has seen in many years.  Tv division sales were down 14.8% y/y, so there is considerable pressure to expand the premium set business and bring up margins from upper management, so likely less face saving, and more sales will be the holiday mantra this year.
 

Back in the early 1900’s Sharp (6753.JP) was a metal fabricator who came to fame when the company’s founder developed the first ‘global mechanical pencil’, but saw that business destroyed in a 1923 earthquake.  Moving the business to Osaka, Sharp began producing Japan’s first radio sets, and by 1953 was producing TVs, calculators, and microwave ovens 10 years later.  Sharp had developed LCD technology for its calculator business, opening a Gen 1 line in 1991, but began investing heavily in LCD technology in the early 2000’s, building a Gen 4.5 fab in 2003, a Gen 8 fab in Kameyama in 2003, and the world’s first Gen 10 fab in Sakai, in 2009, which was able to produce, at the time, the world’s largest TV, a 65” model more efficiently than any existing LCD fabs.  Unfortunately, the global economic crisis and the strong yen around that time wreaked havoc on the cost of Japanese produced panels and CE products, and Sharp’s financials continued to deteriorate until 2012, the company’s 100th birthday year.
After months of negotiations and a major reduction in price after continued stock price declines, Foxconn (2354.TT) purchased a 66% stake in Sharp for $3.5b (original price was ~$6.25b), while the Chairman of Foxconn took a 50% personal stake in the Sakai Gen 10 fab[1], with the capital expected to go toward maintaining the LCD business and funding Sharp’s development of OLED displays.  As Sharp had been an early adopter of IGZO (Indium Gallium Zinc Oxide), a backplane technology used in large OLED devices, the plan was sound, but never fully materialized, although the company was the first to produce a commercial 8K TV as early as 4Q ’15, a dubious honor currently, but under the guidance of Foxconn, Sharp became profitable in 2017.
Sharp was not an exception to the display industry’s woes in 2022, and just reported its first loss since the Foxconn takeover (for the year ending in March ’23).  While sales were up 2.1% y/y, Sharp reported an operating loss, with 84.6% of the loss a write-down of assets ($1.64b), of which 85.4% was against the company’s LCD business, 9.6% against the OLED business, and 4.9% against Sharp’s other businesses. The company indicated that lower selling prices, leading to lower sales, FOREX, and the heavy losses in the display business, were the reasons for the loss, while mix and cost reductions provided some offset, and while management emphasized that all segments except display saw sales increases in fiscal 2022, only one division saw a positive operating profit.
Company guidance for fiscal 2023 (3/24) was a bit darker than other CE companies stating “We expect the demand environment to remain weak in response to a reactionary decrease in demand from the COVID-19 pandemic, global inflation, high energy costs, geopolitical issues, and other factors.  At the same time, carbon-neutral, DX, and other sectors will remain strong.  We are seeing an easing related to the impact of semiconductor shortages, high raw material prices, and rising logistics costs; however, the future remains uncertain.”  The company cited a 2023 goal of achieving net profit at all costs, through cost reduction, and the building of the company’s brand businesses, predicting a 0.5% increase in y/y sales and a modest profit (0.4% margin).  This assumes a 34% improvement in display profitability, a 32.7% improvement in Sharp’s brand[2] business profit, and a small (+2.9%) improvement in the company’s device[3] business operating profitability.  Inventory levels across the company and more specifically in display have fallen since their recent peak in 2022, but against an average level during the three years before COVID (2017 – 2019) of ¥226.3b and an Inv./Sales ratio of 1.19, there is still some trimming that needs to be done before the company could be considered ‘lean’.
While the Foxconn management has done a good job of removing the blinders that were on the pre-sale Sharp management, panel producers overall were unable to avoid the effects of both a return to pre-pandemic demand and catastrophic inflation.  While the company did not break out the Sakai Gen 10 plant from others, we expect the large panel LCD TV business to see a recovery in 1H as prices for TV panels have gained ground, but we also agree with management’s assessment of demand in a post-pandemic environment, and now that inventory has been returned to more normal levels, demand will be the key to more than a ‘back-to-baseline’ year.


[1] Stake was sold back to Sharp in 2022 for $296m by Gou, making it part of consolidated income.

[2] Brand Business includes appliances, energy solutions, TV, and mobile devices.
 

[3] Device business includes display, IoT, and semiconductors.

OLED displays are exceptional in that they have infinite contrast, the ratio between the blackest black and the whitest white.  They typically have a wide viewing angle, averaging ~140⁰, while LCD displays have a more narrow viewing angle of ~80⁰, meaning the contrast is reduced less as you move away from the center of the screen (Figure 1).  The colors tend to be ‘saturated’, meaning OLED materials have narrow color ‘peaks’ (Figure 2).  Phosphorescent OLED materials are more efficient than LCD displays that need a backlight, they are thin and flexible, and OLED materials have a very rapid response time (typ. 0.01ms for OLED vs. 1 – 16ms for LCD).

​OLED & LCD Color Filter Spectral Comparison - Source: Transmission Spectra – Journal of Display Technology

Based on the above, every display used in consumer devices should be an OLED display, providing the best possible image to customers, but there are issues, the largest of which is cost.  While in theory, OLED displays require no backlight as they are self-emitting, and for smaller OLED displays, do not require a color filter, both of which are necessary for LCD displays, the BOM should be lower for OLED display products, but that is not the case.  In a typical OLED fab, OLED materials are vaporized in a heated chamber and pass through a Fine Metal Mask, essentially a very fine screen, that ‘places’ the OLED material in precise positions to form an RGB pixel on a substrate.  Masks must be very thin and very rigid in order to avoid ‘shadows’ that will cause the materials to be misplaced, but as more holes are added to produce higher resolution displays, the masks become more expensive and subject to gravity, causing misplaced pixels, leading to low display yields and an overall higher display cost.

​Slot & Slit Type FMM detail - Source: Toppan

Over the years display equipment engineers have come up with some alternatives to mask-oriented OLED deposition, particularly ink-jet printing, and while there have been a relatively small number of IJP OLED displays made available commercially, the process, in terms of directly printing OLED materials, has its own limitations.  In order for OLED materials to be printed, they need to be dissolved in a solvent, and that can change the properties of some OLED materials, and as the materials must remain in liquid form in order not to clog the ~50,000 nozzles that are small enough to drop 6 pico-liters of material for each sub-pixel (a pico-liter is equal to 1 trillionth of a liter), with a typical 4K RGB OLED display requiring 24,883,200 droplets.   In high resolution displays, where the pixel density is high, a drop that is even a bit too large can cause the material to migrate into another pixel, which leaves IJP to some of the less precise deposition layers, such as encapsulation materials, rather than OLED material deposition itself.
There is an alternative process that is currently being developed by a number of display producers that is based on photolithography, rather than mask-based deposition.  Japan Display (6740.JP) has been developing a maskless photolithography process called eLEAP (Environment positive Lithography with Maskless Deposition, Extreme long-life, low power, & high luminance, Any shape Patterning) that promises 2x the brightness of mask-based deposition displays, 3x current display lifetimes, while reducing 150,000 tons of CO2 emissions/year.  JDI has plans to commercialize the process by 2025 in partnership with China’s HKC (248.HK), and rumors that Samsung Display (pvt) has decided to test JDI’s process. 
A typical (not that there is a typical process) OLED display being processed without a mask would go through the following steps:

1. Clean the substrate.
2. Coat the substrate with OLED material (one color)
3. Apply resist and cure.
4. Pattern vis plasma etch.
5. Strip resist
6. Repeat steps 2 – 5 for each color.

With semiconductor photolithography stepper tools, theoretical line width down to 1um could be patterned, which would lead the way to higher resolutions that would prove extremely challenging for mask-based deposition, but there are drawbacks, a number of which need to be solved before the process becomes scalable or cost effective.  As the process indicated above uses an open-mask or sputtering system, the cost/m2 should be a bit lower than a FMM system, but deposition tools are only produced by two or three manufacturers and can cost upwards of $100m, depending on size and complexity.  Add to that the cost of an i-line or DUV stepper, reticles, and photomasks, and you have added anywhere from $25m to $120m to the start-up cost of such a line, all of which goes into the panel cost.
There are other issues that need to be addressed, particularly the potential effect of the resist on what are typically very sensitive OLED materials, and the effects of UV curing radiation.  There are also questions concerning how the plasma etch process itself might compromise the integrity of the material stacks and a host of other questions that would influence the commercialization of such a process.  So it comes down to physics and chemistry, and then a hefty dose of process engineering to make this concept into a viable display that can compete with other OLED deposition methods, and other existing or potential display modalities.

​One point that will help is that display manufacturers are at least familiar with the photolithography process, as they produce the thin-film transistor backplanes that drive all displays, but those processes are well-known and mature, while photolithographic deposition is relatively new.  The good news is that this month Chinese OLED panel producer Visionox (002387.CH) announced that it is introducing ViP (short for Visionox Intelligent Pixelization), what the company says is the world’s first metal-mask free RGB self-alignment pixelation technology, and while that ‘first’ may be contested by JDI, the Visionox process claims to be able to increase the brightness of a ViP display 4 times over metal-mask OLEDs, increase the device life by 6x, increase the light-emitting area from 39% (mask) to 69%, and increase the pixel density to over 1,700 ppi, with flagship smartphone displays at between 400ppi and 500ppi.
Visionox has indicated that it has produced medium sized samples based on the technology and is ‘rapidly advancing the work related to mass production’, which, when completed will be applied to AR/VR, wearables, phones and even TVs, and has even begun to build a ViP batch production line in Hefei.  While there is still much uncertainty regarding the development and production timeline, the fact that two panel producers are seriously considering the technology is likely to expedite R&D efforts and possibly overcome some of the existing obstacles, and then it will become a direct cost issue if it is to become a practical and profitable process for high-resolution displays.  A few years to go, but the fact that it would not require building a new display infrastructure certainly gives one hope that photolithographic deposition can join the other display processes and technologies that are in operation or on the horizon over the next few years.

Taiwan panel producers saw sales in April decline modestly in April, with the exception of Hannstar (6116.TT), who saw a 5.3% increase m/m, although down 14.2% on a y/y basis.  Both AU Optronics (2409.TT) and Innolux (3481.TT) saw m/m declines in sales of 3.2% and 2.9% respectively, while April y/y results were down 8.2% and 17.5%.  We note that Hannstar is primarily a small panel LCD producer, although they saw a significant jump in their large panel sales, which are primarily IT panel sizes ranging from 10” to 15.6”, while AUO’s and Innolux’s large panel LCD production is more oriented toward TV panel sizes, with AUO at 86” and below while Innolux is in production of LCD panels as large as 100”.
After a bounce in March, following a very weak January and February, LCD sales from Taiwan producers seems to have tailed off a bit, after panel producers increased utilization rates, which had been unusually depressed through the 4th quarter of last year.  With consumer demand still weak, we expect the March improvement was just to fill inventory levels to seasonal norms, and the lack of follow-through in April seems to indicate the same.  That said, with TV panel prices having increased 7.7% in April, we would have expected a slight increase in overall panel sales, although AUO has reduced its exposure to the TV panel market from over 40% in early 2018 to ~14% currently. 35.7% in Innolux’s sales are from TV panels currently, while Hannstar has no exposure.
As we have stated previously, while there will be ups and downs relative to panel production this year, the industry has more LCD Tv panel capacity than it needs currently, so any sustainable rally in production would need to be demand based, and currently there seems to be little reason to expect same this early in the year.  If global economic conditions improve as the year develops, a better 2H is certainly possible, especially7 after the poor early 2023 results, but as can be seen in Figure 1 - Figure 4, the industry was not particularly seeing robust CE demand before the COVID-19 pandemic began.  All in, we continue to expect a modest recovery in LCD panel sales, with ‘modest’ the significant word, and the LCD TV panel capacity reductions expected from LG Display (LPL) have already been figured into the supply/demand equation.  Short of an end to the war in Ukraine, and a quick end to inflation, we expect only a seasonal lift going forward.

Large panel shipments and sales were, to say the least, quite poor in January, with large panel shipments of 48.7m units, down 23.4% m/m and down 35.4% y/y.  To put that in perspective, typically January large panel shipments are down 5.8% m/m (5 yr. avg.), with Jan. ’23 being the lowest January shipment level since 2016.  Sales of large panels in January were $3.72b, down 23.2% m/m and down 43.0% y/y.  Again to put that into perspective, January large panel sales are typically down 5.8% m/m, with January 2023 being the lowest large panel monthly sales since February 2020, the first month of the CVID -19 pandemic.
When broken down by category, notebooks saw the largest m/m shipment decline while monitors saw the least, down 18.4%, as shown below, with some categories getting near or below February 2020 lows (pandemic month one), and others, like TV shipments going back to 2012 below a lower number was seen, and monitors going back even further.

On a regional basis in January, China held the largest share of the large panel LCD market from a sales perspective, with a 53.7% share, above the average of 48.7% the region held for 2022.  South Korea saw its share decline from an average of 23.8% of large panel LCD sales (2022 average) to 18.4% in January ’23, as Samsung Display (pvt), ended all large panel LCD production and LG Display (LPL) continued to limit production of same.  Taiwan and Japan both remained relatively consistent with 2022 averages in January, at 22.5% (Taiwan) and 5.4% (Japan) respectively.
While South Korean panel producers continue to lower or end their exposure to large panel LCD production as they formulate plans to expand OLED capacity, from a sales standpoint, China’s revenue share continues to rise, despite the drop in overall large panel LCD revenue.  Chinese large panel LCD suppliers saw the smallest revenue growth decline in January (↓12.4%) of all regions and similarly, on a y/y basis saw among the lowest y/y decline in sales (↓39.3%), with only Japan  marginally better at ↓35.0%.
All in it was a bad month for large panel LCD producers, al unexpected.  We expect February to remain weak, with March the best month of what will be an overall weak quarter for panel producers.  As we have previously noted, panel producers are hoping to raise some panel prices in March as inventory levels for some products have been lowered, but we expect the price increases will be met with resistance from CE producers who have yet to see any substantial signs of consumer demand returning.  We do expect that panel producers will be able to get some price increase to stick, particularly in TV panels where new model releases  require some inventory build, but the 2nd quarter is far from clear as to consumer demand, so we expect better results from the panel space, but no clear-cut return to the profitability levels seen in late 2021 or early 2022. 

​Display panel producers tend to be an optimistic lot, likely a function of the fact that they have billions of dollars’ worth of equipment sitting on the factory floor that needs to be running at near full capacity to generate profitable results that garner praise and bonuses.  Chinese LCD panel producers are among the most confident, and while some of that optimism is a function of the need to stimulate government agencies to provide capacity expansion and operating subsidies, there is also considerable national pride, much of it well-deserved, in that China was able to achieve dominance in the LCD panel production space against some formidable competitors in South Korea, Japan, and Taiwan.  Behind that conviction however, and this is certainly not limited to Chinese panel producers, is a bit of blind hope, fear of failure on the world stage, and a healthy dose of self-promotion, that sometimes leaves out some necessary details.   
BOE (200725.CH), China’s largest display producer, is, as a listed company, required to disclose meetings that it has with investors and analysts, and the content discussed.  Earlier this month the company disclosed a summary of the last meeting of this type it had on February 2 of this year, essentially a visit to the company’s production fab in Mianyang with 12 local and global sell-side firms, and a Q&A session.  While there was considerable discussion as to the company’s performance in 2022, to us, the most relevant conversation concerned the prospects for 2023, but we summarize BOE’s most relevant comments on 2022/2023 below, using the company’s own words when possible, along with some clarifying points (red):

• According to 3rd party consultation and institutional data, all five major display categories saw declining sales in 2022. (Monitor, Notebook, TV, Tablet, Mobile), while automotive, AR/VR, smartwatch and special displays remained stable. 
• Utilization rates, which sank to about 60%, saw a slight increase starting at the end of 2Q 2022, in order to meet end of the year promotions, but remained at relatively low levels, reducing the annual production of large-size LCDs. Notebook, Monitor & Tablet panel production declined in 2022, but TV panel production was up 0.4%.  Relative to pre-pandemic levels, 2022 shipments for many CE categories were up.
• The overseas promotion season performed well in the 4th quarter, and some brands were conservative as to purchasing strategies to control inventory.  The inventory of TV brands continued to decline in the 4th quarter and the overall inventory is approaching a healthy water level. We question the characterization of 4Q performance as while global 2022 holiday sales were up 6.7%, and 5.3% in the US, electronics and appliance sales (US) were down 5.7% (US), and while global sales were up, volumes were down, with inflation providing the sales boost.
• In terms of inventory, according to data from 3rd party consulting agencies, the low utilization rate of panel producers continues to be lower than the shipment area, and the inventory level drops significantly.
• Looking forward to 2023, according to the forecast of consulting agencies, the demand for large-sized LCD products will return to growth, especially the large size TV market.  Still too early to tell, but TV unit volumes are expected to be flat to down, so growth will be inflation related or limited to specialized TV segments.
• In terms of prices, under the influence of supply-side capacity control, in the 2nd half of 2022, the supply/demand ration of large-size LCD panels has fallen sharply in the 1st quarter of 2023.  The prices of mainstream-sized products remained relatively stable.  Correct so far.
• Semiconductors show that the industry will return to normal low-peak seasonal fluctuations, and thanks to current low inventory, in the 2nd quarter of 2023, as the industry turns from weak to prosperous, LCD products will have opportunities to usher in a rise in both volume and price.  TV panel producers are pushing for higher panel prices in March, but demand remains weak.  Still a toss-up as to whether TV set makers will buy into the potential panel price increase.
• Faced with greater depreciation pressure, the performance of OLED and other businesses continued to be under pressure. In terms of LCD, we will focus on high-value fields such as automotive, e-sports, and AR/VR, and enhance the overall profitability; significantly increase product shipments in terms of OLED and increase high-end production. The proportion of product shipments has achieved breakthroughs in the mass production of innovative products such as vehicles and foldable notebook computers.  The cost of building small panel OLED capacity, particularly for participation in Apple’s (AAPL) iPhone supply chain, will continue to pressure overall OLED profitability for BOE and thus far success has been relatively limited (see our recent notes), so volumes will have to increase considerably, without major price degradation for a quick OLED profitability turnaround, a difficult task for this year.
• In terms of market share, according to data from 3rd party consulting agencies, it is estimated that the company has the largest market share of the traditional five mainstream LCD products, while flexible OLED shipments continue to grow, with the company having the number one share in China and the world (in LCD).  We will continue to increase shipments of high-end in-vehicle products, where the company’s share in 3Q ’22 was 16%, the highest in the world.
• Entering the 1st quarter of 2023, in the traditional off-season, the industry is expected to maintain a low utilization rate.

Q&A
Question 1: What is the development trend of the flexible AMOLED industry in 2022?
In 2022, the overall flexible AMOLED industry shipments-maintained growth.  The penetration rate in the field of smart phones cand notebook computers continues to increase.  New application fields such as vehicles have emerged, but affected by weak terminal consumption, shipment growth rate was lower than expected; at the same time, some customers shipped entry-level products.  With the obvious low-price competition, the price of entry-level flexible AMOLED products has sharply declined.  Penetration is broadening but is still small relative to smartphones.
Question 2: How is the company's flexible AMOLED business progressing?
In the face of many adverse effects of the market, the company basically completed the annual shipment target, maintaining more than 30% compared with last year, especially the increase in the proportion of high-end products, in vehicles, notebook computers, etc.  However, due to the pressure of depreciation and the production of Android customers, the profitability of the products has dropped sharply, and the performance of the company's flexible AMOLED business still suffers pressure.
In 2023, with the continuous growth of the company's flexible AMOLED business, and the continuous increase in client share, it is expected that the company's flexible AMOLED products will maintain substantial growth; at the same time, the company will continue to increase shipments of high-end products, improve product portfolio profitability, promote LTPO, folding, automotive, IT, etc, striving for the leading position in the flexible AMOELD business.
All in, BOE’s dance over some of the more relevant points, such as capacity additions in both LCD and OLED, and the company’s (not 3rd party) expectations for demand growth in 2023, left us wanting, although we expect such a public forum was not the place to be asking difficult questions, if one wanted to be invited back, as these, and those asked at other recent meetings with analysts were all soft-ball questions. But the lack of specifics as to what the puts and takes will be for BOE this year, and a heavy reliance on 3rd party data, seemed to indicate that BOE was either not disclosing its actual forecasts or that it does not have them.  Even the company’s platitudinous comment from its last analyst meeting gave little toward what gives the company confidence to use the terms ‘rationality’ or ‘reasonable range’.  Here’s the previous quote:
“As the influence of uncertain factors is gradually digested, the industrial development pattern will gradually return to rationality.  The price of products will fluctuate within a reasonable range mainly due to the influence of low and peak seasons.”

Yesterday we mentioned the extremely poor January results from one of the two large panel LCD display producers in Taiwan, Innolux (3481.TT).  The other, AU Optronics (2409.TT) reported January results last night that were also weak, but not quite as weak as those from Innolux.  AUO reported January sales of 15.91b NT$ ($528.7m US), down 11.4% m/m and down 42.7% y/y.  Typically (5 yr. including 2022) January sales are down 20.6% m/m so from that perspective AUO saw better results, but being down 42.7% y/y shoouof as ‘good’.  While AUO does not report large and small panel detail, they do report total area shipped, which in January was 1.25m m2, down 18.8% m/m and down 37.5% y/y, which would imply that AUO continued to maintain or increase low utilization rates in January, an important point in understanding how display producers are reacting to the current demand weakness.  All in, AUO’s January monthly results were as expected to slightly better than expected.