​Innolux (3481.TT), one of Taiwan’s two major LCD large panel producers reported January sales of 12.597b NT$, or $419.2m US, down 21.8% m/m and down 47.5% y/y.  Over the past 5 years Innolux has averaged a 9.2% decline in sales between December and January, putting January ’23 far below the average, although a bit better than the -24.9% m/m decline seen in January 2020 at the beginning of the COVID-19 pandemic.  Excluding 2020, the current results, in absolute terms, are the worst since we began tracking Innolux sales in 2010.  Large panel shipments were 7.75m units, down 20.5% m/m and down 37.5% y/y, the lowest since 2010’s 4.1m units, while small panel shipments were 20.51m units up 8.0% m/m but down 10.9% y/y, the lowest small panel unit volume since 2019.
Our focus on Innolux is due to the fact that listed Taiwanese companies are required to release month results which gives a bit more color into CE display trends than typical quarterly results.  While AU Optronics (2409.TT), the other major Taiwanese large panel supplier, we expect similar results as the display market heading into the Chinese New Year holiday was working toward continuing the reduction of inventory levels heading into 1Q ’23.  As January and February are typically seasonally weak, we expect little change in February, with March usually the first positive m/m sales period. 
As we noted previously, we expect large panel (TV) prices to remain stable or increase slightly over the next month, which could work toward a slight improvement in February results for display producers, but the question remains as to what drives TV set demand going forward, and for how long will panel producers maintain low utilization levels..  We expect little change in TV set or panel demand in 1Q, so the real question is whether display producer managements will cut prices again to stimulate 2Q sales.  We expect that will not be the case, and managements will deal with 2Q results above those in 1Q but still lackluster and rely on 3Q to bail out the 2023 year, under the assumption that the global economy will have recovered enough to support a more positive holiday season.  It is a lot to hope for, and there is much that needs to happen to make it work, but we are still quite early in the year which allows for that hope to remain alive.

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

Starting the new year, large panel LCD prices changed modestly, down 0.1% m/m, a far cry from the volatility seen last year (Jan ’22 was down 4.3% m/m), with only tablets seeing prices decline out of our forecasted range.  While not in our large panel data, mobile phone panel prices also dropped more than our expectations, as weakness in the smartphone sector saw the weakness continue into the new year.   While panel shipment and revenue data is typically a month behind panel price data, December panel producer sales were up 2.0% m/m (down 28.7% y/y), while unit shipments were up 3.4% m/m (down 20.6% for the year), pushing large panel overall ASP down by 1.3% for the month.  Tablet and notebook shipments were up 8.6% and 11.7% m/m in December, which would portend a relatively weaker shipment month in January, especially given the early Chinese New Year. 
We believe inventory levels for most IT panels are close to normal, as are TV panels, but demand is still an issue, which leads to a basically flat January in terms of panel prices, with some seasonal weakness in shipments through the Chinese holiday.  All in, a quiet start to the new year, and with few surprising announcements at CES earlier this month, little new product to attract consumers.  Samsung Electronics (005930.KS) is expected to release it next iteration of its Galaxy S flagship smartphone line in early February, but without something unexpected, such as a new Galaxy Fold model (The ‘Folds’ tend to be released around August), price will most likely be the deciding factor for most smartphone buyers, rather than new features.  

Tough times in the display business typically lead to utilization cuts and the eventual reduction in personnel if those lower utilization rates are sustained.  Such was the case for most LCD display suppliers last year, and while little was said about lower utilization or employee reductions at Chinese producers, other panel producers were a bit more forthcoming about belt tightening.  As public companies in Taiwan have a bit more public transparency than most, it has been a bit easier to see what has transpired to panel producers there than in other locations.
Last year, Innolux (3481.TT) promoted a program that encouraged employees to take consecutive vacations, reduced the number of foreign workers, and in some cases instituted a 3-day weekend schedule to reduce operating costs as utilization decreased in the later half of the year.  AU Optronics (2409.TT) faced similar utilization reductions last year with programs similar to those at Innolux, but AUO has gone further, indefinitely postponed the construction of the company’s planned Gen 8.6 LCD fab in Taichung, the first capacity expansion project the company has undertaken in the last 5 years.
As we have exited 2022, with the display industry facing a continuing drop-off in CE product demand, both companies have instituted new projects, with AUO promoting its ‘Talent Activation/Revitalization Program’ and Innolux its “65 Project”.  The AUO program is said to ‘help long-term senior colleagues with more flexible planning for the next stage of career development’, while the Innolux program is a bit more direct, providing incentives for those who voluntarily apply for retirement.  While the programs tend to be laden with phrases like ‘…taking care of the physical and mental balance of colleagues…’, these reduction plans are part of the usual boom/bust display cycle that regenerates every few years  Perhaps it makes management feel a bit better to couch the staff reductions in more ‘…we care…’ terminology, but we expect there have been few employees that saw the programs as anything other than what they were.
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* Refers to the 1992 quote from then governor of Texas Ann Richards in reference to the President George Bush plan to use US warships to protect oil tankers in the Mideast.  The quote was “Well, you can put lipstick on a hog and call it Monique, but it’s still a pig”.

China is big on promoting its success in the LCD display space, and rightly so given its regional revenue dominance of nearly 50% of large panel LCD sales, but  while BOE (200725.CH) and Chinastar (pvt) stand out in terms of growth, not all Chinese LCD panel producers have been quite as successful, even with the help of the Chinese state or local governments. N One such casualty is Nanjing Panda (600775.CH), a panel supplier that began its first production line in September of 2011, and at its peak had one Gen 6 fab and two Gen 8.5 fabs in Nanjing and Chengdu.  Unfortunately Panda was not able to sustain profitability and was forced to sell both Gen 8 fabs to BOPE for $1.78b, leaving it with one Gen 6 fab whose lines were over 8 years old on average.
Panda’s largest shareholder is the Chinese state, which through a number of state-run entities owns almost all of the shares that are not in the hands of the public, although there are no greater than 5% individual shareholders in the public group, so the impact of any continuing financial difficulties would likely be borne primarily by the government, but it seems that even with quarterly state grants, things have not been living up to plan for the company as losses continue.  According to local press, it seems that Le Eco (pvt) a Chinese CE brand that has had its own financial problems, camped outside of Panda’s fab carrying signage that read, “China Electronics Panda Home Appliance Repay My Hard-earned Money!”, and other similar statements.
It seems that Le Eco had been supplied LCD TV panels by Panda that it used in its branded TV sets.  Under a contractual agreement, Panda was required to reimburse Le Eco if the panel failure rate exceeded 1.8%, roughly an industry standard, however Le Eco found that the failure rate was as high as 20% for three of the models supplied by Panda and tried to negotiate with Panda concerning the cost of replacement or repair over the last 18 months.  Unfortunately, Panda has not reimbursed the company for the cost of replacement displays that Le Eco was forced to purchase, even though both parties agreed that the Panda displays were the cause of the TV defects. 
As Panda is theoretically part of China’s state-run electronics conglomerate China Electronics Corporation, Le Eco thought it would have no problem collecting what was due, yet Panda seems unable or unwilling to make amends for the inferior displays.  As the publicity over the ‘protest’ gets into the media, we expect either Panda will make amends or the company’s reputation will suffer so much that their financial difficulties will worsen, which would eventually cause the company’s demise.  Such things usually take some time to play out, so we would not expect much change in the near-term, but given the weakness seen in the CE space, weaker players in the LCD space, despite government subsidies, will eventually be culled from the herd.

​While the LCD display industry bemoans the fact that panel prices are at or near historic lows, some continue to push ahead with expansion plans.  One such project is a large Gen 8.6 LCD fab being developed by Tianma (000050.CH) in Xiamen, China where the company operates a smaller Gen 5 LCD fab and a Gen 6 flexible OLED fab.  The Xiamen project, when fully built-out will be the company’s largest fab at 120,000 sheets/month and is expected to cost ~5.15b US when completed, with production expected to begin in roughly 15 months.
SFA Engineering (056190.KS), a Korean company noted for their panel moving equipment, noted that they have just signed a contract with Tianma Xiamen to supply such tools to what we believe is the new fab, through the middle of December of this year.  The contract is for $111.6m US, which would represent ~9% of SFA’s sales last year, making it both a significant contract for SFA, and an indication that Tianma is continuing the fab’s construction at what seems to be a normal pace.  SFA indicated that its Chinese subsidiary had also received a contract from Tianma, but did not disclose the amount (Korean public company rules require disclosure while Chinese rules do not).
Over the years we have seen a number of instances when logic would indicate that it might be a period when the best plan was to slow or postpone LCD capacity expansion, yet panel producers continued to purchase equipment.  Much of this illogical behavior comes from the fact that government subsidies are an integral part of initial and ongoing financing for such projects, with fab  managers spending such subsidies under the thought that it might be reduced or taken away by ‘uneducated’ local officials at a later date.  There have been instances where we have seen millions of dollars of crated equipment sitting in storage for over a year, having been purchased under the ‘strike while the iron is hot’ scenario that seems to be the case here.  As the LCD display space has seen a return to pre-pandemic demand and pricing that is close to cash costs, one might think it best to slow capacity expansion and hope that demand will pick up enough to meet current supply, but when the government is looking over your shoulder as to how their money is being spent, you spend it.

Earlier this week we reviewed panel pricing for December and the year, and we are close to having full data for panel producer sales in December and for the full year.  In the interim, we show results for November, which were slightly better than October, and walk through the display industry on a regional and company by company basis. 
November large panel revenue was up 0.8% m/m but down 30.9% y/y which puts the 2022 YTD (11 months) down 25.8% y/y, while large panel shipments are down 10.7% over the same period.  On a regional basis, both Taiwan and Korea saw m/m revenue increases, surprising in that Samsung Display (pvt) has been winding down large panel LCD production capacity as has LG Display (LPL) to a lesser degree.  Chinese large panel LCD producers saw their overall revenue share decline, following October’s rise, and has seen its revenue share decline YTD from 49.0% in December of last year to 46.6% in November of this year, while Korea has seen its share increase from 19.0% last December to 28.0% this year.

From a company perspective, out of the 10 large panel LCD producers that make up the bulk of sales for the space, 4 saw positive m/m results for November, while the remaining six saw m/m declines.  Of the four that saw positive m/m revenue growth in November, two were Taiwanese, one Korean, and one Chinese, while none are up on a y/y basis.  As noted, industry revenue is down 30.9% y/y for the 11 months and looking at the top 10 large panel LCD display producers, only two are above the average, with the remaining 8 below.  LG Display performed the best on a YTD y/y basis and CEC Panda (600775.CH) the worst.  All in November was, as expected, a relatively quiet month, as panel producers remained beholden to continuing weakness in China, weak early holiday sales, and little change in panel pricing.  We expect little change again in December.

From a company perspective, out of the 10 large panel LCD producers that make up the bulk of sales for the space, 4 saw positive m/m results for November, while the remaining six saw m/m declines.  Of the four that saw positive m/m revenue growth in November, two were Taiwanese, one Korean, and one Chinese, while none are up on a y/y basis.  As noted, industry revenue is down 30.9% y/y for the 11 months and looking at the top 10 large panel LCD display producers, only two are above the average, with the remaining 8 below.  LG Display performed the best on a YTD y/y basis and CEC Panda (600775.CH) the worst.  All in November was, as expected, a relatively quiet month, as panel producers remained beholden to continuing weakness in China, weak early holiday sales, and little change in panel pricing.  We expect little change again in December.

While transparent displays are understandable in a retail environment, LG Display (LPL) has been working toward establishing itself as the pre-eminent supplier of transparent OLED displays and has been trying to convince parent LG Electronics (066570.KS) that this is a viable CE product for consumers.  Meetings between the display producer and parent earlier this year gave some indication that LGE was considering the idea for the 2023 TV set year but recent comments out of South Korea have indicated that no progress has been made on the idea, at least for the 2023 year, leaving it open for 2024.
Given the weakness in the CE space and the TV market overall, the idea of a new TV modality, and the costs associated with development, production, and advertising seem a bit off center, but we still have trouble with the concept itself.  Understandably, many would like not to have a massive black screen situated in a well-decorated room, and we agree, however a transparent TV, one that would look like a glass sheet, does not come without drawbacks.  In a normal OLED display, the display stack has a reflective metal cathode, so as light is generated by the emitting materials, it is reflected back and exits the display.  In transparent OLED displays, the cathode is made of a transparent material, allowing light to pass through the OLED display.  That said, each pixel in an OLED display has a driver circuit, which takes up a portion of each pixel, and while that circuitry is invisible in a transparent OLED display, it reduces the amount of light that can pass through the display.  This makes transparent OLED displays, when off, between 70% and 85% transparent relative to clear glass.  When in operation, while the display is roughly as bright as a regular OLED TV, ~38% of the image is what is behind the display, reducing the clarity of the picture.
As a display in a retail environment, such as a store window, this is not n issue as the concept is usually to add to what the viewer sees through the window, perhaps overlaying text or changing images, but still allowing the in-store merchandise to be seen.  In a residential environment, the viewer is usually interested in the best possible image, and making the above compromises for transparency reduces the quality of those images.  Chinese CE company Xiaomi (1810.HK) offered a 55” transparent TV in August 2020 based on an LG Display OLED screen for $7,200, but from what we can derive, sold very few sets and no longer offers the set on its website.
As transparent displays improve, we expect there will be more adoption in the commercial space, but we still find it unusual that LGE would consider such a product given the cost and trade-offs that consumers would have to experience.  LGD does have some slick videos about potential transparent OLED display applications, but they all fall under the commercial (signage) product line, which, in our view, is where they belong.  While we certainly commend LGD for looking to expand its transparent OLED display base, it seems a technology looking for an application in the consumer space.

December
December was another wishy-washy month for LCD panel prices, with little movement in either direction, which after a few years of unusually large monthly swings, is the second month of essentially little or no change in LCD panel prices, and a positive in our view.  That is not to say we could see continued weakness in panel prices, especially given the spike in COVID cases in China as they reduce lockdown restrictions, but a bit less volatility is a good thing.  It is difficult to judge whether the lesser COVID restrictions in China will unleash some pent-up demand or whether the higher infection rate will keep that in check, but data from the 12/12 shopping holiday in China (a subset of the more well-known 11/11 shopping holiday) indicates that TV shipments were down 8.2% y/y and sales value was down 15.8% y/y for the 12/12 holiday, even with TV set ASP declining 11.5% between the 11/11 holiday and the 12/12 holiday. 
Notebooks and tablets did better than our December forecasts, pushing IT LCD (Monitor, Notebook, & Tablets) also above our forecasts, with the remaining categories within the forecasted range.  We expect relatively similar results for January, with the total LCD panel prices between -0.3% and +1.5%.  As a bargain hunting month in the US, we are modestly optimistic about overall LCD panel prices early in the 2023 year, but have already heard that one of three panel producers in Taiwan is expecting to see the company’s utilization rate increase from ~65% currently to 80% to 85% in the first quarter.  This change alone would represent a 2.5% increase in industry capacity on a m2 basis, and while we would expect capacity decreases from South Korean producers to offset some of that expected increase, we expect other producers will also take the new year as a possible ‘better world’ and increase utilization rates. 
As whatever stability the LCD panel space has seen over November and December has been driven by supply reductions rather than demand, we become more cautious when we hear that utilization is potentially increasing in the new year.  Understandably, panel producers want to have an optimistic view and are looking for a better year than 2022 in 2023, but a slow implementation of utilization reductions last year (2022) was responsible for the difficulties the LCD panel space saw during what should have been its best quarter, so hopefully the same mistake will not be repeated in reverse.  That said, panel producers are a competitive lot and do not always do what is good for the industry, so while we see a relatively flat January, we are on the alert for misplaced optimism going forward.

2022
Sometimes numbers speak louder than words and in the case of LCD display panel prices this year, the table below says pretty much the bulk of what needs to be said.  Other than TV panel prices, which hit 2022 lows in September, and the categories in which TV panel prices are a part (‘Large Panel’ & ‘Total’), all panel categories are at their lows for the 2022 year and for the three-year period from 2020 to 2022.  What the table does not tell is that the results are the same for the five-year period between 2018 and 2022, putting all categories, other than TV LCD panels, at their lows going back to January 2018, two years before the COVID-19 pandemic began, so the mantra of returning to pre-pandemic levels tends to soften the fact that panel prices are at lows that are in some cases, the lowest in 8 years.  

We do note that the effects of COVID have had a major influence on panel prices, both to the positive and to the negative, but the one fact that seems to override the effects of COVID is that panel production is driven by individual companies that do not work toward a common goal.  There is always the “…if they are doing it, we have to also do it…” short-term view that would seem to be a result of management looking at daily, weekly, or monthly numbers and making decisions without evaluating the near-term impact on the industry overall.  This shortsightedness seems to drag out each cycle, as the hard decisions are put off, ”…to make sure the other guy doesn’t do better than us…”, even if such decisions are detrimental to the industry.  This lack of industry coherence was quite obvious this year as many panel producers held off the utilization cuts that they knew were the only way to stem the tide of falling panel prices. 
We do note that there were other factors at play, such as high component costs, especially early in the year, and the resulting pressure to raise prices to compensate, eventually raising the specter of a global inflationary environment.  But many were predicting an end to Mr. Toad’s Wild Panel Price Ride late last year and early this year, yet panel producers continued to view the world with rose colored glasses, and have been paying the price most recently.  It would seem that either panel producers have poor economic forecasters on staff, or managements pay little attention to them, likely the latter, but the industry only seems to respond when hit repeatedly over the head.  The CE space overall is relatively poor at responding to economic indicators, so we don’t put the entire onus on panel producers as they must respond to customer requests, which can also be contrary to logic or the health of the industry, so we struggle to see a solution to the problem, which tends to be made worse by governments who support industry growth with subsidies, regardless of the consequences.  It’s a complex ecosystem that seems to find itself back in the same position every few years, albeit with a bit of CE matter being sucked into a black hole.  While black holes are among the most destructive forces in the universe, it seems most would know enough to stay as far away as possible.  JOHO
 

​AU Optronics (2409.TT) has said it is considering building a module/assembly plant in the US.  The company, among the top 5 panel producers globally, produces panels in Taiwan and China, is expected to make a decision in 2023 at the earliest, with mass production scheduled for 2025 if approved.  Other than a sales office in Farmington, MI, a bit outside of Detroit, that is a point for AUO’s automotive display business, they have little representation in the US, and while their panels are in a number of TV sets under major brand names, they are not well known in the US.
While a module/assembly plant is a far cry from a display panel fab, it would be unusual for a panel producer to build such a facility in the US given its high cost of labor.  Typically North America is served by assembly plants in Mexico or Brazil, so such plans would be out of the ordinary, but given the incentives the US has put on bringing foreign electronics manufacturing back to the US, the net result could make such a venture a bit more competitive, especially given the high cost of transportation CE producers have faced recently.  While an unusual decision, and one that could also be used to leverage negotiations with potential assembly sites in other countries, it would be nice to see tangible results from the current administration’s efforts to bring CE and semiconductor manufacturing to the US.