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.

​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.
​
* 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.