As we previously noted, October LCD panel pricing was mixed with TV panel pricing up 4.5% and combined aggregate IT panel pricing down 1.6%, which implies that panel producer results will be quite dependent on the overall mix of orders.  TV panel revenue for most panel producers has been declining as a percent of the total, given the rapid TV panel price declines that have been evident since July of last year so the TV pricing leverage will be relatively small, although AU Optronics (2409.TT) saw its 3rd consecutive monthly improvement is sales, while competitor Innolux (3481.TT) did not, after a sales jump last month.  Hannstar (6116.TT), primarily a small panel producer, saw a m/m improvement in sales after a weak September, but continuing the downward trend of sales for the year.
While m/m results are looking a bit better for Taiwan LCD panel producers, we expect they will, bounce along the bottom for the remainder of the year, with the objective being to lower inventory levels and attempting to only take orders for lots that are priced above cash costs.  Taiwanese based LCD supply chain participants tend to be focused on making aggressive inventory adjustments before year-end to enhance year-end financials, and weakness coming from Chinese COVID lockdowns will all likely contribute to a lackluster 4Q.  That said, there is some hope that the inventory reductions underway will keep the seasonally slow 1st quarter from being a disaster, but without a demand driven recovery, it would be hard to make the case for anything but a relatively flat 1Q.  

For panel producers, large or small, decisions about entering new markets or expanding or reducing capacity are significant given the cost of both the construction and equipment involved in such decisions.  The ~18 months needed for building out greenfield capacity, along with the additional 6 months of ‘tuning’ and yield management that follows, can make those decisions even more critical as the CE space sees shorter product cycles and considerable competition from Chinese producers.  A wrong decision can leave a panel producer with an expensive line that takes years, if ever, to become profitable, along with the burden of depreciation.
Both LG Display and Samsung Display are in the midst of that major decision making process, with both finding the current macro environment making those decisions harder and less likely to be made as originally expected.  SDC has been working toward the expansion of its OLED production capacity to facilitate a push to bring OLED technology further into the IT space, meaning monitors, notebooks, and tablets.  SDC is already producing relatively small numbers of such IT displays which have made it into mainstream products, but this production has been done on existing Gen 6 SDC infrastructure, which is more oriented toward small panel (smartphone) production.  While the glass substrate upon which mobile devices (smartphones) are produced are almost 30 ft2 and can contain almost 300 devices on a single sheet, the chambers used for the deposition of OLED materials are unable to process such sheets, forcing the substrate to be cut in half or quarters to be processed.  This slows production and makes it less efficient, so SDC and other OLED producers have been working toward moving their RGB OLED display production to Gen 8 lines, which use substrates that are over 2x larger, there are problems associated with such large substrates, along with the deposition chamber size issue mentioned earlier.  As we have noted previously, Samsung is working with partners to develop a deposition system that can process an entire Gen 8 substrate without cutting, which would have a significant impact on efficiency and therefore cost, but the decision as to whether to build out capacity based on a tool that has not been used for mass production is a serious one, along with the cost of such a tool, which we would expect to be $200m to $300m, and the other equipment and fitting needed.
Samsung Display is also evaluating the timeline for the expansion of its QD/OLED production capabilities, which are currently limited to a 30,000 sheet/month line.  The expansion of that capacity would likely cost less than $1b, given it would be done in an existing SDC site that is currently not in operation, but again, it would include substantial depreciation, capital expense, and likely weigh on profitability for some time after it begins operation.  At the same time, LG Display is evaluating when it might order equipment for a potential OLEDos (OLED on Silicon) production line that would be used to produce AR/VR high resolution displays, with a timeline that must coincide with Apple’s plans for a 2nd generation AR/VR device (Sony (SNE) is expected to produce the displays for the 1st generation device).  Such a decision, particularly the equipment ordering, was expected last quarter but was postponed and could be pushed forward again.
These decisions are all being hampered by the state of the global economy, particularly the fear of a global recession in 2023, and the prospects for continuing Chinese COVID-19 lockdowns adding to the negativity.  As these are major capital and strategic decisions, it is understandable that managements want as much time as possible to see how the macro economy develops, and with the holiday season on the horizon, how consumers participate this year.  Other factors, like the war in Ukraine and the semiconductor trade issues with China add to a witch’s brew that seems to have put the display space and much of the CE space on hold until next year, with little excitement over delving into new technologies or capacity risk taking. 
All  of this is understandable, especially to those that cannot count on governmental subsidies to fund new projects or support extended payback periods, but at the same time the rapid change in demand that occurred when COVID became a global issue made it apparent that the JIT global supply chain was far less flexible than most had thought and without the capacity expansion and technology risk taking that seems to have gone by the wayside currently, the CE space will face another cycle of rapid price increases or shortages whenever the demand gap is suddenly filled by some global event.  In the past companies like Samsung and LG took big risks in the display space and in most cases reaped significant rewards, but we fear that the recent CE down cycle might have tempered some of the bravado that is necessary to lead an industry.  Hopefully the fear will pass quickly.

​The Board of Directors of China’s BOE (200725.CH) has approved the capitalization of its latest OLED fab project, a $3.98b US project to be constructed in the Beijing Economic & Technological Development Zone.  The project is a Gen 6 OLED fab (1500x1850) that will sit on a 420,000 m2 site, and will be oriented toward the development and production of VR devices using micro-OLED technology.  The fab will also be capable of producing mini-LED backlight products and will have capabilities for both LTPS and LTPO backplane technologies.
The fab construction is expected to begin next year and be completed in 2025, with mass production scheduled for 2026.  BOE will be responsible for 11.5b RMB of the 29b RMB cost, with the remainder coming from a subsidiary of Beijing’s Economic Zone State-owned Asset Investment & Development program.  As is typical of such state financed projects, BOE will own 79.31% of the project, despite providing 39.7% of the financing.
This project will give BOE the ability to produce VR oriented micro-displays, a capability it does not presently have, and will further the development of its LTPO backplane technology when it is in operation.  LTPO is a key technology in that it combines the best aspects of LTPS and Oxide backplane technologies, but more to the point, is the backplane choice of Apple for OLED displays going forward.  Currently Samsung Display (pvt) is the only high volume LTPO provider, with LG Display (LPL) beginning to commercialize the technology, so if BOE is to compete with SDC, they need to spread their LTPO know-how to as many potential Apple projects as possible.   While Apple’s first foray into the XR world is expected to be produced by Sony (SNE) using micro-OLED, 2nd generation devices could be micro-OLED or micro-LED, both of which could be produced at the new BOE fab, according to the company, so it seems obvious that BOE is moving ahead with this project to gain ground with Apple.  That said, the competition for a 2nd generation VR display out a few years, will be intense and while Samsung Display is the de facto leader in small panel OLED, micro-OLED displays are far more difficult to produce than current smartphone or current VR displays, which are still primarily LCD displays.  While this project is an ambitious one, it will not be in production until 2026.  A lot can happen in the interim. 

Japan Display (6740.JP), in keeping with its goal of reducing costs to bring the company back to profitability, has sold its display module facility in Suzhou to a Chinese OEM, converting fixed costs to variable.  The module plant, which was incorporated in 1996, takes raw (‘open cell’) panels produced by JDI and adds backlighting, a frame, and a number of other components to create a display that can be used in a device.  The subsidiary had annual sales between $394m and $487m over the last three years, but had net margins of 0.6% to 2.8% over the same period.  The sale price, which is subject to a final audit, is ~$139m, which represents ~32.2% of the average of sales over the last three years.  The sale is expected to be completed sometime between January and March of next year as it must be approved by a number of government organizations, and JDI will continue to use the module plant as a customer of the buyer, DSBJ (002384.CH), an OEM and assembler based in Suzhou.
While the last few years have been quite difficult for Japan Display as its primary customer, Apple (AAPL) has converted from LCD displays to OLED displays for its iPhone line, with JDI having little or no OLED capacity[1].  The company brought in Scott Callon, the Chairman of Ichigo (2337.JP), and the investment firm that bailed out JDI in 2020, as Chairman and CEO in to guide the company toward a new business model.  Since then the new JDI management has closed one of four JDI LCD fabs in Japan and sold another module facility to Wistron (3231.TT) and while the company is still losing money on a quarterly basis the losses are considerably smaller than in the past and the company’s product portfolio is more oriented toward newer technology where JDI has an edge.  All in, while it is both a difficult display environment and a hard road toward profitability, JDI seems to be making considerable progress toward regaining some of the statue the company had as a major supplier of small panel displays years ago.


[1] JDI shares a board member with JOLED 

Last week we noted that demand for small panel (primarily smartphone applications) rigid OLED displays in 2Q was considerably below expectations (missed by 25.9%), coming in down 19.5% q/q and down 33.2% y/y.  Much of the small panel OLED demand shortfall came from Samsung Electronics (005930.KS) and Xiaomi (1810.HK), and has led to expectations for 3Q small panel OLED rigid demand to decline by 25.9% q/q and by 46.5% y/y.  While these are certainly concerning data points, we also noted that small panel rigid OLED displays are an increasingly smaller part of overall small panel OLED displays, falling to 38.6% in 2Q and averaging 40.1% in 1H after 2021’s average of 44.0%, which puts the focus more specifically on small panel flexible OLED displays for a better understanding of demand for the smartphone OLED display market.
Now that we have full demand data for small panel flexible OLED displays, we note that the results for flexible OLED displays in 2Q was only off by 1.9% putting 2Q composite small panel OLED demand 12.85% below expectations, not a great number but certainly better than the rigid miss.  As can be seen in the table below, while both Apple (AAPL) and Vivo (pvt) came in above small panel flexible OLED expectations, Apple represented 49.6% of actual small panel flexible OLED demand in 2Q and was the only brand that saw better than expected results in the composite, with the composite itself being down 13.6% q/q and down 3.4% y/y.

The weak results in 2Q and the ongoing macro challenges facing the smartphone market have brought down expectations for small panel OLED demand in 3Q although there is hope for a relatively small amount of q/q growth (3.4%), as shown in the table below.  While these expectations translate to a decline of 20.3% (composite) on a y/y basis Apple, Honor (pvt) and Huawei (pvt) are expected to see q/q increases, with only Huawei seeing a y/y increase, a result of the extremely poor results Huawei saw in 2021 due to US trade restrictions. 
All in, another weak quarter for smartphones continues to put a damper on small panel OLED growth, despite an increasing share of the overall smartphone market, with Apple the only substantial standout.  As the iPhone 14 series was announced on September 7, much of the 3Q actual results will rest on the new iPhone line’s popularity during the last 15 days of the month, and based on those results, Apple will determine it order rate for 4Q.  In 2020 and 2021 Apple increased orders q/q in 4Q (11.9% and 71.5% respectively) while the y/y increase was less than 1%.  While we expect Apple is optimistic about customer demand for the iPhone 14 series, we assume they will temper that enthusiasm a bit as the macro-economic situation  continues to weigh on consumer spending, which would lead us to expect Apple’s full year small panel OLED demand to be ~200m units, up 9.8% y/y.  Given that almost all of Apple’s iPhone models (old and new) are OLED, this gives a good approximation of Apple’s 2022 display demand, which should translate into shipments, less build and transport timing and existing inventory.

​Chinastar (pvt), a subsidiary of TCL (000100.CH), celebrated the opening of its T9 LCD display fab in Guangzhou, China last week, with considerable fanfare and the usual ‘glorious’ description of how the new fab, along with Chinastar’s T8 OLED fab that is under construction, will push Guangzhou to become the display capital of the world, generating over $35b US, up from $25.3b that was generated in 2019[1].  The T9 fab however, will not be in mass production until 3Q ’23, running what we expect to be two 30,000 Gen 8.6 sheet/month lines at the onset.  Phase two of the project, another two 30,000 sheet/month lines are expected to become producers in mid to late 2024, while plans for phase 3, another two 30,000 sheet/month lines are a bit too far out for speculation.
The T9 fab will be initially producing IT panels, automotive displays, and PID (public information displays), but is also expected to, at some point, incorporate an ink-jet printing line, along with the T8 fab.  We expect the IJP line will be used for Mini/Micro-LED products at T9, while for OLED materials at T8, although actual IJP based displays at Chinastar are still at the technical demo stage.  Both fabs are expected to be producing IGZO backplanes for the displays they produce and the T9 fab, which is expected to cost upwards of $5b US, will have a module production facility in the complex to take the open cell panels and create display modules that can be sold to OEMs..
Note that Figure 1 shows Chinastar’s large panel sales and Gen 8+ capacity (dotted line), with large panel LCD industry sales scaled to match Chinastar’s January 2019 sales.  Chinastar’s growth through 2021 has been based on the company’s ability to fully utilize the new capacity it has added over that time period, however since the beginning of the year sales have declined rapidly as utilization rates for existing Gen 8+ fabs declined.  The industry has seen sales for large panel LCD displays decline by 32.3% since the end of 2021 while Chinastar has seen sales decline 39.3% over the same period.
While the celebration ahead of actual production is typical, given the current circumstances in the display space, the addition of new LCD capacity, especially Gen 8 type capacity is of little use to an industry that is facing low utilization rates at many Gen 8 and Gen 10 fabs due to weak demand.  Chinastar, now the 2nd largest LCD panel producer in China (19.3% sales share) and the 5th largest (sales) globally (9.3% global sales share) as of August of this year, so we would expect to see sales continue to increase next year as the T9 fab begins production.  That said, a continuation of weak overall display demand next year, T9 could prove to be a significant burden on the company as it will be difficult to fil the new lines along with added depreciation.  Under that scenario, we would expect the phase 2 schedule to be slowed, but with a year between now and the planned phase 2 opening date there are a lot of parameters that could change.


[1] According to Guangzhou Bureau of Industry & Information Technology.

September panel prices offered a ray of sunshine in what has been a dark forest of depressed pricing across all panel categories.  While the shaft of sunlight is a thin one, as all categories (lg. panel, sm. Panel, tot. panel, IT panel, TV panel, Mon. panel, NB panel, Tablet panel, & Mobile panel) are all at their 3 year pricing lows, some solace can be taken in that the monthly rate of decline has been slowing, albeit still negative.  Perhaps as we get closer to the holiday season we are becoming more cheerful, but Figure 1 looks like it is getting close to the zero line, although a polynomial trend line (4th order) would take 6 more quarters to reach zero change.
There has been little change in the balance between buyers and sellers with buyers certainly having the upper hand, while sellers are trying, mostly unsuccessfully, to keep prices from falling further.  We expect there is some panel buying for Black Friday and the Chinese 11/11 holiday, but we temper our optimism with the global macro environment, which is doing little to stimulate consumer demand.  Given that panel prices are at lows and that there has been some relief on transportation and component costs, there is the possibility that as lower utilization rates allow existing panel inventory to be sold, there will be room for lower priced products to enter the market for the holidays, which could stimulate some bargain hunting, but we are still would not raise our expectations substantially for the remainder of the year as there remain considerable negatives on the horizon.
All in, September was slightly better than expected, mostly in the TV panel space, as it peaked and started its decline earlier than other categories.  Our modest sense of optimism, at least for October, is reflected in our October forecast, which portends a better (less negative) month across almost all categories.  We hope our optimism extends more than one month but we take it one day/week/month at a time. 

In order to meet the competition in the display space, panel producers must spend substantial sums to develop new technologies and processes and as timelines for the development and implementation of new display technologies grows shorter, risk levels increase.  Panel producers, in many cases are forced to pick a leading edge technology, sometimes before it has been proven to be feasible from a mass production standpoint, or take the approach of researching as many new display technologies as possible.  While both approaches carry considerable risk, there are only a select few that can take the later approach, as the cost of spreading R&D across a number of technologies yields little in terms of breakthroughs.  Large panel producers allocate between 7% and 8% of revenue to R&D while smaller producers allocate as much as 25+%, but the dollar values are so much smaller that the effect is negligible.  Samsung Electronics (005930.KS) spent $15.85b on R&D last year, and while that covers Samsung Display (pvt), the company’s semiconductor business, and all other segments. Smaller panel producer Visionox (002387.CH) spent 23% of sales on R&D, or $635m.
As we noted in Part I, historically, the display industry has tended to focus on one major technology advance at a time, which, when proven commercially viable, became the immediate focus for large panel producers and a later focus for smaller producers unless it happened to be one that the smaller producer had chosen as their ‘go to’ R&D project, such as Sharp’s (6753.JP) development of IGZO that resulted in its lead in the technology starting back in late 2012.  However, with the number of new potential display technologies being developed, and the potentially shorter timelines to a final mass production decision, the decision for smaller panel producers is more toward developing new product categories using existing infrastructure than it is developing new display technology.  In some cases the development of new product categories does entail new equipment or process changes, but most new product categories can be based on existing process lines or minor modifications, with more research done on the development of a marketing strategy and developing new customer relationships than leading edge technology.
The display industry has in the past categorized display panel products as ‘large’ and ‘small’, essentially categorizing large as panels over 10” (diagonal) and small as anything under 10”, with ‘large’ categories broken down into monitors, notebooks, and TV panels, and the ‘small’ category representing primarily feature phones (inexpensive with few features) and smartphones.  Over the years those categories became more defined, especially as OLED technology became a significant part of the ‘small’ category.  With the first LCD display on a phone appearing in 1994 (see Figure 5), LCD panel producers increased LCD display size, colors, and quality until OLED smartphones displays became a new category for ‘small’ displays back in 2005, although all small OLED displays were ‘rigid’ in that they were based on a glass substrate.  That changed in 2010 when Samsung Display released the 1st flexible OLED display used in the Galaxy Note Edge and only 4 years later when Samsung released the first commercial foldable smartphone display, the Galaxy Z Fold.
The timelines between these technology milestones continues to contract, which makes the R&D process even more critical to both large and small panel producers, with Figure 4 representing only small panel displays.  Large panel displays have undergone similar technology changes and now face a multitude of potential game changing display technologies that are at various stages of development toward commercialization.  With only a few panel producers able to spend the R&D dollars necessary to examine all of those potential display technologies, smaller panel producers are taking the ‘road less traveled’ and building out new display applications such as automotive or ultra high-resolution displays, especially as more generic panel categories see declining prices.  We expect this ‘bifurcation’ in the display space to continue as Samsung Display, LG Display (LPL), and BOE (200725.CH) push technological boundaries, and smaller panel producers more toward niche product development, with the pace of change in both regards, continuing to increase. 
In Part III we look at large panel display technologies, their timelines, and the new display technologies being developed.  Stay tuned
​

Based on the dire headlines in the display trade press, focused on massive utilization cuts at LCD panel producers, we were expecting very depressing results from producers in August.  “Lowest utilization levels in history”, and similar stories set the tone for disastrous shipment numbers for panel producers in August and we played along mentally preparing for the worst.  As it turns out both from a sales standpoint and a shipment standpoint, August was not nearly as catastrophic as we thought, with large panel combined shipments declining only 1.3% m/m although down 18.1% y/y.  August large panel LCD sales declined 5.7%, while prices dropped 5.2% for the month, which indicates that the impact of the shipment decline was partially offset by an improvement in mix ASP.
The shipment breakdown in terms of application was even more antithetical to industry chatter, with TV shipments up 7.6% m/m and now up 7.1% y/y, the only major panel category that is above last year’s shipment levels.  While the peak and subsequent decline in TV panel prices happened earlier than the cycle with IT panels (monitors, notebooks, and tablets), much of the recent industry chatter concerning utilization cuts was focused on Gen 8 fabs, the mainstay for the production of TV panels, and while IT panels can also be produced on Gen 8 lines, the focus on utilization cuts at Gen 8 fabs would have tilted TV shipments more toward lower shipment levels.
Notebook shipments declined 10.1% m/m and 41.9% y/y and as monitor panel shipments did not peak until December of last year, the y/y comparisons will likely remain weak and while monitor shipments are certainly below any month in 2021 they are still above the lows of 2020 when the pandemic began.  Monitor shipments declined 8.4% m/m and declined 25.3% y/y in August, while tablet shipments increased by 2.5% m/m and declined 3.1% y/y, seeming to hold shipment levels relatively consistent this year.  On a regional basis, while South Korean producers saw the biggest shipment decline m/m in August in terms of revenue (-8.2%), it is hard to disaggregate both Samsung Display’s (pvt) and LG Display’s (LPL) large panel capacity reduction plans from the effect of utilization cuts.  Taiwan saw a 6.7% reduction in panel revenue, a bit more in line with the industry m/m revenue decline of 5.7%, while Chinese producers, where much of the utilization attention has been focused, saw a 4.0% revenue reduction m/m.  On a y/y basis Taiwan was down 55.9%, Korea down 9.8%, Japan down 22.1% and China down37.6% against the combined industry sales being down 37.0%.  For reference, the only panel producer that had a positive m/m sales ROC was HKC (+13.1%), although still down 11.4% y/y.  Samsung Display also had a positive August sales ROC but it is likely only from large panel lines that are in the wind-down process and represents only 0.19% of industry large panel LCD sales.
IT panel shipments did decline in August, some of which we attribute to utilization cuts, but we are even more suspect about the extent of the utilization cuts made at panel producers in August than we were before, given the better shipment results for TV panels.  We expect that much of the doom and gloom came from panel producers themselves who embellished the utilization cuts a bit to create an atmosphere where panel buyers might be concerned that they would be unable to secure even the reduced quotas they would need for August and September.  While this sounds quite cynical, it would not be the first time such a strategy was employed.  If our cynicism proves correct in September it leads us to see a longer cyclical downturn for the industry than if panel producers really made the very deep cuts across all company fabs that were hinted last month.  Hopefully that is not the case as we had anticipated that panel producers would really bite the bullet in August to tighten the overall LCD large panel market, but it looks like that was not the case.