​While it is hard to believe that it took the Taiwan Taoyuan District Court essentially three years to make a decision, said court has ruled that former panel producer Chunghwa Picture Tubes (defunct) is bankrupt.  CPT, a once robust panel producer generating over $500m in quarterly sales back in the late 2000’s, found itself unable to compete, with sales down to $13m/q by the end of 2018, along with a heavy debt burden incurred during the construction of the company’s 2nd G6 LCD fab and its investment in a Chinese subsidiary.   
According to court documents CPT  had total liabilities at the end of 2021 totaling $1.372b US which far exceeded the value of its assets (not provided but were ~$772m at the end of 2019), and the court sponsored auction of the company’s plants and associated building, which was priced at $206.6m (base price) received no offers.
The court has appointed an accountant and two lawyers to oversee the bankruptcy proceedings with a creditor’s meeting scheduled for the end of October.  The company’s largest shareholder is Tatung (2371.TT), a Taiwan-based manufacturer of PCs LCD TVs, and appliances, holds a 39.7% stake in CPT, along with eChem Solutions (4749.TT) and a variety of smaller stock and note holders, a sad demise for a company that at one time held an 8% share of the global small panel LCD market.

Shenzhen, China is the 4th largest urban city in China, with a direct population of 12.6m and an urban population of 17.6m, about the size of New York City and LA together.  The government of Shenzhen has locked down a portion of the city due to the discovery of 11 cases of COVID-19 (9 symptomatic), closing all rail and metro stations and restricting residents to one person per family able to purchase groceries or other essentials every two days, as long as they have a negative PCR test within the last 24 hours.  All businesses in the Futian and Luonu Districts have been ordered closed, although take-out restaurants are still open, but food deliveries are only allowed to be made to community lock-boxes and then picked up by residents.  Most important is the closure of the CBD (Central Business District) in the city, a 2.4 mi2 area that is home to the city government, and a wide variety of major businesses, including one of the city’s biggest electronics retailers.
To get some understanding of the size of the two districts that were closed, they are the equivalent of the size of mid-town Manhattan, in order to contain 11 COVID cases, and the cites of Xianghe (just under 400,000 residents) and Zhuozhou (~380,000 residents), were shut down last week after a total of nine cases were discovered.  Both cities are within 50 miles of China’s capital city of Beijing where residents are required to get a PCR test every three days in order to ride public transportation and enter most public buildings.  We wonder how that might work in NYC…wonder who would be checking PCR test results for those in Figure 2… 

​Innolux (3481.TT) is one of almost all large panel LCD producers that have lowered utilization rates as the display industry finds itself with high inventory levels and decreasing demand.  Given that panel producers do not want to fire workers that have been trained only to hire and train new workers when utilization rates move up, the company has announced a new ‘Unified Vacation Plan’ for employees that designates September 12th and 13th as ‘vacation days’, along with October 5th, 6th, and 7th, with the payroll system deducting said ‘vacation days’ from worker’s pay, which has caused workers to complain to the media and the Taiwan Ministry of Labor.
The Ministry of Labor seems to believe that the Innolux leave announcements ‘clearly violate Labor Standards Law’ and put the company in position to receive a maximum fine of NT$1,000,000, which is the equivalent of ~$33,000 US$.  The average engineer in Taiwan earns $85,300/year, which comes to $234/day and assuming all 52,600 Innolux employees are forced to take the 5 additional unpaid vacation days, the savings to the company would be ~$62.5m, which makes a $33k fine seem a bit insignificant.  Of course it does little for company/employee relations but with the outlook cloudy for the next few months we expect management would not be distressed if a few employees left for greener pastures.

The CEO of Samsung Display (pvt), affiliate of Samsung Electronics (005930.KS), indicated that it will be building a Gen 8 OLED fab in its production complex in Asan, South Korea, designed for the production of IT OLED panels.  As we have noted previously (8/16/21, 06/30/22,5/26/22), the construction of such a facility has been rumored, particularly as SDC has been developing specialized OLED deposition equipment with tool supplier Ulvac (6728.JP) that will help overcome the physical limitations that restrict the use of fine metal masks to Gen 6 OLED fabs.  Fine metal masks are used to pattern OLED emitter materials on rigid or flexible substrates but begin to sag, causing defects, when they are used above Gen 6.  The new process that SDC is developing places the deposition chamber and the masks vertically, rather than horizontally, keeping gravity from deforming the masks.
We expect the fab will be built in the L8 building, where SDC formerly had two large LCD fabs, producing up to 350,000 sheets/month at its peak, or the equivalent of 25.2m 55” LCD TV panels/year.  SDC closed the first line in 2019, sold the equipment to Chinese LCD module producer Shenzhen Efonlong (pvt), and since built the production line for the company’s QD/OLED display products in that location.  While no specific details about the new fab’s capacity were given, the company is expected to begin production on the new line in 2024, which will improve the efficiency of OLED panel production for IT products (monitors and notebooks), which are currently being produced on less efficient Gen 6 OLED fabs at SDC.  This would coincide with Apple’s (AAPL) rumored plans to move the iPad from LCD to OLED displays in that year.
The OLED IT category is small relative to OLED smartphones, watches, and TVs, but represents a less competitive category and rapid growth. Current estimates see OLED monitor revenue growing from $57m last year to over $200m this year, although that includes QD/OLED and OLED notebooks growing almost 40% in sales y/y and over 60% in units.  The chairman also indicated that SDC would be pursuing two forms of micro-displays, micro-OLED and micro-LED, neither of which comes as much of a surprise considering Samsung’s micro-LED commercial products are already available albeit at extremely high prices.  The indication was that the company will be in mass production of micro-displays in the 2024 year along with the Gen 8 OLED IT line, which musts some significant milestones for SDC over the two years.  While SDC management did not indicate the cost of these projects, the Gen 8 fab alone is estimated to cost between $2.3b and $3b, and we would expect that the OLED micro-displays would be produced on silicon, which would entail a dedicated production line. 
All in, these are big projects but necessary for SDC to maintain its leadership role in the RGB OLED space and compete for micro-LED commercialization with Chinese panel producers, who have also been making such investments.  While 2023 will be a year primarily dedicated to more traditional OLED products, which are increasingly influenced by macro factors, 2024 and 2025 will be years in which SDC is able to expand its display product line, particularly with new premium priced display products that will lessen its exposure to competition from Chinese panel producers.  There are still a large number of roadblocks to overcome but it is nice to have the backing of one of the world’s largest CE companies when it comes to taking such chances.

Given the fact that most CE devices have a display of some sort, and as the device category becomes more sophisticated the display tends to follow suit, and the display itself tends to be the single highest cost component in many CE devices.  As an example, the cost breakdown of components in the Samsung (005930.KS)  Galaxy Note Ultra 5G, one of Samsung’s flagship models that was released in August of 2020 had a component BOM of ~$468, and while the cost of the display included the 6.9” OLED screen, touch overlay, driver IC and cover glass, it was 19.6% of the component BOM, with only the entire cellular system, encompassing the 5G modem (both Sub6 and mmWave), 2G,3G, 4G systems and antenna modules costing more (20.8%), although we believe the display itself was still the largest share of the component BOM.  As such the display market is a key indicator as to both short-term and long-term trends in the consumer electronics space and we have looked at and maintain data display sales and shipments on a monthly basis since 2004 to help in understanding the prospects for a wide variety of companies that feed the CE supply chain.
As the industry contracts after hitting a peak in July of last year, we watch for signs that those factors that caused or are causing the decline are gaining or losing ground in order to gain some insight into when a bottom in the display cycle might be reached and what the momentum on the up cycle might look like.  The data, particularly charts, paint a picture that can give hints as to where the display industry will be in 3 months, six months, a year, or two years but the psychology behind what goes on in the display space is equally important and we try to provide an unbiased perspective to balance the data.  When we speak with industry professionals we try to understand their way of thinking, which can be diametrically opposed to our perspective, but our goal is to read through the corporate speak, technical gobbledygook, and blind optimism that pervades the industry and figure out the root of the conversation and real answers to questions.  We have no positive or negative bias toward the display space or the CE space as we get paid to provide information and not promote sponsored products, which we hope our readers understand and value.  So much for shameless self-promotion…
As we have noted, panel; producers finally began to realize that panel pricing was not going to go up forever and that what they hoped was going to be the ‘new normal’ was just another wave in a cyclical industry.  As we noted yesterday panel producers have begun to lower fab utilization rates for a number of reasons.  The first, demand has declined, and second, many panel prices have fallen below cash costs.  As demand rose in 2020 and the 1st half of 2021, as COVID changed consumer habits, brands embraced that demand but held on to consumer momentum far longer than necessary, and coupled with an underlying fear of not having enough components to meet future demand, brands built inventories past normal levels.  Now, with lower demand from consumers as COVID wanes and inflation rears its ugly head, those inventory levels are the third leg of the stool forcing producers to lower utilization levels to work down that inventory.
Panel producers began this process in May and have since lowered utilization rates from the low to mid 90% level to the mid 70% level and while in yesterday’s China LCD Production Utilization Chart we left July industry large panel sales flat, we now have added actual July data, which indicates that large panel sales in China decreased by 8.5% in July, giving some indication as to the effectiveness of the most recent utilization cuts in China.  As China fabs generated 47.3% of total industry large panel LCD sales, the utilization cuts made on the Mainland have a significant effect on the global display supply situation, hence our focus on China during this part of the down cycle.

On a global basis, as panel producers in other regions have also cut utilization, July global large panel sales were down 4.3% m/m and down 35.7% y/y to the lowest point since May 2020.  July large panel shipments were down 12.1% m/m and down 16.9% y/y, and as shipments declined at a faster rate than sales, overall large panel ASP’s rose by 8.9% to $81.73, the first m/m increase since February.   All product categories saw shipment declines as shown below.  If we average the sales/month for this year, the reduction in sales between June and July would be the equivalent of 1.2 days of sales, a rather mediocre push toward reducing panel inventory, which we believe to be ~15+ days above normal, with some of that sales reduction from weaker overall demand.  While we expect the additional cuts made this month will impact sales further in August and help the industry to absorb more than a day or two’s worth of inventory, our expectations for how long such utilization cuts might last are now extended into 4Q and beyond.

​[1] Includes Notebooks, Monitors & Tablets

Before we go further we need to quantify what we mean by ‘better’.  For the first time in many months actual panel pricing (in some categories) came in better than our forecasts, hence the ‘better’ in the title, but we also have to qualify that in noting that the aggregate large panel price is currently at its lowest point in the last three years and you would have to go back as far as February 2014 to find an aggregate price lower than current.  With that said, we look at panel pricing for August against that backdrop and while TV panel pricing came in within our forecasted range, IT panels, particularly notebooks and monitors, did a bit better than our expectations.  Again, qualifications are necessary as monitor and notebook panel pricing in August was still down 5.5% and down 4.6% respectively, but given that those are the smallest monthly declines since March/April, the glass is half full.
We expect that the utilization reductions have tightened the panel market to a degree, and panel producers are a bit more picky about the profitability of projects that they take on for customers as they have less capacity to fill, which pushes us to look at least a bit more favorably at pricing in September, and while we still expect the aggregate large panel price to decline between 2.9% and 3.5%, the momentum to the downside has lessened.  The question to us is whether there is a seasonal improvement to demand driving the ‘improvement’ or is this more of a drive by panel producers to avoid unprofitable jobs that they might have taken on in the past in order to maintain a good relationship with large customers.  We expect the power issues in China might also have a bit of psychological impact on buyers who still need to meet quotas, albeit lower ones, and are willing to negotiate a bit more to ensure volumes are met, but we expect things will cool down in China by the end of the month and buyers will remain in the driver’s seat.
One metric we watch, which can be seen in Figure 7, is the m/m rate of change, and while still negative the ROC has begun to improve, a sign that at least some pricing pressure is being alleviated.  That said, if we look  at Figure 8, it can be seen that pre-COVID, the m/m rate of change was considerably smaller than what has been seen since late 2019, and while the direction has certainly improved, stability is what we look for to establish a basis for a sustained recovery.  We expect such stability will not come during periods of low utilization and will take some time even after utilization rates return to more normalized levels as those changes will destabilize panel pricing for a short period until a more realistic balance between brands and panel producers is achieved.  While we are not want to give timelines for the industry, we would expect the first point at which a stable balance between both sides of the equation could occur would be late 1Q or early 2Q 2023.  Lots of things would still have to fall in place to achieve that timeline, but we see that as the first point at which it could occur.

Of the three major panel producers in Taiwan, Hannstar Display (6116.TT) is the exception, as the company’s focal point is small panel production rather than large panel, as is the case with both AU Optronics (2409.TT) and Innolux (3481.TT), the other major producers in Taiwan.  As seen in Figure 1 Hannstar’s monthly sales have historically tracked reasonably close to industry small panel pricing up until this year when small panel pricing continued the decline it began in 3Q 2021 while Hannstar’s sales increased and have maintained a similar high level with only April as the anomaly. 
What makes this unusual is that a Hannstar VP noted late last week that given the steady order pull-ins that the company had been seeing, Hannstar expected to see higher utilization rates in the 2nd half than in the 1st, essentially the opposite of the rest of the industry.  The VP went on to say that the company has been less affected by the slowdown in overall panel demand as the company has diversified its product portfolio and its customers.  He cited a company utilization rate of ~80% for the first half of the year and set expectations for a 90% to 95% utilization rate for the 2nd half of this year. 
While sales for the 1st half of 2022 for Hannstar are down 40.78% y/y, the implication is that the 2nd half (assuming small panel prices remain roughly flat), would be up 11.7%, the 5 year average, a far cry from the expectations for large panel producers in the 2nd half, especially with lower utilization rates now being assumed to remain for much, if not all of the 2nd half.  If Hannstar is able to do as the higher utilization rate implies, it would put them in a category by themselves for the remainder of the year, and while there are still many factors that could influence Hannstar’s full year and 2H results, we would certainly give credit to management for the improvement in product and customer base.  Hopefully the customer list has broadened, making the company less reliant on a particular customer, but it is a bit too early to see if the data proves out. 
All in, Hannstar presented one of the most optimistic views of the next two quarters among panel producers, but at the same time we note that the additional capacity that Hannstar announced last July (see our note 7/9/21), the first time the company has added capacity since it began production in 2005, has been ‘paused’, which seems to contradict the outlook above, but we expect Hannstar will not be the only one to slow or stall capacity increases, especially if the utilization rate reductions being seen currently remain in effect for the remainder of the year.  While we have to assume that at the first sign of either stable small panel display pricing or any improvement in consumer demand for mobile devices, those construction projects will be resumed under the thought that there will be a return to the insatiable demand for smartphones and other mobile products that existed in 2020 and early 2021.  Any optimism we might have for the small or large panel LCD display business would be predicated on at least some of those capacity projects being permanently cancelled.

As we have noted previously, panel producers have finally begun to accept the fact that the demand levels seen in 1H ’21 are not continuing this year, and that inventory levels have been increasing faster than sales.  This has led to utilization rate reductions as a number of display products become unprofitable and maintaining full equipment readiness is no longer cost effective.  While these cuts should have started earlier, panel producers were hoping that demand would return in 2Q, and then in 3Q, finally facing the fact that neither was the case.  As China has become the regional share leader in the LCD display space,it behooves Chinese panel producers to bring down utilization I  order to reduce inventory and tighten supply.
When necessary, we track those utilization levels to see if utilization cuts among Chinese panel producers are lip service or are meaningful enough to make a difference, and while the cuts are now reaching levels that have some impact on production, it was not until the end of May that such cuts began to any large degree.  While we do not have hard data for July large panel industry sales (we extend June’s sales through July until the data becomes available), but the initial cuts to utilization quickly brought done sales but have made little difference through the end of June, particularly the cuts at ultra-large fabs (Gen 10+), and while Gen 6 OLED utilization rates were low in China to begin with, they have not changed materially over the last few months.  Hopefully the additional utilization rate cuts made in July and thus far this month will have more of an impact, as inventory reductions need to be more rapidly effected if there is to be any hope for improvement at the panel level in 3Q or 4Q, so we will republish the data as soon as July hard data becomes available.  Until then the data seems to indicate that utilization rates at Chinese display fabs need to be dropped further.

Innolux (3481.TT), a subsidiary of Foxconn (2354.TT) is the 4th largest global large panel LCD producer by revenue, having been producing display panels since 2003, and as one of two remaining large panel producers in Taiwan is a supplier to a wide variety of CE brands.   Last month the company predicted that it would see shipments for 3Q remain flat, despite panel price weakness and high inventory levels, but it seems they have changed their outlook since then and are now expecting shipments in 3Q to drop by 12% and expect to lower their utilization rate from 90% last quarter to between 50% and 70%.
The company’s chairman stated “It is meaningless to manufacture that many panels when selling prices have dipped below the cost level and inventory digestion is slower than expected”, which seems to be stating the obvious when looking at Figure 7 & Figure 8,  and is directing the company to allocate more capacity toward high-value added products in order to ‘optimize’ the product portfolio, something other panel producers have been doing since the middle of last year.  The company is now looking for only modest sales gains in 4th quarter, despite the holiday season after the company slipped into a loss position for the first time in almost two years.
Other than the closing of the barn door after the horse has gone, what gives us concern is that the company is pinning its hopes on the weather in China, with it’s best case scenario being one where the power cuts in China cut panel production between 3.5% and 5%, or 2m to 3m 32” panel equivalents, and stated that the ~70% reduction in power to factories in Sichuan would not be enough to keep production lines running.  Under such a scenario Innolux management sees a bottom for the industry by year-end and a good start to 2023.  The company also believes that global notebook shipments will be maintained at the higher levels reached as the COVID-19 pandemic forced people to remain sheltered, with the idea that remote learning and a hybrid lifestyle will maintain notebook demand for the next few years, although based on Figure 9 we expect notebook shipments will fall back to pre-pandemic levels, as they seem to already have. 
Unfortunately, this ‘head-in-the-sand’ approach does little but exacerbate the negative display market situation that has been developing since the middle of last year, but we keep our expectations low.  While Samsung Display (pvt) and LG Display LPL) made the decision to step out of the large panel display business a few years back, others seem to be willing to look at the world through rose colored glasses, which only works well when prices are rising.  The glasses should have come off last July.

Yesterday we noted that a number of regions and cities in China were facing an unprecedented heat wave that had caused local power authorities to cut production from August 15th to August 20th.  According to China’s largest panel producer BOE (BOE), the four display production lines that it runs in Sichuan province have been notified by the Sichuan Power Authority that “in order to ensure the safety of the power grid in Sichuan Province and ensure people’s livelihood enterprises need to make production adjustments.”  The company goes further stating that it will cooperate with people’s livelihood, security policies, and minimize electricity load, and flexibly arrange production operations, although the company will make ‘timely’ adjustments to the TFT-LCD production line, performing routine equipment maintenance.  However they also state that “Based on the above situation, after evaluation, this power cut will not have an impact on the company’s overall operating performance.
BOE’s fabs in Sichuan province are:

​Based on the fabs affected, potential production outages could represent 9.6% of BOE’s overall display capacity should they all be shut down, with 8.6% of the company’s LCD capacity and 55.2% of its OLED capacity more specifically.  We do not yet know which lines and by how much production cuts are being made, but the metrics here represent the worst case and are not actual estimates of actual production reductions.  We would expect that ongoing negotiations with the local power authority are continuing, as they are with HKC (248.HK) and other CE supply chain companies in the region, but we are a bit more focused on BOE considering its entry into the Apple (AAPL) OLED supply chain this year and the problems it has already faced in that regard.  As we noted yesterday, forecasts for Chengdu and the region call for continued above average heat through the 25th, so we expect that the original restriction end date of 8/20 will be extended for an extra few days.