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.

As analysts we always look for anecdotal evidence that what we feel is true is actually a valid hypothesis, but most times that evidence is hard to come by…and other times it’s not.   Given our longstanding experience with the CE and display space we tend to get a feeling that something is going to happen before it actually does, and while we are certainly wrong (on occasion) or misjudge timing, having closely followed the display space for over 18 years gives us some sense of intuition about how things will play out.  While the industry bemoans about how deeply it had to cut utilization to try to manage inventories and keep panel prices from dipping so far below cash costs that it was not worth turning the power on, we saw this issue as the potential solution to the very problems the industry had created for itself.
The necessity for lower utilization rates at panel producers, be it LCD or OLED, is a function of the classic imbalance between capacity and demand, and while there are many ways in which demand can be influenced, supply/capacity, especially in the display space, where greenfield capacity has a high capital cost and process equipment has long lead times, needs years to plan and complete, which means panel producers must anticipate industry and macro conditions years in advance.  Such advanced planning is fraught with influences that color panel producer views and complicate the process further and such can push a short-term or long-term roadmap toward a postponement or eventual cancellation, or worse, an idle or under used facility.
The threat of competition is certainly one ‘influencer’ in the capacity decision making process, but there is competition in every business.  In the case of the display business however there is another kind of competition that we believe is, and has been, a major factor in exaggerating the cyclical nature of the panel business, and that is political nationalism (aka ‘polinat’ – you heard it here first ☺).  Under our definition, polinat is the influence of politics in a country’s desire to be recognized globally, which puts the government’s necessity to gain global acceptance above that of the populous and can be a significant influence on a country’s economic and business outlook, depending on the political system.  Over the last 12+ years the Chinese government has had a significant influence on the display space through government sponsored funding of display capacity, which was readily accepted by panel producers.
The plentiful funding, which typically comes from provincial or city owned entities, has allowed Chinese panel producers to expand capacity at an unprecedented rate, which in many cases had little to do with supply/demand and more to do with a desire to cement China’s place in an industry that has previously been dominated by other Asian competitors.  Underlying this political nationalism has been good old company rivalry between Chinese panel producers themselves, which has served to aggravate the situation.  The Chinese display industry has been focused on chasing market share since its inception and now is the dominant force in the LCD display space, and has built out very significant capacity under the assumption that the LCD display business will continue to grow, with China the dominant force behind that growth. 
This enthusiastic capacity expansion was reinforced during the COVID-19 pandemic, as panel prices rose under unusual demand circumstances and most panel producers became profitable.  This positive justification led to further expansion planning under the assumption that we were living in a ‘new’ demand environment and funding continued, even after panel prices began to deteriorate in July of last year, and while TV panels pricing declined rapidly, panel producers continued to justify those expansion plans citing the mantra that IT panel pricing (monitors, notebooks, and tablets) remained strong.  Unfortunately that IT panel price stability was not sustainable given the fact that most panel producers shifted capacity from TV panel production to IT panel production as TV panel prices deteriorated, which caused IT panel prices to deteriorate, especially as demand weakened.
Little has been said during the 1st half of this year about previously announced expansion plans, but we expect much has been said internally and most recently a trip by the chairman of TCL (000100.CH) the owner of China’s 2nd largest panel producer Chinastar (pvt), visited South Korea to meet with Korean equipment suppliers to discuss ‘the current state of the industry’.  According to the South Korean trade press, those discussion were focused around the TCL chairman explaining to equipment suppliers that delayed payments and timeline pushbacks were the result of the overall weakness in the display market and to discuss the feasibility of changing the format of some of the equipment from small panel OLED (Gen 6) to Gen 8 in order to move more toward the production of IT OLED panels and away from those for smartphones.
Equipment producers were told that Chinastar’s T5 Gen 6 LCD fab in Wuhan that TCL announced late last year would be expanded, has delayed the expansion until 2023 and the company’s T9 Gen 8.6 LCD fab project in Guangzhou will also be postponed for 6 months, apologizing for the delay in progress payments.  This is a sensitive subject for South Korean equipment suppliers as we mentioned in notes on 12/29/20 and 6/1/21, as a company known as Jiangxi Infintech Optoelectronics (defunct) has ordered roughly $77m from a number of South Korean suppliers for a $3.5b mixed use LCD/OLED Gen 6 fab it was planning to build in 2018.  After multiple delivery pushouts and little, if any payments, the company’s management abandon the project and left the country leaving South Korean equipment vendors with raw materials and project expenses that were never paid and the expensive task of trying to recover funds through the Chinese courts.
TCL is lucky in that Samsung Display (pvt) has a 12.3% share in TCL, which it purchased when it sold its LCD fab in Suzhou to Chinastar in August 2020.  This gives TCL considerable credibility with Korean suppliers, but more importantly the delays in TCL’s display expansion projects are indicative of the theory that the idea that helter-skelter expansion might not be the only way to prove a country’s ability to compete in the world market, and that the concept of ‘If you build it they will come’ was a line form a movie and not necessarily a motivation for spending billions of dollars.  The continued expansion of LCD production capacity through 2023 and 2024 against a more moderate demand cycle was one that give us little hope for more than modest sales gains for the industry and as that philosophy spread to the OLED space, the same fate, out a few years further, was also inevitable, but a more rational view of capacity now seems to be starting to take hold with the TCL chairman’s trip a good omen.
That said, we still have to account for the political nationalism that exists in China which is exacerbated by anti-China political rhetoric in the US.  Historically capacity delays tend to disappear at the first sign of rising prices and while Samsung Display made the hard decision to exit the large panel display business years ago and LG Display (LPL) has been following a similar path, that decision seemed a very wise decision in 4Q 2019 and a terrible one in July 2021.  The underlying price competition from Chinese LCD producers that caused such decisions, a function of the Chinese desire to prove its global worth by dominating a space that had been controlled by it political and regional rivals, still exists and our concern is that while we take the TCL/Chinastar postponements as anecdotal evidence that there is potential for more rational display capacity expansion planning in China, changing a mindset is a difficult task that either takes a long time or is forced economically.  While we prefer the former and abhor the idea of an extended downturn in the display and CE space, sometimes it takes being hit over the head to figure out that you are the one doing the hitting.

As always we look at panel sales as an indicator toward the health of the CE space given the relative high percentage of BOM that displays represent in most CE products, but much data on CE product shipments is gathered quarterly, we focus more on data that we can gather on a monthly basis in order to gain insight into the trends that will be affecting quarterly and yearly industry and company results.  While in the US and many other countries there is no requirement that companies report monthly sales to investors, there are such rules in Taiwan, which is the reason for our focus on Taiwan based panel producers AU Optronics (2409.TT), Innolux (3481.TT), and Hannstar (6116.TT), particularly AUO and Innolux, as they are both large panel producers, while Hannstar is primarily a small panel producer. 
AU Optronics reported July sales of NT$17.43b ($582.3m US), down 15.8% m/m and down 47.7% y/y against a 5 year July average of -0.5% m/m.  This continues the monthly downward trend which began in July of last year as seen in Figure 1.  AUO also reported shipment area of 1.3m m2, down 18.2% m/m and down 38.1% y/y, the lowest monthly shipment area since AUO began reporting such data.  This is indicative of the weak customer demand and the resulting utilization cuts that have been plaguing the display space since the end of 1Q, and give some indication as to the extent of those utilization cuts.  Based on 19 months of shipment area data, the average monthly shipment area is 2.0m m2/month, with the July data down 35% from that number and down 42.9% from the peak (12/2021), and also down 29.0% from the average shipment area for this year (1.83m m2/month). 
While it is difficult to disaggregate reduced customer demand and intentional utilization cuts, we estimate that AUO has reduced their utilization rate by between 25% and 30% this year, after being close to 100% for much of 2021.  That said, AUO has been able to maintain a relatively stable sales/m2 since the beginning of this year, albeit down from 2021, indicating that the lines that are still in operation are generating 6.1% less sales than they were during last year’s 1st half, likely a result of producers having less choice as to what jobs they take on, meaning settling for less profitable products to fill existing lines.
Innolux, Taiwan’s other large panel producer reported sales of NT$15.760b ($526.5b US), down 18.3% m/m and down 51.1% y/y against a 5 year average for July of down 2.2% m/m.   Large panel shipments were 8.25m, down 26.2% m/m and down 32.8% y/y, the lowest large panel unit volume since February 2020, as seen in Figure 4, with small panel shipments of 22.97m units, down 24.4% m/m and down 19.3% y/y (Figure 5), putting total shipments down 24.9% m/m and down 23.3% y/y.  We believe Innolux has waited a bit longer than most to become more aggressive as to lowering utilization and pulled back large panel production to a larger degree in 3Q.
All in, the effects of lower utilization rates at Taiwanese large panel producers are now becoming more apparent in their monthly sales, while still facing weak panel pricing as Chinese LCD panel producers continue to offer panel price discounts to fill fabs.  We expect a little help over the next month or so from easing raw material and component costs, but expect it will take some time for those cost reductions to filter through the display supply chain.  Given that panel inventory was certainly higher than normal exiting 2Q, we expect it will take the rest of August at least, to work that down to more realistic levels, which would imply that utilization cuts will remain in place for this month, although we do not expect additional cuts in September from most large panel producers.    We believe the holiday season will still be lackluster, but even a small improvement in inflation could help to lift consumer spirits enough to at least keep 4Q in the CE space from declining q/q.  It is still hard to get optimistic about the remainder of this year, but at least we can see the possibility that there are a few scenarios where 2023 sees some y/y upside.

AU Optronics (2409.TT) reported 2Q results as previously noted, down 22.9% q/q and XXX y/y, generating an operating loss.  2Q weaker sales and profits were the result of lockdowns in China and weaker IT product demand from customers who have higher than normal inventory levels, which is predicament that most panel manufacturers faced and AUO was no exception.  The company has lowered its utilization rate (area) to ~70% and will ‘dynamically adjust’ that rate in 3Q, which means they have not set goals, other than to look at each product line and decide if they can generate a profit or positive cash flow before deciding to produce that product in 3Q.  While this sounds like something that should be done on a regular basis, when utilization and profitability is high there are some products that panel producers will run to satisfy large customers, even if they run negative CF.  Given the direr macro circumstances, that perspective has changed.
The company has guided to a decline in shipment for 3Q of between 14% and 16% although they expect ASP (area basis) to be flat based on mix changes, essentially focusing on those products that are in the premium segment of the display market, with automotive and medical singled out.  On a general basis management indicated that they are beginning to see raw material prices stabilize or decline and while transportation costs are still high, many of the logistic bottlenecks have abated.  While this is a positive for the company (and the industry) and is expected to lead to a 2% to 3% cost reduction in 3Q, the easing of transport bottlenecks also pushed more inventory into the channel in 2Q, which now has to be digested by customers and has forced the utilization reductions that are expected to continue in August.
On a medium-term basis, AUO has decided to reduce it capex for the 2022 year by 20%, from NT$45b ($1.5b US) to NT$36b ($1.2b US) and has delayed plans to build a new Gen 8.6 LCD fab until a better picture of the demand cycle becomes available.  The company did indicate that it intends to increase its exposure to the automotive display market, which is seeing improving demand and will continue to grow its ‘non-display’ businesses to offset the cyclicality of the display market.  Figure 1 shows the breakdown by product category of AUO’s revenue with TV declining from over 38% in 2Q ’18 to 16% in 2Q ’22 and the combined commercial, automotive, public display and other category moving from 20% in 2Q ’18 to 43% in 2Q ’22.  While this has helped AUO through various product category weak cycles, the overall weakness in the TV and IT display space in 2Q was great enough to generate losses.
All in, the quarter was generally as expected for AUO and the call rhetoric seems to indicate that while the company would like to be optimistic (they are hoping that brand discounting will burn through excess inventory quickly), they are unsure as to how long this scenario will last, and the capex cut is indicative of that concern.  AUO has responded well relative to competitive challenges from Chinese panel producers over the last two years by focusing away from generic panel production, but with almost all other panel producers now under pressure to find more profitable display products, will likely face increased challenges over product differentiation and capex could shift back to upgrading existing fabs to become more specialized and away from overall capacity expansion given the excess capacity currently existing in the display space.  It was a difficult quarter for AUO and the industry, and it looks like 3Q has started off in the same way, although we expect 3Q to end a bit better than it began and 4Q is going to be a reflection of consumer psychology heading into the holidays, which, given the rapidity in which the macro environment changed in 2Q, seems light years away and equally unpredictable.

LG Display (LPL) reported 2Q results of 5.607t won ($4.278b US), down 13.4% q/q and down 19.5% y/y.  Operating income was a loss of 488b won ($372.4m US), the first quarterly operating loss since 2Q 2020.  Gross margins declined from 12.6% in 1Q to 4.9% in 2Q, against 20.8% in 2Q last year as volumes decreased and panel prices declined.  Little in the basic numbers was a surprise although for the first time in the last 4 quarters, the percentage of revenue generated by the production of TV panels increased, although likely as a result of IT panel shipments and prices slowing more rapidly.  On an area basis LG Display saw both shipments and capacity decline, which has been the case since 4Q 2021, with the area utilization rate rising slightly from last quarter’s low of 70.4%.  We note this is not full fab utilization, meaning against the total capacity of the fab, but against the area currently being used.

The company attributed the weakness to soft demand, weak LCD panel prices, and disruptions in the supply chain in China, resulting in lower LCD panel utilization and shipments, although OLED TV shipments were up in the quarter, a ray of hope for OLED emitter supplier Universal Display (OLED) that derives material sales and unit price royalties from LGD.  OLED TV sales were up ~25% y/y in the 1st half, however the company is forecasting that while there will be OLED TV shipment growth in 2H, it will be at a slower pace than in 1H,, likely closer to 13% to 17% as retailers are expected to order more cautiously in 2H.
In that same vein, inventory levels increased in 2Q by 11.6%, which is concerning considering the company is forecasting continued soft demand at both TV set manufacturers and retailers as a result of excessive inventory levels at those points in the supply chain.  The rational, despite the company’s expected further reductions in utilization were based on new model introductions and the potential need for higher inventory levels heading into the holiday build period, although Figure 4 would indicate that such levels are out of line with historic norms, with the company indicating it expects to return to more normal inventory levels by the end of the year.  We expect some of the inventory build in 3Q is related to the company’s display supply contracts with Apple (AAPL) for the upcoming iPhone, but no specifics were given.
Guidance for 3Q was a bit more specific, with area shipments projected to be up between 4% and 6% q/q as IT and OLED shipments recover, and ASPs (Area basis) increase as the share of smartphones and wearables, which carry higher profitability on an area basis, increase in 3Q, but at the same time the company was forecasting IT panel prices to continue to decline and TV panel prices to also continue to decline, but at a more gradual rate as other LCD panel producers continue to lower utilization rates.

As the risk levels for panel manufacturers rises most companies indicate a desire to expand their product lines away from more generic LCD IT and TV panels and to more value-added displays that are both less competitive and carry higher margins, and LGD indicated the same mantra, with a focus on expanding its already market leading automotive display penetration while increasing both its OLED TV penetration rate and expanding what it calls a ‘made to order’ business, which we assume to mean more product co-development with large customers. 
Much of this is the same corporate speak that appears when the macro environment begins to sour, and should be addressed more closely when things are going well, but LG Display, along with Samsung Display (pvt) has been in the camp of winding down its large panel LCD production for the last few years, although at a much slower pace than their rival.  This brought up the question of the company’s plans for that process, with LGD being a bit more open about plans for their LCD large panel business.  The company’s largest production line known as P7 is a Gen 7.5 a-Si LCD line that was built to produce 225,000 sheets/month.  The company has already brought capacity down to 150,000 sheets and plans to reduce that by another 60,000 during 2H and another 30,000 in the 1st half of next year.  The original plan was to end all production by the end of next year but the company has indicated that they will likely accelerate that process now that large panel prices have been declining.
While we understand that LGD has supply contracts with customers that it must fulfill, and certainly does not want to maintain fabs that run at a small portion of stated capacity, we have been surprised as to how long it took for the company to make the decision to accelerate the wind-down process, with the company stating that the fab had been running at high utilization rates, but as of last July (2021) large panel prices began to decline at a rapid pace and it seemed inevitable that the high utilization rates of 1H 2020 were not sustainable, at which point the push to cut large panel exposure should have been made.  The company did indicate that its Gen 8 fab in Guangzhou China will not be closed but will be converted to the production of smaller IT panels, rather than larger TV panels, for which 10% - 15% has already been completed, with the remainder by the end of 2H next year, which will reduce the company’s exposure to large panel production by 40% (their number).  Other company fabs in Korea, which are Gen 5 and Gen 6 are already oriented toward IT panel production.  The company indicated that the profitability of its IT panel production declined in 2Q but saw less impact than the overall market due to its focus on high-end products.
While the question was asked about plans for expansion of the company’s OLED TV capacity, no answer was given other than the general reference to the development of new OLED oriented products (including automotive), but more importantly when asked about the on-again off-again negotiations with Samsung Electronics (005930.KS) concerning that company’s purchase of multiple millions of OLED TV panels, management indicated that such negotiations had taken place but there was nothing in progress, followed by the more general comment that the company would negotiate with any major customer ‘as long as they recognized value’, which would seem to indicate that price negotiations between the two did not end well.
The circumstances under which panel producers such as LG Display had to operate in 2Q were difficult, but not unexpected and we are always surprised at how slowly pane producers react to what seemed an inevitable conclusion as to panel prices, both TV and IT, and now that the inevitable has occurred panel producers seem a bit surprised at how rapidly things deteriorated, although few were complaining when pane prices were rising rapidly and hitting unprecedented heights.   Now it seems everyone, LGD included, have gained ‘religion’ and are looking at a more conservative approach to production and longer-term plans.  Of course it is easy to me an arm-chair quarterback but there is one consistency in the CE space and that is history repeats itself, so when things like prices get far out of line with historic norms, the elastic band always snaps back, so we wonder if those being ‘snapped’ really thought things were really at ‘a new normal’ or they just did not want to think about anything other than near-term prospects.  Its actually not that hard to answer.

CE brands have been reducing orders as demand slows across many product lines as they try to work off the excess inventory that was accumulated earlier this year when a more optimistic view of demand still reigned.  Panel producers have in turn, lowered utilization rates but at least in July those reductions were not enough to take pressure off panel prices, which declined substantially in July and are expected to decline again in August (see table below).  As we have noted previously we believe that the utilization cuts made by panel producers in June were minimal and the continued decline in July large panel prices bares that out.  Monitor and TV panel pricing was worse than our forecasts, with TV, which had seemed to be seeing a slowing rate of decline, fell 8.7% for the month, far above our -2.9% to -3.5% estimate, and the overall IT segment coming in worse than our range and our August forecasts call for similar declines in almost all product categories.
Based on July large panel pricing all display categories are at or below their 3 year lows which brings up the question of at what point will such low panel prices begin to stimulate demand.  Declining panel prices boosted notebook (+9.7% m/m) and tablet (+15.7% m/m) shipments in June and the overall large panel display space saw a 0.8% m/m increase in sales, and while that could begin to paint a picture of a bottom, we expect July sales to decline as brands cut targets further and panel producers get more aggressive toward discounts in order to maintain current utilization levels.  With large panel prices expected to fall again in August, it would be hard to be optimistic in the near-term, although display sales should see a modest seasonal pick-up in September, but even with some improvements in logistical costs, we would expect more of a bounce along the bottom rather than an easily definable recovery.
While there are many mitigating factors that could change over the next few months, we are a bit more optimistic about 2023 in the display space, although we temper that feeling with the inherent overcapacity in large panel production and a careful definition of what a ‘better year’ might look like.  We expect a return to a more normalized 1st/2nd half split but do not expect more than a modest y/y sales recovery in 2023, with most of the profit leverage coming from reductions in raw material and component prices and less from improving demand.  We expect panel prices to begin to stabilize in late 1Q or early 2Q, but to remain at pre-pandemic levels.  The timing will depend on how aggressive brands will be during the holidays, essentially how willing they are to sacrifice margin to return inventory levels to pre-pandemic norms, and inflation/recession fears at the consumer level.
Calling the bottom of the display cycle here seems premature as there is a considerable likelihood that the industry will see sales declines in the near-term and while some might consider our modestly optimistic view of 2023 a recovery, we see it more as a return to what existed before COVID-19, warts and all and more a return to the industry status quo than a recovery.  Maybe our perspective is a bit biased toward the glass half empty here, but at this juncture it is hard to see what would fill the glass.

Investing in Chinese companies can be a harrowing experience, with listing requirements varying between exchanges and financial oversight a challenge for both investors and regulators who can find themselves up against corporate structures that make parsing financials a Columbo-like endeavor rather than a numbers oriented session.  But there is one aspect of investing in Chinese companies that opens up a new venue for investors that is not available in the US and that is the Q&A platforms sponsored by the exchanges that allow investors or potential investors to directly ask questions of company managements on a daily basis.  Based on the companies we follow on the Shenzhen and similar exchanges, company responses vary considerably in response time and depth, and many are just platitudes with little substance, but where face-to-face questions asked of managements might be indirect and circuitous, on-line questions tend to be quite direct, and while the answers can dance around a simple answer, the simple answer is usually obvious.
China’s BOE (200725.CH), the world’s largest LCD panel producer, is one of the more responsive companies on the Q&A platforms, and while they do the ‘dance’ like many others, they at least attempt to answer questions where others do not.  A recent very simple question prompted a rather lengthy response, which could have easily be summarized in a few words.  Here’s the question and answer, and our summary…
Question
“Hello, is the OLED screen company losing money?  Is it possible to increase the selling price to reduce losses?”
Answer
“Hello! At present, the company's three flexible AMOLED production lines are still in the climbing period, and the newly added depreciation is under pressure in the short term. In the long run, the flexible AMOLED business is one of the company's important growth points in the future. The company has given full play to its advantages in technology and production capacity, and has established extensive and close customer cooperation relationships, and has made important breakthroughs in the development of flexible AMOLED business. According to consulting agency data, in the first quarter of 2022, the company's flexible AMOLED product shipments increased by nearly 50% year-on-year. With the continuous increase in shipments, the operation of the flexible AMOLED business will continue to improve. In the field of smartphones, the company's flexible AMOLED products have basically completed the introduction of global mainstream brand customers in 2021. In the future, it will mainly focus on achieving more product series coverage for customers and continuously increasing the proportion of customers of the company's products. At the same time, continue to promote the application of flexible AMOLED in new fields such as IT and automotive, and enhance the value and performance contribution of flexible AMOLED products. Thanks!”
Summary
“No, not yet.  Not sure when”
In similar fashion, another Chinese panel producer Visionox (002387.CH) was recently queried in a similar fashion also about their OLED display business, although with a bit more detail as follows…
Question
“Thank you very much for the performance forecast.  The estimated loss in the first half of 2022 is about 1.1 billion.  After deducting more than 500 million depreciation from Gu’an in the first half of the year, the loss is basically the same as the same period last year.  Then, while the operating income has increased by about 20%, why has the loss reduction still not achieved except for the solidification.  At present, it is indeed as the majority of investors have said, the more you sell, the more you lose.  Please give a reasonable explanation for the increase in revenue but not profit after deduction of depreciation, thank you!”
Answer
“Thanks for attention.  At present, the AMOLED field is still in a period of rapid development dominated by technology. Due to the ramping production capacity, the continuous improvement of utilization rate, the continuous investment in research and development and the gradual expansion of market demand, the gross profit margin of OLED products is still in the stage of continuous improvement. In 2021, the company's OLED product gross profit margin will increase by 6.6 percentage points year-on-year. In the future, the increase in gross profit will come from economies of scale and industrial synergy. First, the yield rate and utilization rate will be further improved, especially if a relatively sustained high utilization rate can be achieved, the scale advantage of the production line will appear, and various costs and expenses will be Obtain a more reasonable and effective allocation; the second is to continue to build an industrial ecology and strengthen technical coordination. Relying on solid technology accumulation, the company provides a product verification platform, and actively promotes the localization and introduction of upstream supply chains to reduce costs and increase efficiency. Thanks!”
Summary
“No, not yet. Not sure when”
To point, we commend the Chinese exchanges for their push to open public communication between companies and investors, something far more guarded in the US, but we all know companies are going to try to paint the best possible picture, regardless of the actual answer.  While the dance is inevitable, at least there is a sort of a forum, which is a positive step, and on occasion there is some glimmer of useful information given or at least hinted at.  Of course disclosure rules differ from country to country and open Q&A platforms like these can be a minefield for legal counsel, but at least the average investor does not have to wait 90 days to ask a question, if they are able to find a way into the quarterly queue, and the answer, regardless of how obfuscated, is public record.