​AGC (5201.JP), aka Asahi Glass, a competitor to Corning (GLW) and NEG (5214.JP), has raised their 1H sales and operating profit guidance.  Sales, which were original forecasted to be ¥870b yen, have moved up by 11.5% to ¥970b and raised its 1H operating profit forecast by 21%.  The new sales forecast is 7.2% above last year’s 1H, while the new Op Profit forecast is up 20.8% over the same period last year.  The original forecast was made by the company on 2/8/22.  While we were hoping that the increase might have been associated with the company’s display glass business, Asahi indicated that the company’s caustic soda (Sodium Hydroxide – NaOH – aka lye) business was positively affected by price increases in the chemical, which is used in paper processing, soap manufacturing, and in the refining of aluminum, along with a number of food preparation processes.   The company also indicated that its PVC (polyvinyl chloride) business, among the top 3 synthetic polymer plastics produced globally, saw higher than expected prices in Southeast Asia during the 1st half.  The company was also able to pass on the higher cost of raw materials and fuel prices to customers in its architectural glass business in Europe.  No mention of the display glass business.  We will likely have to wait until the call next month.

AU Optronics (2409.TT) reported June Sales of NT$20.69b ($69453m US), ↓5.8% m/m and ↓39.0% y/y, putting the 2nd quarter sales at NT$62.881b ($2.111b US), ↓22.9% q/q and ↓34.3% y/y and 1st half results are ↓19.1% y/y.  Typically (5 year average) June is up 0.4% m/m and 2Q is up 7.0% q/q, so from any perspective June and 2Q were weak for AUO, although no surprising given the weakness seen across the CE space and the display space in particular, as overall display panel prices declined 12.0% during the 2nd quarter and panel orders from brands were reduced.  Area shipped was 1.59m m2, ↓9.7% m/m and we do note (see Figure 2) that AUO has been able to maintain fab efficiency (not utilization), meaning the sales value of each m2 of display produced, at a reasonable level since the beginning of the year, which points to the company’s focus on high value display products rather than generic displays.
While we wait for Innolux (3481.TT) and Hannstar (6116.TT) to report June sales and shipments to complete the Taiwan panel producer data, we expect July results for most panel producers will see further declines, more weighted toward order reductions than price declines, giving a messy start to 3Q.  With Samsung Electronics (005930.KS) reducing or eliminating TV panel orders from suppliers to reduce inventory, as we have previously noted,  it will be difficult for panel producers to maintain production at earlier levels, unless they are willing to offer larger discounts than in previous months, which will amplify panel price declines.  Our hope is that the order cuts will be enough to reduce inventory to more normal levels by mid-August, and that the panel price declines that have been evident for part of last year and the 1st half of 2022 will slow to more ‘normal’ levels as we enter September.  Brand targets have been reduced but consumers have yet to jump at discounts thus far, and the macro environment leaves a bit to be desired, so again we look at such prospects as possible but less probable than an extension of the current CE malaise into 4Q.  As of yet there are few signs pointing toward a better than expected outcome, but we keep looking.
 

​Way back in February 2020 we noted that Samsung Display (pvt) had been evaluating ink-jet printing equipment from a number of suppliers for use as part of the development of the company’s QD/OLED process, which has recently become available for TV and monitor panels.  The ink-jet process was expected to be used for depositing quantum dots that convert the blue/green OLED materials to a full RGB pixels, and, as is the case in other OLED manufacturing, to encapsulate the OLED materials to protect them from exposure to damaging air and water vapor.  As the encapsulation process is one where a large swath of raea is covered with organic and inorganic materials, the IJP technology used is less advanced than what is necessary for the more precise placement of quantum dots, which must be precisely registered with the emitting OLED materials and the TFT below.
SDC was evaluating IJP tools from Kateeva (pvt) the leader in encapsulation IJP but chose tools made by SEMES (pvt), a Samsung affiliate, despite what we believe was data that indicated that the Kateeva product was the superior choice.  While we speculated that SDC was helping to bail out SEMES, which was seeing its LCD tool business decline as SDC wound down its large panel LCD production business, at the time we could only cite 2nd hand data.  SDC’s choice caused significant disruptions to Kateeva, who had produced working tools with the hope of recovering pre-order costs from SDC, and the company had to reduce its staff by over 50%, and refocus its attention on potential Chinese customers for its encapsulation IJPs.
It seems that HB Solutions (297890.KS) invested $13.5m in Kateeva earlier this year after it was thought that Samsung Display will be using Kateeva’s ink-jet printers for the potential expansion of its QD/OLED production line, after experiencing problems with the SEMES tools, with Kateeva collateralizing a number of its South Korean patents to secure the loan.    HB Solutions is also said to have purchased rights to additional Kateeva patents in the US, although those might be subject to the preferential rights of another purchaser.  HB Solutions would be the end supplier of the IJP tools to SDC, with Kateeva the actual source of the IJP tools.
As there have been a number of delays in the development of the QD/OLED process by SDC, with questions still remaining about how well the product is being accepted by consumers and parent Samsung Electronics’ (005930.KS) commitment to the QD/OLED product line, the pressure is on Kateeva to secure the hard orders for the equipment to maintain it ownership of its IP.  As we have noted yesterday, Samsun expanded its QD/OLED marketing footprint, and while we are want to take this as a positive sign toward the QD/OLED product line, the macro environment is such that a delay in stepping up production capacity at a 2nd QD/OLED fab could push what we originally though would be an end-of-2Q decision further down the road, putting even more pressure on Kateeva.  Hopefully the long-term picture for QD/OLED at Samsung Display will take precedence and a decision (including Kateeva’s IJP) will be forthcoming, but the heat is on once again at Kateeva. 

​Samsung Electronics (005930.KS) is said to have suspended orders for LCD TV panels from its suppliers for between 30 days and 45 days according to a number of sources in South Korea.  This comes after it was widely noted that Samsung had reduced its TV set shipment plans for the year a 2nd time, from an original 53m – 54m units to 45m units and then to the current 40m units, as inventories grew to  2x pre-pandemic levels while demand slowed.  The original estimations would have built in an increase over last year’s 50m units, which was 10% above the shipment rate in 2020.
While the impact will be different for each of Samsung’s suppliers, we expect Samsung’s monthly order rate to be between 3.3m and 3.75m panels, which would represent between 5.8% and 6.6% of monthly panel production based on most recent data, and with an average price of $76 (TV panel ASP) a value of between $250.5m and $285m, would represent between 5.0% and 5.6% of large panel sales on a monthly basis.  Given that the 5 suppliers most likely affected would represent ~69.2% of monthly large panel industry sales, we expect the impact to be significant for BOE (200725.CH), Chinastar (pvt), HKC (248.HK), AU Optronics (2409.TT) and Innolux (3481.TT), but again, specific impact by company would depend entirely on order concentration and the type and price of the panels ordered as we are using an average price across all panel sizes.  Those with orders for 65” and larger panels, which carry a price considerably above the average would see a greater impact.  We expect BOE and Chinastar, both of whom have Gen 10.5 LCD panel fabs which specialize in large panel production would see the biggest impact.
As we have noted previously, much will depend on how quickly TV panel and set inventory can be reduced to more normal levels, which would entail a period of watching demand in a steady state environment (June) and then gauging how much discounting is necessary to bring those levels in line.  As raw material and component prices have risen, offsetting some of the declines in panel prices, TV set brands will likely tread softly when it comes to discounting, at least at the onset, but we suspect if normal levels have not been reached by the end of July, we will see even more aggressive discounting and the potential for Samsung’s cuts to extend into the first two weeks of August, exacerbating the potential impact to LCD large panel producers.  That said, we expect at least a modicum of stability by September but worry that at the first sign of even modest demand improvement at the set level, panel producers will increase utilization to bail out what is shaping up to be a weak 3Q.

​months is dependent on reducing panel inventory across the industry.  This is accomplished through utilization reductions at panel producers, who must take a hit to margins from the lower utilization rate or continue to over-produce and worsen the panel inventory overload, pushing panel prices lower.  This has always been a difficult choice for panel producers, especially after such a strong boom cycle last year, and resistance to such cuts is always high, but there are few alternatives, especially when many raw material and component prices are rising.
While each panel producer must make utilization cuts based on orders, estimates, and targets from customers, the temptation is to err on the low side and maintain production at the highest levels possible, and that has a tendency to extend the period during which utilization cuts are necessary, so we try to gain insight into how deep panel producers are making the cuts as an indication of how long it will take to work down inventory, and how much panel producer performance will be affected by the cuts themselves.
There is a certain amount of granularity here also, with vastly different utilization rates at LCD fabs vs. OLED fabs, and even more granularity across fab substrate generations, as fabs Gen 6 and below tend to be used for IT and mobile device displays, and fabs above Gen 6 being used for TV displays, although with gaming monitor sizes reaching TV size, those lines are blurring somewhat, and utilization rates ay ultra-large (Gen 10/11) LCD fabs, which are for TV displays 65” and larger, provides even more granularity.
Panel producers tend to keep this data to themselves given the competitive nature of the business, but occasionally enough data becomes available to make such calculations with some sort of accuracy, although there are many assumptions that have to be made and doddering opinions on those assumptions, but to us the important point is how much utilization rates change during periods of panel price declines and periods of excess inventory vs. orders and shipments.  As Chinese LCD producers now represent ~66.1% of Gen 7+ capacity, they hold sway over how their production rates will affect large panel prices, and consequently we pay close attention to whatever data we can derive concerning changes to their utilization rates.
According to our most recent data, we estimate that the utilization rate across all Chinese LCD fabs was ~84.9% in May, down ~3.5% from April and down 8.1% relative to January.  A relatively small m/m drop in May. With small panel LCD fabs seeing a 3.2% decline in May (m/m) and ultra-large format LCD fabs seeing only a 2% drop m/m.  With the largest producers such as BOE (200725.CH), Chinastar (pvt), and HKC (248.HK) seeing m/m declines between 3.1% and 6.1%, it would seem smaller producers have made only small adjustments to utilization rates on the Mainland.  We calculate that the cuts in May would reduce inventory production by ~600,000 m2 of capacity, or the equivalent of ~515,000 65” TVs out of ~15m that could be produced monthly.
It the industry, particularly Chinese LCD producers, expect to work down inventories the reductions seen in May would likely not be enough to stem the tide of panel price declines and inventory glut, but there is a reason why the cuts tended not to be deep in May, and that is that panel fabs tend to operate a breakeven at a utilization rate of ~85%, and while this is a generalization across a wide variety of producers and fab operations, cutting utilization below this point across the industry tends to lead to a general lack of profitability for producers.  The problem is that with inventory levels still high and demand low, along with raw material and component costs that are not absorbed by customers, further utilization cuts are necessary to shorten the time it takes to reduce inventory levels before the holidays.
We expect that further utilization cuts were made at Chinese LCD fabs this month, likely bringing the average LCD utilization rate to between 78.5% and 79.0%, which will hopefully be sustained in July, which we believe would be enough to al least bring down inventory levels to more reasonable levels based on current demand.  Whether that happens will depend on how much of the ‘bullet’ Chinese panel producers are willing to bite

Since July of last year the revenue generated by large panel display producers has been on the decline, tracking closely to the decline in large panel display prices, however the spread between the two, which we plot as an arbitrary value in Figure 2, shows that the spread between the two has yet to reach pre-pandemic levels (avg. 2019 spread = 233), which would seemingly forecast a contraction in the spread going forward.  Taking it one step further, we plot three key large panel display metrics for the same period, Price, Shipments, and sales, adjusting vales to a common starting point, and projecting out three months to see the result, which is shown in Figure 3, which indicates that by the end of August shipments will decline but sales will decline more rapidly as prices continue to decline, which would follow the utilization cuts at major LCD large panel suppliers that have been rumored in the trade press.
Making the scenario a bit more difficult is the fact that panel producers waited until June to make such utilization cuts, and the data for shipments in June will not be available for a few weeks, and with Chinese producers representing ~50% of industry large panel sales, the utilization reductions at BOE (200725.CH), Chinastar (pvt) and HKC (248.HK), who together represent 45.4% of total industry large panel display sales, and May large panel industry sales were down 5.4% m/m and 32.8% y/y, shipments were down less at -3.9% m/m and -11.5% y/y.  Some producers have done better than others during this year, as shown in the table below, which shows only those producers that are primarily large panel suppliers.  We note that Samsung Display (pvt) has been winding down its remaining LCD large panel production which accounts for the large swings shown below.
While orders from customers can make a substantial difference to m/m data for individual producers, we expect much of the negative growth for large panel LCD producers seen this year is a function of declining large panel prices, however in June we expect both large panel prices to decline and to also see the effects of utilization cut backs that have been rumored across much of the industry.  If the cuts are substantial enough, they will have some effect on high inventory levels over the next two months, but if they are less than expected, and seasonal builds begin in August, we expect panel producers will face a very rocky 3rd and possibly 4th quarter this year.  If that turns out to be the case, we would expect January/February ’23 to be especially week, as many fabs will essentially shut down for the latter part of January during the Chinese New Year holiday, which occurs on January 22

​In order to stem the tide of falling panel prices panel producers typically reduce utilization and reduce inventory levels against the weaker demand.  While painful for producers, especially after a period of high margins, it is a solution that typically begins to stabilize panel prices relatively quickly, at least that’s how things have progressed in the past.  However, as the LCD industry leadership has moved from Japan to South Korea and Taiwan, and now to China, things have not worked quite the same as in the past.
While there have always been government support programs for the display industry that provided infrastructure or tax abatement, the Chinese government has been far more aggressive toward developing its display industry and provides those same perks, along with construction and operating subsidies, which can be a substantial benefit to Chinese panel producers.  While Chinese LCD panel fabs are expected to produce positive financial results, the understanding that such subsidies will continue as the fab matures, leads to a different mindset that is less profit oriented and more focused on objectives that can satisfy the political goals of the funding sources.  This is not to say that Chinese fab managers are lax in their ambitions toward sustained profitability, but they have the luxury of being able to make decisions that might be more difficult for those that face shareholder scrutiny that is oriented toward quarterly results.
We believe this has led to a less traditional reaction time to events in the display industry from Chinese panel producers and while it seems a moot point when panel prices are rising, as they did in much of 2020 and early 2021, when panel prices began to drop last year the rhetoric was that ‘things were different this time’ and production shifts to less volatile display products (IT) was considered the perfect solution.  Unfortunately, when most of the major players in the industry make the same move at the same time, the intended safety net of the shift becomes its own worst enemy and competitive pricing is used to keep fabs running at high utilization rates.  At the first sign of segment demand weakness, the competition becomes more desperate and panel prices fall faster.
During the pricing slide there is always the mantras of ‘it can’t go much lower as it is near cash cost’, but in this down cycle the hunger to keep fab utilization levels high seems to have kept panel producers, particularly Chinese panel producers form making any real utilization rate changes, other than token reductions.  Now that a number of generic panel segments and sizes have fallen below cash costs, it is suddenly important to lower utilization rates to ‘preserve pricing.’  Of course, the real question is whether substantial utilization rate reductions are being made to ‘help stabilize the industry’ or to avoid running much of the fab at a loss (the answer is obvious), but the time for waiting seems to have passed, with rumors that some Chinese LCD panel producers are now making the utilization reductions that should have been made months ago.
Based on data from China, we believe that the major Chinese LCD panel producers have adjusted their yearly production targets down by ~8%, a modest reduction, but have recently implemented utilization rate reductions in excess of those numbers.  In terms of Gen 8 and above fabs, those that would normally be used to produce TV displays and large monitors, we believe utilization reductions of 23% have been implemented, although not every producer has done so to the same degree and these metrics do not include smaller substrate fabs such as Gen 6 lines that are used for much IT and mobile device display production, so we see the impact primarily on TV panels and focused on only large producers.
While these reductions might move the needle a bit, with inventory levels above normal it could take some time to slow panel price declines along with other macroeconomic influences.  While it is easy for use to arm-chair quarterback the industry, if history teaches us anything it is that the display industry is cyclical and will eventually respond as such, so keeping your foot on the accelerator as you begin to descend from the top of the mountain might make things look good for a quarter or so, but it won’t make stooping the decline easier, so we hope that the utilization reductions that we think are being implemented are more than just lip service to a short-term problem, but it is a bit too early to tell.
 

In our 05-11-22 note we reviewed the results for the three Taiwanese LCD panel producers which were quite weak and while May sales results were up on a m/m basis for two of the three, y/y comparisons were quite poor.  Of the three AU Optronics (2409.TT) fared the best, with sales of NT$21.97b ($744.0m US), up 8.7% m/m but down 31.6% y/y, while Innolux (3481.TT) saw sales of NT$18.01b ($610.02m US), down 12.6% m/m and down 42.6% y/y, and Hannstar (6116.TT) generated NT$1.60b ($54.32m US), up 15.6% m/m/ but down 43.1% y/y. 

AU Optronics typically sees a m/m sales increase of 8.1% (5 yr. avg.), so this month’s performance seems in-line on that basis, although sales for the month are now only slightly above 2020 pandemic levels, which were the lowest since 2005,  While AUO does not report large and small panel shipments, they do show shipment area (m2) for each month, which we convert into sales/m2, as seen in Figure 4, which peaked in July of last year, and has continued that m/m decline this year as panel prices declined.
Innolux fared the most poorly of the three, despite a continuing rebound in small panel shipments, although we expect the continued weakness seen in large panel pricing offsets the shipment gains in the small panel segment.  Hannstar, which specializes in small panel production, saw a large jump in large panel units, but we note that these are small volumes relative to other producers and vary considerably based on orders, especially after the weakness seen earlier this year.  After a poor April Hannstar is now seeing relatively steady small panel shipments, although pricing remains under pressure, and with the return of large panel shipments (IT panels most likely) was able to generate positive m/m performance in May.
Looking at the two large panel Taiwanese producers combined, sales saw a 2.07% decline, and while we cannot directly compare large panel shipment data for bot (AUO does not provide), we assume that the combined large panel shipments were roughly flat, leaving price as the basis for the sales decline.  As we expect June will see additional panel price declines, we expect flat to weaker results for Taiwan panel producers this month.  We do expect to see Chinese panel producers lower utilization rates again, although the increments have been small thus far, which could help to slow panel price declines, but we would not expect to see panel price stability until August when panel production for the holidays begins again.  Much will depend on how much inventory Chinese panel producers were able to bring down by lowering utilization and how aggressive brands will be on maintaining inventory levels into the holidays, but we are still quite concerned that the lingering effects of COVID-19 lockdowns and the war in Ukraine, along with the rapidly increasing price of energy will temper production demand in 3Q.

​The China Securities Regulatory Commission has received an IPO and listing guidance report from China International Capital Corp. (601995.CH) concerning the potential IPO and listing of Huike Company (248.HK) (aka HKC), a producer of large panel LCD displays in China.  According to the report HKC has a ‘relatively complete accounting management system’ and is ‘relatively independent in terms of business, assets, personnel, finance, and organization.”  As we noted on 02/10/2022 HKC was added to the ‘unverified’ list managed by the US Department of Commerce’s Bureau of Industry & Security, which does not preclude US exporters from ‘engaging’ with listed parties or that there are specific foreign policy or national security concerns with those on this particular list, only that the BIS is unable to establish the legitimacy and reliability relating to the end use or end user of the items that fall under the US Export Administration Regulations (EAR) by such parties. 
The reasons for this inability could be an failure to contact or locate the parties involved, failure by those parties to demonstrate the disposition of items subject to EAR, or lack of cooperation by a host government with the BIS when making end-use checks.  The corporate structure of HKC overall is a bit complex but the company that owns HKC’s Chongqing Gen 8.6 LCD fab (Chuzhou HKC Optoelectronics), which is owned by HKC and two Chongqing government entities, had submitted proposals for the purchase of equipment used in the display process and the US government was unable to verify that the end user for HKC products that were being produced (using US equipment) was not in violation of the BIS rules (no sales to Chinese military).
HKC itself, owns four Gen 8.5 LCD fabs and currently has a ~5.5% share of the total LCD market (by capacity) and an 11.6% share of the Gen 8+ LCD market and this year has been generating between $380m and $430m in sales on a monthly basis.  Peak sales were in June of last year when the company generated $540m in LCD panel sales.  We expect the actual IPO filing will reveal a bit more detail about HKC, in particular its recent performance as it has not yet released results in 2022.

​As we have noted, Chinese LCD producers have been reticent to cut production levels this year and with large LCD panel pricing at or near cash costs, one would expect utilization reductions that would tighten the market.  At least that is what one would expect, especially given that inventory levels at panel; producers are higher than normal, but thus far utilization rate cuts from Chinese panel producers have been almost negligible, and the rhetoric remains basically the same as it has been for the last 6 months, with “…panel prices are at cash costs so they cannot go much lower…”, and “…the 2nd half will be better…” (by how much would be the real question), and some panel producers continue to build inventory to gain share as Samsung Display (pvt) makes its final exit from the large panel LCD business.
Demand does not seem to be a driver behind these statements, as target cuts in the TV, smartphone, and notebook markets have already been registered and components, such as display drivers, that were in desperate short supply last year, are now seeing price pressure and production reductions, so where does this end?  Will it continue throughout the rest of the year with Chinese panel producers hiding their heads in the sand until they are forced to unload excess inventory at even lower prices to avoid showing y/y levels 50% or higher than last year?  Hopefully not, as the impact on the display industry under that scenario would be profound, and the best suggestion were have heard was that Chinese panel producers should drastically cut utilization in June and July to bring inventory levels down, and then return to higher utilization levels for the remainder of the 3rd quarter.  While this seemed a good idea, the mindset of Chinese panel producers would likely not allow such a move, as the risk of a competitor lowering utilization by less and gaining share, is foremost currently.
Whether the need to gain share and show positive growth is strong enough to offset the lack of profitability and the extent of the downturn in panel pricing is still an unknown, but the fact that Samsung Display is finally ending its large panel LCD display business, and parent Samsung Electronics (005930.KS) is playing the long game by becoming a beneficiary of LCD panel price reductions as a net buyer, should be some indication of how those with the most experience view the situation.  More than likely it will not be the force that will change opinion as the immediate response to SDC’s large panel termination scenario has been to look to gain share by increasing production and capacity.  You can lead a horse to water but you can’t make him drink…