LG Display (LPL) is expected to close its P5 LCD fab in Paju, South Korea, which has been producing LCD panels since 2003, most recently those for automotive use.  The fab has been producing panels with a-Si (amorphous silicon) backplanes, which is an older technology that now competes with LTPS (Low Temperature Polysilicon), IGZO (Indium Gallium Zinc Oxide), and most recently with LTPO (Low temperature polycrystalline oxide), which tend to have better characteristics but are more expensive to produce in most cases.  LG Display has been reducing its exposure to a-Si over the last few years and the P5 closing will further that goal.  Production at P5 will be shifted to P6, a Gen 6 fab that is housed in the same complex. 
While no timeframe was given for the closing, other than this year, we note that yesterday we indicated that Japan Display (6740.JP) was closing a small Gen 3.5 LCD fab in order to continue to bring down its breakeven, and with panel prices declining, we expect other panel producers to start reevaluating the efficiency of older LCD fabs, something most were less concerned about when demand was stronger last year.  We expect this trend to continue as panel producers evaluate the efficiency of smaller or older fabs.  LGD has not decided (or announced) what it intends to do with the P5 fab, which could be converted to OLED for small or large panel production at a later date.
LGD’s transfer of its automotive panel production from a Gen 5 to a Gen 6 fab, while seeming a small change, is indicative of how sensitive the panel space is to substrate changes.  Small panel production sees little change from a transition from Gen 5 to Gen 6 fab production, but as panel sizes reach 18” to 19” those transitions become apparent.  In the table below we show the number of units and the substrate efficiency[1] of both fab layouts, noting also that the size of a single sheet of Gen 6 glass is 1.93x the size of a Gen 5 substrate, so the number of units for smaller size panels doubles while for larger panels the number of units increases by between 125% and 150%, while the efficiency also improves.  Given that P5 was designed to produce 150,000 substrate sheets/month, those efficiencies can be a significant improvement to margins while reducing the burden on other company fabs.


[1] The percentage of the substrate that is used for actual panel production as opposed to the waste.

April was not a good month for panel producers in Taiwan, and likely similar results would be found for other panel producers.  AU Optronics (2409.TT) reported April sales of NT$20.22b ($682.37m US), down 27.9% m/m and down 31.7% y/y.  Area shipments were also down 73.9% m/m and down 23.7% y/y.  To put this data in perspective, the drop in sales seen by AUO was the largest m/m decline seen since November 2008, the y/y decline was the largest seen since January 2009, and the panel area shipments were the lowest since AUO began reporting those numbers in February 2020.  Typically these monthly numbers are reported without any commentary however this month AUO added the following to the report, which we feel sums up the month quite succinctly:
“Revenues dropped sharply in April, largely due to weaker demand amid macroeconomic uncertainties caused by war and inflation, together with higher channel inventory resulted from previous port congestions and container shortage. In addition, eastern China has introduced strict Covid-19 related lockdowns since April. Given the challenges of lack of workers, combined with supply chain disruptions under these lockdown measures, the Company has lowered utilization rates at its production sites in Kunshan and Suzhou. Meanwhile, shipments to customers were also impacted by these lockdown restrictions. Currently, lockdown measures were lifted in certain areas while the pandemic gradually eased. However, it may still take some time for market to return to normal.”
​

Innolux (3481.TT) did not fare much better in April reporting sales of NT$20.6b ($695.2m US), down 13.9% m/m and down 32.1% y/y.  Innolux shipped 10.7m large panels in April, down 10.9% m/m and down 10.6% y/y and shipped 26.55m small panels during the month, which was up 14.5% m/m but down 5.0% y/y.  Innolux made no comments about the results for the month

Hannstar Display (6116.TT), who is primarily a small panel display producer, saw  sales of NT$1.39b ($46.91m US), down 20.3% m/m and down 49.6% y/y, while large panel shipments declined to 38,000, down 39.7% m/m and down 78.3% y/y, while small panel shipments declined to 17.32m, down 41.4% m/m and down 52.6% y/y.

​Characterizing April as a bad month for Taiwanese panel producers is a bit of an understatement, although some fared better than others.  As panel producers face lower sales and bring down utilization rates to compensate for weaker demand, we expect to see margins turn negative and if the recovery from China’s COVID lockdowns and the war in Ukraine take much of May, the 2nd quarter will be quite poor, even with a bit of a snap back in June.  While each panel producer will see different results in May and June, we expect Chinese panel producers will still try to maintain shipment levels by continuing to discount panel prices into June, but will soon see those prices fall below cash costs, at which point they have no choice but to lower utilization rates.  While those lower utilization rates will lead to more stable panel prices in 3Q demand does not seem to be strong enough to warrant increasing utilization to previous levels, which means 3Q panel results will be negative on a y/y basis.  We expect the only hope for results better than this scenario would be if China gets COVID under control and there is a bit of a recovery in the Chinese economy, but that is an optimistic scenario.

Japan Display (6740.JP) has decided to close a small (27,000 sheets/month) Gen 3.5 LCD fab in Higashiura, Japan by the end of the company’s 2023 fiscal year, which ends in March.  The fab currently produces displays for cameras, wearables, automotive, and VR, with the production of those products to be transferred to JDI’s remaining fabs in Japan.  The 259 employees at the fab will be offered employment at other sites at JDI and the company is evaluating whether the land and buildings can be sold or used for other purposes.  The company will record expenses related to the closing in the 3/2023 fiscal year, although the amount is currently under review.
The Higashiura fab was commissioned in September 1999 and has therefore been in service for over 20 years, making it less efficient than current modern fabs.  JDI has three fabs remaining in Japan, older Gen 4.5 lines in Mobara and Ishikawa, and newer Gen 6 lines in Hakusan and Mobara.  We expect the impact of the closing will be a financial positive for JDI after closing costs, as production will move to newer fabs that will likely see higher utilization rates.  JDI has been working toward reducing its breakeven for a number of years and while the company is getting closer to its goal, breakeven will not be achieved this fiscal year (3/22) as the decline in JDI’s traditional mobile display business has been severe this year while increases in the non-mobile display business have been relatively modest.  We expect the closing of the Higashiura fab will help to lower the 3/2023 breakeven further, however JDI needs to continue to expand their non-mobile business further before they can return to profitability, which we expect could occur in the 2024 fiscal year.

​We have mentioned the Chinese company Royole (pvt) a number of times over the past few years, in particular relating to folding displays, where the company was the first to release a development kit for a foldable device, beating out CE giants like Samsung Electronics (005930.KS) and LG Electronics (066570.KS).  That said, the company has not done as well as early expectations might have predicted and in our 4/422 note, we described some of the problems Royole was facing, including rumors that the company had been failing to pay worker wages starting last December.  Some of the wage arrears were paid in January, with the promise the rest would be paid after the New Year festival, which did not happen, however we have now heard that after some employees were told to ‘take a long vacation’ (three months), it seems that some workers have been paid missing wages.
The company’s only comment was that ‘funds would be received in batches’, with those employees that resigned without arbitration getting the first batch and those with arbitration having to wait for the 2nd batch.  The source of the funds however was not made clear, other than the remittance itself came from Qingdou Rouyu Technology,  a company established in August of last year (wholly owned by Royole), rather than the typical Hua Xia Bank (600015,CH).  It was noted that in March of this year Royole pledged a number of patents to Qingdao Urban Investment Engineering Construction Development (Group) Co., Ltd. and Qingdao Urban Investment Industrial Investment (Group) Co., both of which are controlled by Qingdao SASAC (State-owned Asset Supervision & Administration Commission of the State Council), whose obligation is to ‘perform the responsibilities mandated by the Central Committee of the Chinese Communist Party’, so one might imply that Royole is being bailed out by the government.
What seems to be a difficult time for Royole is made worse by the late 2020 announcement by the company that it was planning to build a $2.4b flexible OLED fab in Qingdao, which remained on the “List of Key Projects” by the Qingdao Municipal Government earlier this year, which is likely a massive financial burden, if it is still under construction.  Details on the fab’s status are sparse, although the original theory was that Royole’s ULT-NSSP (Ultra-low Temperature Non-Silicon Semiconductor Process) would allow the company (and potentially other Chinese OLED producers) to produce foldable OLED panels without paying royalties to foreign entities.  This was likely the impetus for the original project, but Royole’s lack of traction relative to their earlier products (they produced only 48,600 units in 2020 at their existing Gen 6 OLED fab) has made it difficult for the company to exist independently, as the company’s failed attempts to list in the US and China seem to indicate.
How much capital the local governments are willing to fund going forward is an open question and while Royole has raised ~$1.1b in 7 rounds over the last nine years (the last was in 2018 with a $5b valuation), we expect they will have to give up considerably more IP and ownership if they are to remain in business going forward.  As a private company we expect to see little financial or ownership information forthcoming, with much of what we know about the company coming from previous IPO filings, but we suspect local government organizations will wind up being the majority owners of the company if it survives.

​LG Display (LPL) reported sales of 6.471t won ($5.1b US), down 26.5% q/q and down 6.0% y/y and operating profit of 38b won (~$30m US), considerably below the consensus of 182b won.  Gross margins were 12.6% against the previous quarter’s 14.9% and the recent peak of 20.8% in 2Q ’21, and operating margins were 0.6% against the previous quarter’s 5.4% and the recent peak of 34.0% in 2Q ’21.  Capacity remained essentially flat at 11.5m m2 while ASPs (m2 basis) declined 18.1% q/q and 10.3% y/y.  2Q guidance was generally for large and medium size panels to see price declines, more specifically down ~10% q/q on an area basis, as weak mobile continues into 2Q (‘seasonal’ in their words).  Area shipments however are expected to increase between 2% and 5%, primarily on large OLED TV shipments, which had been limited in 1Q by logistical bottlenecks.  For the same reason 1Q inventory levels were higher than normal as OLED TV panel stocks were slow to ship and the company built safety stocks.  On an overall basis LGD said they expect supply/demand uncertainty to continue through 1H but expect a better 2H on increased OLED TV panel sales and a more stable high-end IT product market.
LG Display indicated that the high-end OLED TV market grew 10% in 1Q, while the overall TV set market saw a 10% decline y/y, with OLED TV set growth of 40% y/y, although OLED TV panel shipments were lower than expected.  As noted above, LGD expects to see significant growth in OLED TV shipments in 2H and increasing profitability in the segment, although they were careful to add that the improvement would be on a ‘phase by phase basis.”  We expect that at least a part of that OLED TV panel enthusiasm is related to thepotential deal between LG Display and Samsung Electronics (005930.KS) that we have noted in the past, but also on increased consumer familiarity for OLED TV in general.  The company was a bit more vague toward expected improvements in their small panel OLED business, other than typical improving 2H seasonality, mentioning wearables, automotive, and more specifically ‘tandem OLED’ a technology that LGD is developing for Apple (AAPL).  As part of the longer-term OLED plan, the company will see increased capex this year as it continues to spend on additional small panel OLED capacity at its E3 Gen 6 OLED fab (primarily for Apple), which it says remains scheduled for 2024, although we believe they could begin mass production sooner.
Questions on whether the slower growth of OLED TV panel shipments in 1Q would affect the total for the year was answered with “looking at the trend from April (then) we see that the shipment of OLED is likely to pick up from the 2nd quarter and alongside it the profitability as well”, which we found a bit lacking.  As to the potential for changes in the company’s longer-term OLED plans, a boilerplate answer based on ‘the principles of profitability and growth’ would govern future investments.  When queried about the LCD display business, LGD admitted that they had expected Chinese competitors to be ‘more disciplined’ as to pricing, but with such a decline in the market, they have become more aggressive toward pricing.  The company is expecting to reduce the amount of generic LCD panels it produces to remain competitive, something a number of Taiwanese panel producers have done over a year ago, but the company also admitted that while it had expected B2C business to weaken as COVID was slowing, it had also expected B2B business to increase, which has been slower than expected.  While that remains the case, the company added that current levels for B2B are still higher than they were pre-COVID. 
The company was also asked about plans for its entry into the AR/VR display market but gave little information as to real plans, mostly citing the examination of the market and potential entry points and products, so nothing seems to be on the near-term horizon.  When probed a bit further on the company’s view of LCD cyclicality, they stated that the “COVID boom” pulled in considerable demand which will lead to negative growth this year and could be sustained.  They expect this to lead to a potential improving situation based on supply rather than demand, meaning more utilization cuts in the near term and the closing of older, less efficient fabs going forward.  It was not apparent whether they were speaking about LG Display's older LCD fabs or ones across the industry, but LGD does have Gen 5 fabs that were commissioned in the early 2000’s and are still operational that it could close or upgrade, although expecting Chinese panel producers to close older fabs might take a more sustained downturn.
All in, we expect LG Display’s call to be rather typical for panel producers this quarter, although they are lucky enough to have OLED as an offset to the LCD display weakness.  Once again panel producers seem to be shocked about the end of what was a partially artificial ‘boom’ in LCD display demand.  Some producers have the experience to know that building into the peak of a cycle is not the best idea, while others were moving away from LCD TV panel production before COVID-19 began.  That said, those more interested in gaining market share will now face the reality of low or no profitability as the industry faces a more normalized reality going forward.  Display is a cyclical industry so as Roseanne Roseannadanna said “It’s always something!”.

​AU Optronics (2409.TT) reported 1Q sales of NT$81.5b (~$2.77b US), down 12.4% q/q and down 1.7% y/y, Gross margins declined from 18.9% in 4Q (28.7% at peak in 2Q ’21) as did net margin, which was 6.3%, down from 12.7% in the December quarter and down from 14.3% in 1Q ’21.  None of this is surprising given the state of the display space, as we have noted previously.  2nd quarter guidance for AU Optronics  reflects some of the impact of the Russian invasion of Ukraine and Chinese COVID-19 lockdowns, but the company cautioned that the impact may not be fully reflected in the forecasts, which are for area shipments to be down by low single digits q/q after a 7% decline in 1Q.  Blended ASP (m2 basis) is expected to be down by mid to high single digits, after declining 6.3% ((m2 basis) in 1Q.
AUO management indicated that aside from the continuing shortages that most panel producers have been facing, transportation issues for both raw materials and finished product continue to make predicting 2Q more difficult than usual.  Chinese COVID-19 lockdowns have also affected the company’s production fabs in Suzhou and Kunshan, where some operations have been limited or suspended due to the lockdowns, although overall inventory levels have been increasing to higher than normal levels as demand weakened during the quarter and brands lowered panel purchase targets.
We believe while AUO’s quarter is indicative of the difficulties facing panel producers currently, they have been able to mitigate some of the impact by having shifted production goals to more premium products and away from generic panel production, where competition from Chinese panel producers is fierce.  These niche products have helped stabilize AUO’s results for the last quarters but as with all panel producers overall demand will drive both pricing and profitability, so AUO’s results this year and next will be slightly less driven by the global macro environment than some, but will need an improving environment to achieve y/y sales and income growth.

March is typically a recovery month for large panel sales as February is a short production month and reduced production during the Chinese New Year holiday lowers factory utilization rates.  With potential restocking and resumed production, March large panel sales are typically up 18.8% m/m (5 year average), however this year large panel sales grew only 1.6% m/m in March (see Figure 1), even with large panel shipments (see Figure 2) increasing by 8.1% for the month, indicating continued large panel pricing weakness, which was down 3.4% in March.  April large panel pricing is expected to have declined by 4.1% (see table below) and we expect May will see roughly the same decline. 
As we noted in our 04/06/22 note, TV brands had set very aggressive goals for the 2022 year under the assumption that lower TV panel prices would stimulate TV set sales, however a number of TV set brands cut back orders in 1Q and are likely to do the same in 2Q, although not all brands are have reacted the same way.  TV set shipments declined by ~20% in 1Q, despite TV panel shipments being up 2.9% y/y, which has prompted expectations for TV set shipments for the 2022 year to be reduced to flat to up 1%.  Reasons cited have been the Russian/Ukraine war, China’s zero-tolerance COVID-19 lockdowns, FIFA World Cup postponement, and component shortages, much of which had already been part of higher estimates. 
Samsung Electronics (005930.KS) reduced TV panel purchase plans in 1Q by ~7.5% and is expected to do the same in 2Q, while LG Electronics (066570.KS), has lowered its TV panel purchase plans for 2022 by ~20%.  Some Chinese TV brands have also made TV panel purchase order adjustments, but others are waiting to see how the 618 shopping holiday plays out before making adjustments to their TV panel purchase plans, which has allowed some Chinese panel producers to continue to see high utilization rates.  Other than that there has been little for panel producers to be excited about as we head into 2Q, and few of the negatives seem to be changing quickly to the positive.  Large panel pricing is expected to decline again in May (~4.0%), broken out as shown in the table below.

​Taiwan based AU Optronics (2409.TT) has announced the purchase of Rise Vision (pvt) based in Wichita, Kansas for $29.25m US.  The company provides software that helps users design cloud based content for digital signage for schools and commercial applications.  The software is based on the number of displays used (10 displays cost $1155/year, while schools get unlimited displays for $1,000/year).  The software is hardware and OS agnostic so it will run on almost any OS and media player, and is used by a number of large organizations including Marriot (MAR), The Philadelphia Eagles (pvt), and the Chicago Public School System.
AU Optronics has a public display division that provides a broad lineup of displays that include small touch based displays to large video walls.  This software will help to provide a simple and popular solution for content creation as part of a PID sale and goes toward AUO’s push toward providing non-generic displays that carry higher margins and are less subject to competition from Chinese panel producers.   For those not familiar with the public display market here are a few examples:

​China’s Tainma (000050.CH) has set a timeline for its new Gen 8.6 LCD fab project that it is building in  Xiamen.  This follows the recent early production runs at its T18 OLED fab also in Xiamen.  The new project is expected to cost $5.16b, of which Tianma has contributed $464m for a 15% direct stake, and will have a capacity to produce 120,000 Gen 8.6 (2250mm x 2600mm) panels/month.  The project is expected to reach the piling (basic construction) stage during the 2nd half of this year and the main building is expected to be capped a year later.  Phase 1 production is expected to start in 2H 2024, although no timeline has been set for phase 2 development, which we assume will mean that 60,000 sheets/month will be built out for phase 1.  We expect the project will develop both LTPS and IGZO backplane technology and will be oriented toward the production of IT and automotive panels, at least that is the current intention,
While Tianma is best known for its small panel production, both LCD and OLED, the company lacks the Gen 8 capaity that is needed to efficiently produce large panel displays.  That said, given the vast resources of other Chinese competitors, and the potential for over capacity across the large panel display industry, it would seem somewhat ill advised to be building out new Gen 8 LCD capacity at this point in the cycle.  That said, we expect that Tianma’s management is more concerned with their ability to provide what their customer base is asking for or what they believe they will be asking for in the future, without regard for the impact on the overall LCD display industry or China’s exposure to a potentially extended weak profitability cycle for China’s display segment.  There is little chance, in our view, that management has put such a perspective ahead of a desire to gain share against competitors and generate what it believes will be new revenue sources, but we expect the outcome of the project will be to generate incremental sales but at relatively low profitability.  It’s a long way t 2H 20224.

​As we have noted, Samsung Display (pvt), LG Display (LPL) and most recently China’s BOE (200725.CH) have been working toward developing the technology necessary to produce IT OLED panels on larger substrates, moving from Gen 6 sheets, which are 2.78 m2 to Gen 8.5 sheets, which are 5.5 m2 to increase the efficiency of the process.  Recently is seems that other OLED producers are also looking to make such a change, although we believe the motivation and potential for success are different from those producers mentioned above.  Visionox (002387.CH) has been the name most often mentioned as a potential developer of such technology, although we have our doubts as to whether such stories are anything more than self-promotion.
As OLED display technology migrates to larger devices, OLED deposition technology comes up against some roadblocks, the largest of which is the use of fine metal masks that force gaseous OLED materials to form the pattern on substrates that become pixels on a display.  These masks are made of a nickel/iron alloy that is able to remain stable under the heat and high and low pressures found in OLED deposition equipment, as it is absolutely necessary that the FMM ‘screens’ keep the OLED materials in perfect order and spacing during production.  While the FMM are designed to handle heat and pressure they must also react to gravity, which can cause them to sag and misplace pixels, causing a panel to fail.  While this is not a problem for small OLED displays, such as those used in watches and smartphones, as the displays and masks get larger, such as might be the case for notebook or monitor panels, the effects of gravity get worse and yield management becomes more difficult.
Currently the number of OLED displays produced for IT products is relatively small when compared to smartphone production, but that is expected to change over the next few years with OLED adoption increasing for such products, which makes solving the production issues with larger OLED panels all the more important.  It is especially important to SDC, LGD, and BOE, all of whom are OLED display suppliers to Apple (AAPL), who is expected to continue to migrate more display based products to OLED.  Each of the three has been working toward find solutions that will improve OLED IT panel yields, each with their own ‘slant’ to the problems, but with each knowing that they have the ‘ear’ of Apple as they progress.  Visionox however is not a supplier of flexible OLED panels to Apple, with Chinese brand Honor (pvt) their biggest OLED display customer, along with Xiaomi (1810.HK) for whom they produce OLED watch displays.
To give some perspective in 2021, Honor purchased ~24m OLED panels, and while that might sound like a large quantity, it represents ~3.9% of the OLED display market (unit volume), and while Xiaomi has a larger share (~13.9%) given the size of OLED watch displays relative to smartphones or OLED IT panels, it represents only a small amount of small panel OLED industry capacity.  Apple however purchased ~184m OLED displays last year, most of which went toward iPhone production, giving them a ~29.6% share of the overall small panel OLED market, which is why the three mentioned above are working so hard to solve OLED IT production issues, especially under the assumption that Apple will continue to expand OLED penetration among its IT products.  While all three OLED producers are taking R&D risk and potentially large capital risk, the goal of becoming a primary supplier of small panel IT OLED products to Apple is in their headlights.
That said, it is not the same for Visionox, who would have to get qualified as a primary small panel OLED supplier at Apple before they would even have a shot at competing with SDC, LGD, or BOE for Apple’s incremental OLED IT business, so why would they circulate such stories?  Industry folk, and we certainly can see their point, infer that it is to garner support from the Chinese government in the form of subsidies.  Much of the early construction costs and operating expenses for panel producers in China are paid for through provincial or city-based subsidies that can defray construction costs that might normally be prohibitive, allowing Chinese producers to grow more quickly than non-subsidized producers, and during the early years of operation, those subsidies can offset low yields and low utilization rates for Chinese fabs.  As China has already become the capacity leader in LCD panel production, government organizations are want to give subsidies for such capacity, but a challenge to incumbent OLED leaders like SDC and LGD can still garner local government financial support, giving Visionox the hope that by dangling the idea of building out capacity to challenge others for Apple’s OLED IT business, they might set the wheels in motion for potential government help.
Visionox is said to be testing the OLED IT waters at its V3 Gen 6 fab in Hefei to work through production issues, and then would build a new Gen 8.5 OLED line in another location.  The V3 fab is being built in two phases with “the 2nd phase promoted in a timely manner” according to the company late last year.  Perhaps additional financial support is being hinted at for the phase 2 construction and equipment, which we had expected to be completed later this year, although not oriented to IT panel production.  If Visionox is able to solve the necessary IT OLED production issues on the V3 phase 1 line, it would encourage funding sources to push forward with phase 2 and potentially add a new Gen 8.5 fab designed specifically for IT OLED panels.  By indicating that there was potential for a new Gen 8.5 OLED fab to be built, the company can begin selling the idea to city leaders in other locations to see if funding is available and hopefully create a bidding war, similar to what occurred when Samsung was looking for a new silicon fab location in the US.
There is a lot of speculation here, but certainly not any that has not been seen by us over the years in the display space, so while we don’t like to speculate, the Visionox story has many similarities to others we have heard over the years, and feels as if we have been to this rodeo before.  We could be wrong, with Visionox much further along with Apple or the technology needed for IT OLED production, but we are less sanguine about the idea knowing that Visionox only grew their share of the small panel OLED market from 4.7% in 2020 to 4.9% in 2021, while Samsung Display and LG Display’s real competitor BOE grew its share from 7.3% in 2020 to 10.0% last year, which amounted to a 66.9% increase in unit volume y/y.  Without a very dedicated customer base already established, we expect it will be necessary for Visionox to win a few more games before they build ‘it’, especially knowing who ‘they’ are.