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.

​Despite the reductions in forecasts for OLED unit volume this year, in the wake of rising inflation and China’s strict COVID p[policies, it seems that if you want to build out your OLED display business, you still have access to capital, and in this case it is not coming from the Chinese government.  LG Display (LPL) has announced that it has received $1b in funding for the expansion of its small panel OLED assembly manufacturing facilities in Vietnam, a part of its expansion plans that will facilitate a greater product flow to Apple (AAPL) and includes the expansion of small panel production lines at its plant in Paju, South Korea, a $2.5b project overall.  Funding, by way of long-term loans, was provided by Australia & New Zealand Banking Group (ANZ.AU), HSBC (HSBC), Citibank (C), and Caixa Bank (CABA.SM), with guarantees by the Korea Eximbank (state), Korea Export Insurance Corp. (state). 
 LG Display currently provides both LTPS and LTPO OLED panels to Apple for the iPhone 14 series, but faces competition from leader Samsung Display (pvt) and more recently from China’s BOE (200725.CH), who entered the iPhone supply chain last year after a number of failed attempts.  Since then BOE has been said to have been awarded a share of the iPhone 14 LTPS display production but more recently has been said to have been put on hiatus from Apple’s OLED supplier list after the company allegedly made changes to a display design without consulting Apple.  LGD is also looking to secure a place as a supplier of larger OLED displays to Apple and is developing production capabilities to that end as Apple is expected to continue to move its display procurement from LCD to OLED over the next few years.

We have noted a number of times the on again, off again negotiations between Samsung Electronics and LG Display (LPL) concerning the former’s purchase of OLED panels to begin producing an OLED TV brand.  This would be separate from the QD/OLED TV line that is based on such displays produced by affiliate Samsung Display (pvt) and would have been tiered above the company’s extensive quantum dot LCD TV line and their Mini-LED/QD TV line.  The negotiations have been ongoing for months and our assessment in recent notes indicated that if a deal were not made relatively soon it would become difficult for Samsung to assemble and market such a line before the holidays.
While negotiations seemingly were bogged down on price, with OLED supplier LG Display allegedly offering prices lower that what it receives from parent LG Electronics (066570.KS), Samsung has been said to be driving a very hard price position and with the rapidly falling price of LCD TV panels, it seems the negotiations have broken down again.  A spokesman from Samsung was quoted as saying “If we are to use LG OLED panels in our products this year, the discussion would have to be concluded by now. So chances are slim that we will release TV sets with LG OLEDs.   Still the possibilities remain open for future orders, although nothing is decided.”
As we have noted, with Samsung Display’s decision to end its production of large panel LCD displays, parent Samsung Electronics purchases its LCD displays from a number of panel producers, some of whom it has a financial connection with, such as Chinastar (pvt), owned by TCL (000100.CH), who purchased Samsung Display’s Suzhou LCD fab in August of 2020, with Samsung taking a 12.3% stake in TCL at the time.  Samsung also purchases LCD panels from China’s BOE (200725.CH) and Taiwan-based AU Optronics (2409.TT), among others. 
While the decision to terminate the large panel LCD display production business at Samsung Display was made by the board, we believe, based on the composition of the board, that Samsung Electronics was fully represented and was part of that decision, and while there was certainly some difficulty involved in establishing volume relationships with other suppliers, Samsung Electronics as a whole saw weaker TV set sales but higher profits from Samsung display during panel price increases  and saw the opposite during LCD panel price declines.  As the industry began to transition toward OLED, especially small panel OLED, we believe Samsung management was looking to capitalize on that growth and the long-term decline in LCD panel prices, which stimulate TV sales, without the offset of LCD TV panel losses at Samsung Display. 
The strategy suffered during the COVID-19 LCD TV panel price hike, but has since moved in Samsung’s favor, as in theory, TV set sales should increase as set prices decline, without the offset of large panel LCD losses at Samsung Display.  We note that of the 120 data points in Figure 1, 41.7% have been over the trend line, leaving 58.3% of months below trend, leading to a downward trend.  During the COVID-19 pandemic and the rise in LCD TV panel prices, the spread between LCD TV panel pricing and OLED TV panel pricing shrank, making Samsung more focused on offering OLED TVs to its customer base, but as that spread increased beginning last July, that necessity lessened and Samsung had less pressure to offer OLED TVs and more leverage with its QD/Mini-LED and pure quantum dot TVs, which are both based on LCD panels.  It would seem Samsung believes that scenario will continue through the end of this year and therefore has a greater incentive to lowball LGD for OLED displays and less pressure to come to a deal before the holidays.  We expect that Samsung will be highly promotional in regard to its quantum dot and QD/Mini-LED TVs this holiday season and will have less inclination to negotiate with LG Display until next year.

Ultra-large TVs are headline producers but not great sellers, but TV panel and set manufacturers continue to push display dimensions higher despite lackluster sales.  While most of these ultra-large sets are more a proof-of-capability, they are fodder for articles and advertisements extoling the expertise of panel and TV set manufacturing.  LG Electronics (066570.KS) promised to ship a 97” OLED TV this year and seems to be getting close to making that promise a reality as the set received certification from South Korea’s National Radio Research Agency, the organization that ensures devices that emit radio waves are compliant with regulations and safe for the public. In South Korea.  While there is no assurance that certification will lead to an imminent product release, it is among the last necessary steps before a product release.  LG would have OLED monitor and TV products ranging from 48” to 97” upon release.
Under the assumption that the 97” 4K OLED sets will be released in LG’s home country of South Korea first, the price of these sets, which are ~4’ x 7’ is expected to be between $23,300 and $25,500, which will likely keep them out of the hands of the average consumer, but they will show up at exhibitions, promotional tours, and major events, although the idea that they will be released in time for the FIFA World Cup in Qatar later this year, with elimination rounds already underway.  Samsung has a 98” QD/Mini-LED TV but it has been rumored to have sold only a few units at the bargain price of $15,000.

​As we have mentioned a number of times in previous notes, Apple has a strong interest in micro- displays, and has been researching the use of same for a potential AR/VR product.  There is considerable competition in the micro-display space, not only between manufacturers, but between types of micro-displays that are vying for the attention of Apple and others, with LCD, OLED, quantum dot, and LED factions all pushing development to garner favor in the AR/VR world.  Of the AR headsets in our database that have been released or announced, for which we have specific display information, 12 of 23 are based on micro-OLED displays, 5 on micro-LCD displays, 3 on micro-LED displays, with 3 (older) based on LCoS or DLP.
Given the ability for OLED displays to be both self-emissive and patterned, they offer a practical solution for micro-displays than less mature and therefore more expensive micro-LED solutions and nascent quantum dot micro-displays, and the weaker characteristics of micro-LCD.  Currently Sony (SNE) is the leader in the micro-OLED display space, having been involved in the development of such products since 2009, originally for the replacement of optical viewfinders.  Currently Sony displays use a WOLED structure with a color filter, similar to what LG Display (LPL) uses for it OLED monitor and TV displays, as patterning micro-OLED pixels, which are an order of magnitude smaller than those in a typical OLED TV display, is quite difficult.
Given the expertise needed to develop micro-OLED displays, there are only a few producers competing with Sony, including AUO (2409.TT) and EverDisplay (688538.CH), but the leader in large OLED displays, LG Display, is said to be at the cusp of ordering deposition equipment from Korea’s Sunic Systems (171090.KS) in order to develop a competitive micro-OLED display line that will compete with Sony for Apple’s potential AR/VR business.  Sunic supplies both cluster and in-line OLED deposition systems designed for both large and small panel production, which include loaders and various chambers for organic and metal deposition, and are sold to many display manufacturers and research organizations and OLED lighting manufacturers. 
While we do not know the exact tools being ordered by LG Display, which would give some indication as to what stage of development the company has reached, we would expect it will take some time for LGD to get qualified as a volume producer and would likely not be in the running for the first Apple AR/VR release, which is rumored for early in 2023, but given LGD’s expertise in the OLED space, we expect they will eventually become a viable competitor, especially given their OLED supply relationship with Apple, for whom they supply a substantial percentage of iPhone displays.  China’s BOE (200725.CH) has also been developing micro-OLED displays using Sunic deposition tools but oriented toward military applications.

​In December 2013 LG Display (LPL) and Sharp (6753.JP) entered into a cross-licensing contract concerning the use of display IP, however LG Display recently found that Sharp had violated the contract in a specific area (undefined) and requested the case go to arbitration, using the Singapore International Arbitration Center for a ruling in December of 2019.  According to a release by Sharp, the arbitration panel has decided that Sharp was in violation of the agreement and must pay ~$95m to LG Display as compensation for damages, although the details of the infringement remain confidential under arbitration rules.
There has been no date set for the payment, although Sharp has indicated that it will revise its full year 2022 (March year) consolidated financial results to reflect the payment.  While the agreed upon arbitration settlement is far below LG Display’s original claim for $840m in damages, it represents almost 3x LGD’s operating profit last quarter, and while having little to do with LG Display’s actual operating profit or loss in 2Q, it will certainly be a factor in the reported net metrics.

​The same South Korean trade publication that we noted in our 5/4/2022 note was hinting that BOE (200725.CH) was in the Apple penalty box over changes made to circuit design without Apple’s permission, is back with similar speculation that BOE’s display production participation in the iPhone 14 could be reduced or eliminated, even after BOE officials visited Apple’s headquarters to plead their case.  A number of scenarios are presented in the most recent article by the South Korean media source, the most extreme being that BOE’s 30m unit OLED display order (6.1” panels) would be given to Samsung Display (pvt) (20m) and LG Display (LPL) (10m), who are already expected to be producing the iPhone 14 Pro and Pro Max displays in late June or early July, and that BOE would be limited to producing legacy iPhone (12 & 13) OLED displays for the remainder of this year, likely a total of 20m units, 10m of which have already been produced.  Less aggressive scenarios push back BOE’s iPhone 14 OLED display production until early next year and limit it to 10m units, assuming that they are fully reinstated by Apple by the end of this year.
As we noted previously, BOE struggled during 2021 to pass the stringent qualification requirements that Apple imposes on its OLED display producers and was given legacy OLED replacement screens initially as a test to make sure the company was able to meet yield goals.  This was then advanced to producing actual iPhone 13 and 1`4 OLED displays when BOE finally was able to qualify production, but within a relatively short time the story of BOE’s design change seemed to indicate that BOE was in the penalty box with Apple and had been suspended from further production, leading to a drop off in BOE’s flexible OLED unit volumes in February and March (unconfirmed). 
Given the source for this most recent speculation is South Korean, where both SDC and LGD reside, and that the Chinese trade press has made innumerable statements about how BOE’s inclusion in the Apple OLED display supply chain marks the end of South Korea’s domination of the OLED business, we are reticent to take it at face value until the data becomes available.  It would be surprising for a panel producer to make a change in design, even for a legacy product without getting approval or qualification from the customer, especially Apple, but it is certainly possible that such a change was made and is now causing BOE to bear the consequences.  Any negative scenario will hold back BOE from becoming a primary supplier, as can be seen from the years it took for LG Display to gain full OLED display qualification at Apple after it failed to meet production quotas back in 2019.

The display production business is a difficult one with an almost infinite number of internal and external variables working for and against production goals.  With the obvious objective of producing the greatest number of panels possible at as high an efficiency as possible, there are trade-offs that must be made in order to maintain quality while still producing profits.  OLED technology calls for a more specialized fab, which in reality are two fabs.  The first in simplified form is the one where substrates are coated with OLED materials and encapsulated, while the second is the more conventional TFT production line that generates the electronics that trigger each OLED sub-pixel.  There are cases where these processes are done on the same substrate and ones where they are separate, but the coordination between both processes is essential to avoid bottlenecks.
To complicate matters further, not only are such fabs massive and expensive, but they must operate efficiently at all times or the financials of the fab will be compromised, so we broke down the numbers for a typical[1] 30,000 sheet/month Gen 8.5 OLED TV panel fab to illustrate the volumes and dollars involved:


[1] LG Display is the only producer of OLED TV panels currently with Gen 8.5 fabs in South Korea and China.

​We note that these numbers represent a fab that has full utilization and 100% yield, which of course, is theoretical rather than practical, although that is the ultimate objective of every fab manager.  A new OLED Gen 8.5 fab would likely start production at a low yield, which could be anywhere from 30% to 50% depending on the experience of the engineers, with relatively rapid yield improvements for experienced producers such as LG Display (LPL), but the sensitivity to yield at these unit volumes is quite large.  A 1% improvement in yield amounts to a $795,000 gain over one month, so fab managers are extremely interested in yield improvement, especially in the early days of mass production at a new fab.  
Panels are examined at a number of points during OLED panel production to reduce the number of defective panels that pass further down the process line, particularly the deposition stage where expensive emitter materials are added.  Before deposition this is usually done through an optical process, but each fab is different in whether they use AOI (Automated Optical Inspection) tools that are in-line or tools that are off line.  In-line tools must have TACT times that are compatible with production lines or multiple tools would be necessary to alleviate bottlenecks, or the fab can choose to ‘spot check’ by taking random panels off the line for inspection, a lower cost alternative but one that could miss less frequent defects.
The testing process becomes the most sensitive right before and right after the deposition of OLED materials, as pulling a defective substrate off the line before deposition is a major cost savings, and, albeit less so, poor deposition results would prevent the panel from incurring further cost, but the tests following deposition are more complex and require more sophisticated and expensive tools that deal with particular defects that are specific to OLED, some of which require a panel to be tested using a process that changes the characteristics of the OLED materials, which makes them unusable.  Fab managers have to weigh the cost of pulling a set number of panels out of the line and destroying them to facing the chance that customers will be facing a defective panel that went undetected. 
A research team at the Korea Institute of Science & Technology (KIST) have come up with a way to test OLED panels at an ‘intermediate’ stage, meaning after deposition but before encapsulation, that is not destructive.  Testing OLED panels using a contact method is destructive but necessary, while testing them using a non-contact (UV irradiation) is also destructive, so the ‘cost’ of testing OLED TV panels is a yield reducer but carries significant financial risk if the defective panels reach consumers.  The researchers at KIST have found a way to test for defects in OLED material deposition that uses terahertz waves that do not affect the materials themselves, particularly blue OLED emitters which age faster than other OLED materials, and is therefore non-destructive. 
Terahertz waves, which are an order of magnitude higher than the gigahertz spectrum used for cell traffic, can penetrate the very thin layers of OLED materials, but are stopped by thick substances, and can be used to create high resolution images of the interior of thin films without their destruction.  If the research is able to translate these results (Yeongkon Jeong, 2022) into a practical product, it would go a long way toward improving OLED panel quality without reducing yield, and while we don’t usually note such basic research, its non-destructive characteristics make it viable for examining thin films or ultra-small structures like Micro-LEDs and is therefore extremely relevant to the display industry, regardless of how it evolves over the next few years.

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.

Samsung Display (pvt) made its decision to exit the large panel LCD TV production business quite some time ago, selling its last fab in China, and converting much of its LCD capacity to OLED, leaving only one fab still producing LCD TV panels at the request of parent Samsung Electronics (005930.KS).  LG Display has reduced its large panel exposure over the last two years but has maintained a larger LCD panel presence than SDC, which until the middle of last year, served them well.  Since then LCD TV prices have declined 51.5% from their peak only 9 months ago and are expected to decline again this month, putting marginal producers worrying whether they can sell such panels above cash costs.
The Korean Economic Daily is stating that LG Display (LPL) has made the decision to reduce its LCD TV panel production in Korea and China, as competition from Chinese panel producers continues to intensify.  LGD is said to be cutting LCD TV panel production by 10% relative to the first half of this year, which is a surprisingly smaller cut than we had already built into our LGD capacity model.  As has been the case for a number of years, expectations are that the soon to be shuttered capacity will be converted to large panel OLED TV panel production, although much depends on the global economic environment and a potential deal with Samsung Electronics that would establish them as a new customer.

​We are surprised that LG Display is not being more aggressive in closing large panel LCD capacity, although we expect if large panel prices continue to decline they will hasten their retreat form the LCD TV panel business, but we expect that they feel that they can run the remaining LCD TV fabs at least at break-even until they are able to justify the expense of converting same to new large panel OLED capacity, where they dominate the industry.  That said, building a large panel OLED fab is an expensive and time consuming project, and typically produces less in terms of capacity than the LCD production facilities that it replaces, so it is not an easy decision for LGD to make, but there is a point at which the Band-Aid needs to be ripped off and a full decision needs to be made.  We believe the company has already made such a decision but executing such a major upheaval is a daunting task.  All in, if they do make even the 10% reduction this year at least it is a step in the right direction, but China is certainly not going away and will inevitably drive higher cost producers out of the LCD TV panel market unless they are so specialized that they can survive.