We have mentioned a number of times that over the last few quarters Samsung Electronics (005930.KS) and LG Display (LPL) have been negotiating over a panel supply deal for OLED displays.  Samsung, whose display affiliate Samsung Display (pvt) has exited the LCD TV panel business, has been looking to expand its premium TV offerings, and while it offers its own Quantum Dot/OLED TVs, production is limited to one 30K fab, leaving Micro-LED TVs at the top of the line, albeit far out of reach for almost all consumers, the company’s Mini-LED/Quantum Dot lines, a small QD/OLED line, and Samsung’s Quantum Dot only LCD TVs.  With the premium Tv market the only TV segment expected to show positive y/y growth this year, building out that segment is quite important currently and likely necessary for the next few years.

While the definition of ‘premium’ in the Tv market varies, we define the ‘premium’ TV market as sets that are 55” or larger and cost $1,000 or more, and the lines shown in the graphic above all fall into that category, with a few models just below the ‘premium’ cut as shown in the table below.  As the Micro-LED line is not really a consumer-friendly priced item. We would expect Samsung, if a deal were concluded, to insert the ‘New OLED’ line at the same price points as the QD/OLED line to increase the volume of OLED offerings at those price points, and consequently, those price points are roughly equal to LG’s (066570.KS) own G3 OLED TV line, so price competition between the two rivals would not create further friction.
The big question however is Samsung’s margins on the new OLED line, much of which would be determined by the agreed-on price for the panels, which was said to be the contention throughout the earlier negotiations.  As Samsung is expected to purchase ~2m units next year, increasing to 3m and 5m in the following years (unconfirmed), and perhaps up to 1m panels this year, they are looking for a substantial discount to LGD’s normal transfer price.  LG Display has been running its WOLED fabs at less than full utilization so far this year, and such a deal would give a needed boost to OLED utilization rates that have dragged down profitability in recent quarters.  However rumors that Samsung is demanding prices below those offered to LG Display’s parent, which would likely cause a bit of bad blood between parent and affiliate.  That said, LG owns almost 60% of LG Display, so it’s an odd situation for LG.
While news services have picked up the supposed ‘movement’ in the negotiations, this would not be the first time a ‘deal done’ signal was given (or assumed) from local South Korean media.  While such a deal will have benefits for both parties, there is considerable emotional skin in the game for Samsung, who decided in 2013 that producing large RGB OLED panels was not a viable process.  In fact, they were correct in that assumption, as LG Display does not use and RGB patterning process in its OLED panels, but one encompassing creating a white light with a combination of OLED emitters and using a color filter to create the necessary red, green and blue sub-pixels., which reduces the brightness of the display.  Over the years LGD has adopted a number of improvements that have offset some of that issue, but the current-day management at Samsung must bow to the fact that the 2013 decision has given LGD a distinct advantage in the OLED TV space, as both the sole OLED TV panel supplier and LG’s over 50% share of the OLED TV set market.
It will be challenging for Samsung to come up with a marketing plan that continues to sell its QD/OLED technology while extoling the virtues of LG Display’s OLED TV panel vision, and not degrading the company’s Mini-LED/QD technology, which Samsung has been championing since 2021.  Of course that is what the marketing guys get paid for, so we expect rounds of advertisements providing little empirical information about the pluses and minuses of each technology, and more on why whatever the technology is, Samsung’s is better than others.  Samsung’s smartphone and TV divisions were ‘ordered’ to find solutions to improve earnings after 1Q results led to an 18% decline in sales and the lowest operating profit the company has seen in many years.  Tv division sales were down 14.8% y/y, so there is considerable pressure to expand the premium set business and bring up margins from upper management, so likely less face saving, and more sales will be the holiday mantra this year.
 

According to sources in South Korea, which does tilt the story a bit, China’s largest panel producer, BOE (200725.CH) will only be supplying OLED displays for one model of the iPhone 15 to be released later this year.  While both Samsung Display (pvt) and LG Display (LPL) will be producing LTPO displays for the iPhone 15 Pro Max and iPhone 15 Pro, BOE is expected to be supplying displays only for the iPhone 15 model, rather than both the iPhone 15 and the iPhone 15+.  Samsung will be taking up the slack with the iPhone 15+.
BOE has had an up and down relationship with Apple (AAPL) concerning OLED displays, with a number of failed attempts to get on Apple’s OLED display provider list, which has been the exclusive territory of Samsung Display and LG Display.  BOE did supply Apple with replacement OLED displays, sort of a test run for inclusion and was able to convince Apple that it had the technical and volume capabilities to supply LTPS OLED displays for the iPhone 13, released in September 2021, and the iPhone 14, released in September of last year, a point that has been emphasized by the Chinese press innumerable times.  That said, BOE made a catastrophic mistake by changing the design of a TFT backplane in order to improve yield, without getting the change approved by Apple.  We assume that the change was made in order to bring yields to levels necessary to satisfy Apple’s demand requirements.  This caused BOE to be put in the penalty box for the iPhone 14, limited to only producing OLED displays for the iPhone 14 6.1” model and that seems to still be the case with the iPhone 15.
It had not been expected that BOE would be supplying OLED displays for the high-end iPhone 15 models (Pro Max & Pro), as they require LTPO backplanes, a process for which Samsung Display has the most expertise and capacity, along with LG Display, who also has LTPO capacity, but it was expected that BOE would expand its OLED display supply to both LTPS models (iPhone 15 and iPhone 15+), which, at least at this time, does not seem to be the case.   
While there is still time for things to change, as production for this year’s iPhone release does not usually start until July/August, there is also the fact that Samsung has warned BOE that it has been infringing on certain of its OLED patents, and while Apple would therefore be involved in an infringement case, if SDC were to bring the dispute to the courts, there is the possibility that Apple has limited BOE’s participation in the iPhone 15 for both reasons..  While we expect the Chinese press will spin the less than expected participation in the iPhone 15 in a more positive light, and BOE could stack the deck a bit by lowering its quote on the iPhone 15+ displays, but Apple has always been a stickler for suppliers meeting their stringent specifications, both technical and volume related, so it might be a bit more difficult for BOE to change the situation that with other customers, but we note that BOE is about as determined to challenge SDC’s and LGD’s OLED leadership as anyone could be and seems to have a massive amount of energy and will toward making its relationship with Apple continue to grow.  Essentially, they don’t seem to take no for an answer and rejection only seems to spark the company to work harder toward achieving that goal.

​Key = Light Blue – LTPO -  Gray – LTPS

LG Display (LPL) reported official 4Q and full year results of 7.3t won ($5.92b US) and 26.15t won ($21.21b US), with the 4th quarter up 7.8% q/q but down 17.1% y/y, while the year was down 12.5%.  Things got a bit stickier at the operating level with operating income of -875.7b won ($-710.2m US) for the quarter, down 13.3% q/q, against a positive 4Q last year, resulting in a -12.0% operating margin.  The full year operating income was -2.085t won ($1.69b US), also against a positive 2021 full year result, with the full year operating margin of -8.0%.  The company took a 1.33t won ($1.06b US) non-operating impairment loss in the quarter.  

That said, management gave relatively little in terms of forward guidance, other than the very general ‘better 2H than 1H’ line, that area shipments will fall more sharply than the seasonal norms, and to expect that TV panel sales will again be lower than TV set sales.  Here is our take…
According to the first point of guidance, the second half will see better sales than the first half, which seems logical, if not a bit simplistic, as with LG Display, and most other display companies, the 2nd half is sweasonally better than the first.  LGD’s 5 year average (2H/1H) shows that 1H is typically down 16% over the previous 2H, and 2H is typically up 20% over 1H on average.  We expect there has, and later wording confirms, much hope in that prediction, as there is little hard evidence on which to base it thus far this year. 
According to the second point of guidance, the decline in area shipments between 4Q ’22 and 1Q ’23 will be greater than normal.  Based on our data, using a 5 year average including 2022, the typical decline in area shipments in 1Q is 11.9%, with the guidance implying a greater than normal decline in the current quarter.  Typically (5 yr avg.) sales also decline from 4Q to 1Q, and for LG Display that decline averages 19.4%.  if LG Display’s area shipments track to sales (they track within 2.7% over 5 years when normalized to 1Q 2017), the implication would be for a greater than 19.4% decline in 1Q sales.  A 20% decline, only slightly greater than average would imply sales of 5.84t won (down 9.7% y/y), while a 25% decline (10% over the norm) would imply sales of 5.476t won (down 15.4% y/y), and a 30% decline, only 10% below the seasonal baseline, would imply sales of 5.11t won for the 1st quarter (down 21.0% y/y), all of which point to a weak quarter and more difficult y/y comparisons. 
 
The third point, that TV panel shipments will again be lower than TV set shipments indicates the company’s continuing push to match inventory levels with orders, a difficult task at best given the volatility seem over the last few years.  That said, such ‘contract-based’ inventory management is possible in a less volatile environment, one which we seem to be falling into as the threat of COVID 19 decreases and Russia’s invasion of Ukraine becomes more normalized (not saying it should be, only that it seems headed that way).   LGD’s contracts with Apple (AAPL), which are currently oriented toward small panel OLED production, help, as Apple has been the most sucessful brand in maintaining relatively stable sales (and increasing share) during the last few quarters, and lower generic LCD TV panel inventory (see below) demands all work in that direction.  That said, increasing the JIT portion of their business substantially above the ~30% seen last year is an ongoing process that will see smaller incremental gains going forward, although the company has an optimistic target of 40% for this year.  If Apple maintains realistic targets this year it would facilitate LGD’s ability to move the JIT needle higher, but lots of ifs still remain.
One point that management made was toward the acccelleration of the company’s plan to exit the LCD TV panel business.  The company confirmed the closing of the company’s Gen 7 large panel LCD fab and plans for a 50% capacity reduction at its Gen 8.5 fab in China, and given the lack of traction on the demand side, and the excess capacity available to buyers, particularly in China, this continues to be a logical path.  However LGD does have customer contracts that are volume related, meaning they have an obligation to deliver display area targets, essentially access to production capacity as needed by customers.  Existing capacity commitments under those contracts must be met or penalties and ill-will could be generated, which means the capacity reductions targeted for the China fab could take time to implement as contracts are worked down this year.
On the more positive side, the company was a bit more forthcoming about their prospects for OLED, particularly small panel OLED, not usually the company’s focal point for OLED.  Management has separated the company’s large panel OLED business (OLED TVs) into a ‘separate cash-generating unit’, to be better able to monitor its progress, and manage the balance between margins on OLED TV displays and those on small panel OLED smartphone displays, such as the ones they produce for the iPhone.  Given that on a /m2 basis, small panel OLED devices have a higher ASP, it is essential that LGD manage those two segments of their OLED business separately, particularlyt as the TV business remains weak.  LGD, while maintaining that capex (3t won or $2.43b US) will not entail more than “minimum ordinary investment other than order-based projects”, will have to gear up ‘IT’ OLED production for Apple’s 2024 further infiltration into OLED displays, which will take at least some of that ‘project-oriented’ capex this year.  Perhaps some of the 5.2t won ($4.22b US) spent in 2022 has included some of that build spending (We note that LGD mentioned that last year’s capex was higher than expected), but we expect that LGD will increment capex later in the year.
LGD gave some detail about its OLED business, other than asserting that it is capable of producing 10m units this year, which is certainly a positive, as they broke out OLED as a percentage of sales for the last 5 quarters.  While it lacks the detail that would isolate the small panel OLED business (smartphones, tablets) from the large panel business (TV), it does show that the trend in LGD’s OLED business is more a function of its mobile OLED sales than its OLED TV sales.  When looking at Figure 3 LGD’s overall OLED share of sales (red) tracks closely to the company’s share of mobile dispay sales share (blue), while relatively poorly to the company’s TV sales share (yellow), which indicates that while the OLED TV panel business can, at times, generate a larger portion of company revenue, the small panel OLED business seems to be what is driving growth  We do note that the TV share shown in the chart also includes LGD’s LCD TV large panel business, which continues to shrink, so there is some play in that category, but the close tracking between total OLED share of sales and mobile share of sales is noticeable, along with the general weakness seen in the TV space.

​The Q&A served little, as most of the few questions asked were not directly answered by management, although when pressed they indicated that the company was, in addition to all mentioned above, working toward developing three new business segments, Hi-end gaming monitors, transparent OLED displays, and thin-film speakers.  The most attractive of the group is the gaming monitor business, and given that the space is one that is already recognizable and fits the company’s emphasis on OLED (high response time, high contrast, wide color gamut), we expect this category has the most chance for near-term success, and the company indicated that it was in discussions with 8 or 9 potential customers and expects to be in production this year.
Transparent OLED displays are, in our view, a bit more problematic, and when the company called the potentiual products ‘a solution product, not a standalone product’, it seems they have already faced the more unusual circumstances that limit the use of transparent OLED displays.  We do believe they are practical and viable in retailing, and can be a better alternative to more typical opaque signage, but applications in retail tend to be customized, and while that leads to higher margins, it is less condusive to mass production.
While LGD has been in what is loosely called the speaker business, we did not expect the company to promote its thin-film speaker technology, one that it has been using in its OLED TVs for a number of years.  Given our extensive background in the audio business, we have strong opinions as to this product category, which we will not get into here, but have difficulty understanding how LG Display will create a mass market product here.
All in, while much of the 4Q call was of little consequence, and at this early point in the year, especially given the poor economic environment, we expected little.  We had hoped that LGD would write off as much as possible, which they seem to have done, and was happy for the bits of insight into the company’s OLED business, but a bit more on the company’s thoughts about how the CE business might play out would have been helpful.  As noted above, the CE space seems to be settling into what we consider a more ‘normal’ mode, where sensativity comes from the fine balance between normalize supply and demand, without the exogenous factors that have run the CE show since 2020.  While most in the space do not look forward to sweating over the small stuff again, we look forward to a year that might not see spectacular changes but a more steady and measured progression toward better CE products, more rational planning, and less frenetic start-up investing.  Maybe we should be careful what we wish for but every environment has its opportunities.

​​LG Electronics (066570.KS) released a number of updated laptops at CES 2023, as part of its Gram laptop line.  What makes these laptops unusual is the Gram 15.6” “Ultraslim” and the Gram 14” and 15” “Style” models now use OLED displays.  In itself, it is not surprising for LG Electronics to feature OLED displays as it is the leader in large panel OLED display production through its affiliate LG Display (LPL), who also produces small panel OLED displays for Apple and a number of other smartphone customers., but in the case of these new OLED laptops, parent LG Electronics is buying the OLED panels from rival Samsung Electronics. 
Samsung Display (pvt), affiliate of parent Samsung Electronics (005930.KS), is the leading producer of RGB OLED displays, primarily for use in smartphones and tablets, while more recently building out its RGB OLED display line to include larger panels suitable for the notebook market.  While smartphone OLED displays are typically produced on a flexible substrate, with the phone’s structure providing the rigidity, laptop displays tend to be produced on rigid substrates (glass), as the more structurally solid frame keeps the glass-based display from flexing.  Further, the production cost of glass OLED displays is lower than that of those produced on flexible substrates, as during the production process the flexible substrate material must be attached to a glass substrate to make sure it remains flat during deposition, and them must be removed using a LLO (laser lift-off) process to return the display to a flexible state.
LG Display does not produce rigid OLED displays, producing only those with flexible substrates for smartphones, watches, and automotive displays, so in order to keep down cost, but also provide an OLED alternative to its laptop line, LGE had no choice but to buy from SDC or go to a Chinese supplier.  Considering that it has had problems with the displays on earlier models in its laptop line, the choice of Samsung seems logical, albeit a bit embarrassing.  We believe Samsung Display has ~ an 85% share of the rigid OLED display market, with only Everdisplay (688538.CH) and Visionox (002387.CH) competing and has considerably more experience than the others in producing these large OLED displays.
What also stands out in this unusual relationship is that Samsung Electronics and LG Display were said to be in negotiations last year for a potential purchase by Samsung of a large (>1m) number of OLED TV panels, which never occurred.  Rumors that while LG Display was willing to lower the OLED panel price below the price at which it sells OLED panels to its parent, the two were still unable to reach an agreement and the deal was called off, but when it comes to CE products, margins rule. 

​LG Display (LPL) has decided to end TV panel production in South Korea by winding down production at its P7 LCD fab , producing only to fulfill long-term existing contracts.  LGD is also expected to reduce LCD TV panel production at it fabs in Guangzhou, China from 210,000 sheets/month to 120,000 sheets/monthly, leaving that fab as the only one that will continue to produce LCD panels for the TV space. LGD’s P8 fab, which is a Gen 8 fab will produce LCD panels for IT displays (notebook, monitor, and tablets).
LG Display has expressed its intentions to reduce or eliminate LCD TV panel production in South Korea in the past, however the rise of TV panel prices during the COVID-19 pandemic in 2020 and 2021 , gave them reason to postpone those changes, likely with encouragement from parent LG Electronics (066570.KS), who, along with most other TV set manufacturers faced short supply from other sources.  Since last July the price of LCD TV panels has declined precipitously, making the decision a bit of an assumption.
Both Samsung Display and LG Display have been facing aggressive competition from Chinese panel producers, who are able to produce generic LCD TV panels less expensively due to lower labor costs and government subsidies.  In recent quarters, LG Display, along with other non-Chinese panel producers, have shifted away from direct competition with the Chinese and tried to change their mix toward higher margin more specialized products.  While this has offered a bit of protection from competition, weakness in the overall display market has lessened the benefits of those changes and pushed LGD and potentially others to restructure fabs in order to maintain a profitable mix.
Some have moved toward OLED, which we expect will be the case for LG Display in the future, converting P7 to either an OLED IT panel fab or an OLED TV panel fab, but given the current macro circumstances, such decisions can wait for a quarter or so to see how the holidays pan out and what the longer-term picture might be.  While it is expensive to have an idle fab of the size of P7, it is certainly less expensive than running it at low utilization rates or producing at cash costs or below, so the decision was imminent, although we will have to wait until January to get more information on how quickly the implementation will take place, the cost, and if any plans for the future of the fab have been made.

​Back in March we noted that LG Display (LPL) had decided to trademark OLED.EX after the company unveiled its new TV line at CES, touting a 30% increase in brightness compared to conventional OLED displays.  What made this possible was a change in the chemistry used by LGD, substituting an isotope of Hydrogen (deuterium) that has both a proton and a neutron in its nucleus, as opposed to just a proton, as is the case with ‘regular’ hydrogen.  While this change is a yawn for most consumers, the bonds between molecules using deuterium rather than hydrogen, are stronger and the rate of reaction is slower than normal, which means a potentially longer life.  In OLED displays, the current ‘push’ given to emitting materials determines their lifetime, with the tradeoff between brightness (more push) and lifetime a major concern for OLED display designers.  By substituting deuterium for hydrogen, the materials can be driven harder, increasing brightness, while the lifetime remains the same, hence the 30% increase in brightness that LGD claims, similar to deuterium’s application in pharmaceuticals where it is used to extend drug lifetimes.
Deuterium has been used in the development of TADF (Thermally Activated Delayed Fluorescence) emitter materials but is currently expensive as it requires a more complex synthesis process, but when compared to the cost of alternatives that would increase OLED display brightness, such as dual OLED stacks, the material cost is more reasonable.  However, there are few sources of deuterium, as the process for extracting it from water (1 in every 6700 water molecules is deuterium) requires considerable energy, which limits production, and while the demands of LG Display’s OLED TV business use relatively small amounts of the material, it remains another expensive materials in the OLED stack.
While the promotion of deuterium as a point of differentiation for LG Display’s OLED TVs continues, they are not the only ones interested in the material, and a joint venture between Samsung Display (pvt) and Japanese chemical supplier Hodogaya Chemical (4112.JP) seems to have thought enough about the potential use of deuterium to take LG Display’s patent for its use in display devices to court in South Korea in January of this year, asking the Intellectual Property Trial & Appeal Board to invalidate the IP.  It seems that the court agreed with Samsung and Hodogaya and nullified a patent that specified the use of deuterium in an electroluminescent device that was filed by LGD and development partner Material Science (pvt), as sated in the IP Abstract below.
“The present invention has the effect that it has property including the low driving voltage, the luminous efficiency and longevity etc. as the organic compound which more specifically, becomes as the new organic compounds and the organic electroluminescent device including the same with the deuterated (Deuteration) and the organic electroluminescent device including this as the material of at least one organic layer high.”
 
IP litigation is extremely complex and in the case of organic materials, is burdened by the number o0f potential organic molecules that can be combined to create an emissive device, but when a patent is challenged, the burden of proof is on the litigant to prove that there was prior art, the patent was similar (not novel) to other IP, or a number of other qualifiers that might have been overlooked during the patent’s original application and approval.  While we have a limited understanding of the nuance of the Korean judicial system, we believe that an appeal must be filed within two weeks of the invalidation notification, or for procedural issues, a filing must be made with the Supreme Court, but it would be rare that a ruling of this kind would prohibit the broad use of deuterium in display devices, but more likely limit its use to certain circumstances. 
 
While LGD has filed tag-along patents in other countries, including the US and China, as the displays in question are produced in South Korea and China, the ruling will likely be challenged in those jurisdictions by SDC or others and defended by LGD, and will continue this litigation battle for years to come.  We expect this will do little to change LG Display’s plans for adopting the deuterium process for its entire line, but will only serve to raise the total cost of materials a bit higher when litigation costs are factored in.  

Samsung Display (pvt) has been the exclusive supplier of LTPO based displays to Apple (AAPL) since the company began using the more advanced TFT process for two models of the iPhone 13 last year.  As high screen refresh rates are desired by consumers to keep fast moving images from smearing, device designers also had to deal with the fact that those higher refresh rates mean the images on the screen are redrawn more often each second, with draws more power from the device’s battery.  LTPO (Low-temperature Poly-Oxide) is a combination of LTPS (Low-temperature poly-silicon) and IGZO (Indium Gallium Zinc Oxide) backplane solutions, and is able to allow high refresh rates as well as low refresh rates, which gives the device designers the ability to create a ‘variable rate’ device.  Such systems can sense the resolution of an image stream and tailor the display’s refresh rate to meet that need, so the device can run high resolution images when necessary, but can also throttle the refresh rate to very low levels for text or other slow moving images, saving considerable battery resources.
Apple is credited with the development of LTPO and has used it in the Apple Watch since 2018, but it was used in Samsung (005930.KS) smartphones (Note 20 Ultra) in 2020 and a number of Chinese brands before Apple began to migrate to the technology last year.  The process for producing LTPO is more complex than either of the two processes from which it is derived and that complexity gave Samsung Display the first mover advantage for LTPO, especially in 2021 when it was the sole supplier for the iPhone 13.  This year however, LG Display (LPL) has been working toward adding LTPO to the displays it provides to Apple and had to go through Apple’s rigorous qualification process to join rival SDC, which took longer than expected, leaving Samsung Display as the sole OLED display supplier to the iPhone 14 Pro Max and the iPhone 14 Pro until the end of October.  From that date forward LG Display can now provide LTPO displays for those models, in addition to the two LTPS models it previously supplied, which will reduce SDC’s shipment levels and give a boost to LG Display’s mobile OLED display business, which took a hit when parent LG Electronics bowed out of the mobile phone business last year, especially as the two LTPO models have proven more popular than expected.
BOE (200725.CH) remains a supplier of the iPhone 14’s two LTPS models, but has been working toward improving yields on its LTPO production, although we expect they will likely not qualify this year.  That said, there is the possibility that BOE could get LTPO qualified for the iPhone 15, which would eat further into SDC’s dominant position.  While this is certainly a factor, yield is still a major consideration, and SDC’s long experience as an LTPO producer will likely leave them as the highest volume supplier, but the addition of LG Display and potentially BOE will likely put pricing pressure on SDC going forward.  We expect this will trickle down through the component supply chain in 2023, with purchasing leverage moving from SDC to LGD and BOE, and Apple able to make progress in lower display costs.
 

​In our note yesterday, we mentioned Samsung Display’s (pvt) potential expansion of its QD/OLED display capacity, both through improvements in process tact time and the eventual conversion of shuttered LCD fab to additional QD/OLED lines.  Some of what we noted was derived from a recent speech made by the CEO of Samsung Display where he made a number of specific references to SDC’s plans for QD/OLED, a technology that SDC is promoting as an alternative to LG Display’s (LPL) WOLED.  The two large panel display technologies are the same in that they are both based on OLED emitters as light sources, but differ in the way that they quantify that light into Red, green, and blue sub-pixels that are necessary for full color displays.
WOLED technology uses a yellow/green (We note that yellow is a combination of green and red in light) phosphorescent OLED emitter combined with a blue fluorescent emitter as its light source.  With all three primary colors represented, the mix produces white light.  The white light is then passed through a color filter, essentially a sheet of red, green, and blue dots of phosphor materials.  The red phosphor dots allow the red component of the white light to pass through, while the green and blue dots do the same, creating an RGB pixel, one of ~8.3m on a 4K display.  While this is a cost effective way of producing an OLED TV display, as each sub-pixel blocks what is theoretically 2/3 of the light, much of the light intensity of the OLED materials is lost at the color filter.
Samsung Display uses a different technology for their QD/OLED displays.  The light source is a blue fluorescent emitter, similar to the type used in the WOLED process, but the color filter phosphors are replaced with red and green quantum dots.  Quantum dots differ from phosphors in that they do not block light, but convert it from one frequency to another, which corresponds to changing the color, so in the SDC system, in theory, the blue light is converted to red and green sub-pixels while the blue light passes through unchanged without filtering out other color components, producing a brighter display.
Both systems has a drawback, and that is they rely on blue phosphorescent emitters, which differ from phosphorescent OLED emitters in that fluorescent emitter are only able to emit 25le to generate 25% of the light that phosphorescent emitter materials can.  The physics behind this issue is complex, but if OLED panel producers had the ability to use a blue phosphorescent emitter they would, other than the fact that they are not commercially available, hence the reliance on the lower output fluorescent blue.  Again, the physics behind why a blue phosphorescent emitter is not available is complex, but leave us to say that the higher energy levels of blue phosphorescent emitters causes them to break down more quickly than red or green, and deep blue phosphorescent emitters do not yet have the lifetime needed for commercial use.
There is an alternative, which is a derivative of fluorescent blue called TADF (Thermally activated delayed fluorescence) which improves the characteristics of generic blue fluorescent emitter materials, but they are still on the cusp of having the characteristics needed for commercial display, which leaves both Samsung Display and LG Display to use fluorescent blue emitters and look for ways to improve output until a blue TADF or phosphorescent OLED emitter can be commercialized.  Universal Display (OLED) and a number of other display material suppliers have been working toward the commercialization of such a material, with UDC expecting product by 2024, along with SDC itself, who has license agreements with UDC.  Samsung recently cited its own developments in the development of a blue platinum-based phosphorescent emitter material but gave no timeline as to its potential commercialization or internal use.
Back to the speech given by Samsung Display’s CEO this week…what caught our attention was the reference he made to changing the blue fluorescent emitter material currently used in the QD/OLED process to a blue phosphorescent ar blue TADF material to increase the light emitting efficiency.  This seems to imply that SDC is considering changing the QD/OLED stack with what would have to be a commercial blue emitter that has been developed by a partner or affiliate, which would be a major step forward in the development of OLED materials.  We expect the production of such a material would be done in outside of Samsung itself, which opens the question up as to whether this material will be exclusive to Samsung or whether it will be made available to other OLED producers.  While the advantage to Samsung would be obvious if the IP is limited, the licensing of said IP would allow the OLED industry to progress further, particularly large panel; OLED devices, and would improve the characteristics of both WOLED and QD/OLED, as well as improving small panel OLED displays by increasing their efficiency and reducing power requirements.  While this was a mention in a longer speech, we see it as carrying significant weight toward the commercialization of a blue phosphorescent material.  Only 494 days to wait to see if the prediction rings true… 

​LG Display is the world’s only supplier of OLED panels for TVs and has set the tone for large panel OLED products, offering WOLED displays from 97” down to 42”, with flexible, rollable and transparent offering across many of those sizes.  LGD’s TV OLED displays are based on technology that uses a substrate coated with yellow/green and blue OLED materials that produce a white light which passes through a color filter that consists of red, green, and blue phosphors that convert the white light to the colors necessary to produce highly color accurate images.  While this differs from smaller OLED displays that pattern red, green, and blue OLED emitters and do not need a color filter, limitations on the size of RGB OLED displays keeps the technologies from overlapping and given LGD’s experience in producing large panel OLED displays, the competition in the large panel space is limited.
Gamers push the display envelope, looking for larger, faster and more accurate displays, and OLED displays for gaming and monitors have become increasingly popular but at these smaller sizes, the choice of OLED technologies becomes more difficult and with Samsung Display’s QD/OLED the choices become even more complicated.  Small panel OLED producers are looking to find ways to bypass the size limitations of RGB OLED displays while LGD is looking to reduce the size of its displays to further feed the gaming market while still using existing OLED resources.  To that end LGD has indicated that it will introduce a 20” OLED display by the end of this year, which we assume will utilize its WOLED technology, while it works toward the commercialization of an RGB OLED process that is feasible for such panel sizes.  Samsung Display and others are looking to also find ways to bypass the RGB size restrictions to feed such demand but those projects are in the development stage, leaving LG Display’s smaller OLED panel size seeing only minor competition from ink-jet printed panels from JOLED (pvt), which seem to be produced in relatively small quantities.
If LGD is able to produce 20” or 21.5” displays under it current WOLED process it would have an efficiency advantage over those OLED producers that use Gen 6 fab lines as LGD’s large panel OLED lines are based on Gen 8.5.  Not only does this give LGD the ability to produce between 35 (21.5”) and 40 (20”) panels on a single substrate vs. 18 and 21 on a Gen 6 line, giving economies of scale, but also increases the substrate efficiency (the used substrate/total substrate size) from 85% to 93%, and while this doesn’t seem like a big advantage, when multiplied by hundreds of thousands or millions of units, it adds up.
LGD has also indicated that it is working with a customer to design a flexible gaming panel with a curvature that can be adjusted by the user.  This would allow a gamer to adapt the OLED display to the needs of particular games, some of which require extreme focus on the center of the display while others need more peripheral viewing, which would be enhanced by a tighter curvature.  LGD was quick to point out that its WOLED displays, which are based on a single substrate, would be able to provide such a function, while SDC’s QD/OLED displays, which are based on two substrates (OLED and quantum dots) would not.
All in, LGD continues to squeeze as much as possible out of its investment in WOLED which has given it the ability to maintain the massive lead it has in large panel OLED display production, and anything that extends those capabilities should be a plus, but we expect as sizes get down to around 20” the competition from small panel OLED producers will become intense, even if they are less efficient, and by the end of 2023 we expect there will be at least some Gen 8.5 RGB OLED capacity that will compete directly with LGD in that panel size category.  Grab the ring as soon as possible as new contenders are waiting in the wings…

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.