Back in the early 1900’s Sharp (6753.JP) was a metal fabricator who came to fame when the company’s founder developed the first ‘global mechanical pencil’, but saw that business destroyed in a 1923 earthquake.  Moving the business to Osaka, Sharp began producing Japan’s first radio sets, and by 1953 was producing TVs, calculators, and microwave ovens 10 years later.  Sharp had developed LCD technology for its calculator business, opening a Gen 1 line in 1991, but began investing heavily in LCD technology in the early 2000’s, building a Gen 4.5 fab in 2003, a Gen 8 fab in Kameyama in 2003, and the world’s first Gen 10 fab in Sakai, in 2009, which was able to produce, at the time, the world’s largest TV, a 65” model more efficiently than any existing LCD fabs.  Unfortunately, the global economic crisis and the strong yen around that time wreaked havoc on the cost of Japanese produced panels and CE products, and Sharp’s financials continued to deteriorate until 2012, the company’s 100th birthday year.
After months of negotiations and a major reduction in price after continued stock price declines, Foxconn (2354.TT) purchased a 66% stake in Sharp for $3.5b (original price was ~$6.25b), while the Chairman of Foxconn took a 50% personal stake in the Sakai Gen 10 fab[1], with the capital expected to go toward maintaining the LCD business and funding Sharp’s development of OLED displays.  As Sharp had been an early adopter of IGZO (Indium Gallium Zinc Oxide), a backplane technology used in large OLED devices, the plan was sound, but never fully materialized, although the company was the first to produce a commercial 8K TV as early as 4Q ’15, a dubious honor currently, but under the guidance of Foxconn, Sharp became profitable in 2017.
Sharp was not an exception to the display industry’s woes in 2022, and just reported its first loss since the Foxconn takeover (for the year ending in March ’23).  While sales were up 2.1% y/y, Sharp reported an operating loss, with 84.6% of the loss a write-down of assets ($1.64b), of which 85.4% was against the company’s LCD business, 9.6% against the OLED business, and 4.9% against Sharp’s other businesses. The company indicated that lower selling prices, leading to lower sales, FOREX, and the heavy losses in the display business, were the reasons for the loss, while mix and cost reductions provided some offset, and while management emphasized that all segments except display saw sales increases in fiscal 2022, only one division saw a positive operating profit.
Company guidance for fiscal 2023 (3/24) was a bit darker than other CE companies stating “We expect the demand environment to remain weak in response to a reactionary decrease in demand from the COVID-19 pandemic, global inflation, high energy costs, geopolitical issues, and other factors.  At the same time, carbon-neutral, DX, and other sectors will remain strong.  We are seeing an easing related to the impact of semiconductor shortages, high raw material prices, and rising logistics costs; however, the future remains uncertain.”  The company cited a 2023 goal of achieving net profit at all costs, through cost reduction, and the building of the company’s brand businesses, predicting a 0.5% increase in y/y sales and a modest profit (0.4% margin).  This assumes a 34% improvement in display profitability, a 32.7% improvement in Sharp’s brand[2] business profit, and a small (+2.9%) improvement in the company’s device[3] business operating profitability.  Inventory levels across the company and more specifically in display have fallen since their recent peak in 2022, but against an average level during the three years before COVID (2017 – 2019) of ¥226.3b and an Inv./Sales ratio of 1.19, there is still some trimming that needs to be done before the company could be considered ‘lean’.
While the Foxconn management has done a good job of removing the blinders that were on the pre-sale Sharp management, panel producers overall were unable to avoid the effects of both a return to pre-pandemic demand and catastrophic inflation.  While the company did not break out the Sakai Gen 10 plant from others, we expect the large panel LCD TV business to see a recovery in 1H as prices for TV panels have gained ground, but we also agree with management’s assessment of demand in a post-pandemic environment, and now that inventory has been returned to more normal levels, demand will be the key to more than a ‘back-to-baseline’ year.


[1] Stake was sold back to Sharp in 2022 for $296m by Gou, making it part of consolidated income.

[2] Brand Business includes appliances, energy solutions, TV, and mobile devices.
 

[3] Device business includes display, IoT, and semiconductors.

​There are many TV brands represented in the US, with Best Buy (BBY) and Walmart (WMT) listing over 20 and Amazon (AMZN) listing over 25 TV brands offered.  But while US TV consumers have choices when it comes to LCD TVs, they have far less choice when it comes to OLED TVs.  OLED TV brands are plentiful on a global basis, with over 20 brands having at least a single model (albeit some a bit dated), and while this was not a good year for the TV market in general, ~7m OLED TV sets were shipped globally, for a ~3.5% share of the overall TV market.  In the US however, a quick look at the OLED TV market shows that it is dominated by three or four brands, and few, if any other OLED TV brands are sold in the US market.  Until last year, LG (066570.KS) and Sony (SNE) were the dominant OLED TV brands sold in the US, with Vizio (VZIO) entering the US OLED TV market in 2020, and Samsung Electronics (005930.KS) entering the OLED TV market last year with its QD/OLED TVs.
One brand that has been conspicuously absent from the US market has been the Japanese TV brand Sharp (6753.JP), who built a reputation on calculators and later microwave ovens, built the world’s first Gen 10 LCD plant in 2004, years ahead of other panel manufacturers, and was the leader in large-size LCD TVs.  By 2010 however, the company faced mounting losses and instituted staff reductions in 2012, but was unable to recover sustainable profitability, being forced to sell a 50% stake in its Sakai LCD plant to then Hon Hai (2317.TT) chairman Terry Gou and 10% stake in the overall company to Hon Hai (aka Foxconn (2354.TT)) for a bit over $800m US.  
While the Foxconn stake kept the company afloat for a while, in 2015 Sharp sold its Mexico assembly plant to China’s Hisense (000921.CH) for $23.7m US, along with the rights to the Sharp brand name in North and South America, where it had a ~4.5% share of the US TV market.  In 2016 Foxconn announced it would raise its Sharp stake up to 66% for an additional $6.24b US, but after additional financial issues were revealed, the payout was reduced to $3.5b US.  In 2017, after a restructuring by Foxconn, Sharp began legal proceedings against Hisense, who they said was producing low quality TV sets using the Sharp name and a protracted legal battle ensued, ending with Sharp buying back the brand name rights in the US in 2019 for an undisclosed sum and was expected to return to the US TV market that year.  While Sharp’s TVs are sold on Amazon to US customers, the brand remains under-represented in the US although it is still a major brand in Japan.
With all of that said, we expect Sharp to enter the US OLED TV market this year, likely with assembly being done at the Mexico plant, which is now owned by Foxconn, and will likely be Roku (ROKU) based, as their LCD TVs have been, which would be the first 4K Roku OLED TV sold in the US (it sells OLED TVs in Japan and other regions).  We believe Sharp will offer at least a 55” and 65” OLED model, but pricing and other specifications are still unknown, although we expect sets will be priced toward the middle of the range relative to LG’s pricing, which would be ~$1,100 to $1,200 for a 55” set and between $1,400 and $1,800 for a 65” set.  While we expect Sharp will enter the US OLED TV market with a limited number of models, Sharp does represent a recognizable TV brand name to US consumers, as opposed to many Chinese TV brands and could have the potential to compete with Samsung, LG and Sony, however unless Sharp is able to strike a deal with major retailers, we expect most consumers will stick with those brands featured by Best Buy and Amazon, unless Sharp can prove its TVs are of higher value, a difficult task when competing with the two sole producers of OLED TV displays.

​Japan’s Sharp Corp (6753.JP) has had an ongoing relationship with Taiwan based Foxconn (2354.TT) since August of 2016 when Foxconn purchased a 66% stake in the ailing company for ~$3.43b, a bit under $1b less than Foxconn’s original offer, as Sharp’s financials revealed some inconsistencies.  This came about a year after Sharp sold the rights to its US brand and Mexican assembly factory to Chinese TV brand Hisense (000921.CH), a deal that was later seen as a mistake and a thorn in the side of the company.  Much of the impetus behind Foxconn's original stake was the company’s Gen 10 LCD fab and Sharp’s leadership in IGZO TFT technology, which was relatively new at the time and could be shared with Foxconn’s other LCD assets, primarily Innolux (3481.TT), which it purchased in 2009.
Over the last few days Foxconn affiliates have purchased 51m shares of Sharp (500k voting rights) raising the company’s stake from 46.85% to over 50%, giving the company controlling interest once again.  We believe the purchasing entity was a Cayman Island company known as SIO International Holdings (pvt), a shell corporation created by then Foxconn chairman Terry Gou, which also held title to the company’s Wisconsin ‘Super Factory’ that was touted by former President Trump as the ‘Eighth Wonder of the World’ at the groundbreaking.  Most of the site remains idle and the 13,000 jobs said to be created by the facility, which was to be the first LCD TV panel production fab in the US, never happened.
It is hard to know for certain what is behind the increased Foxconn stake in Sharp, other than the thought that things in both the CE space and the display space are at low points, along with Sharp’s stock price, which is close to the low of the last 20+ years.  Gou, while vowing to give away 90% of his fortune away, has a net worth of $6.3b, so tossing a few NT$ around bargain hunting Sharp is like  every day folk looking to save a few bucks with a 2 for 1 coupon…   
LG Display Waiting for the Apple OK for LTPO
According to South Korean trade press, LG Display (LPL) has submitted new batches of LTPO (Low Temperature Poly Oxide) displays for Apple’s (AAPL) qualification.  If approved, the company will begin to produce such displays for the iPhone 14 Pro and Pro Max, whose displays are currently being produced by Samsung Display (pvt).  The most recent qualification process follows a previous submission which did not meet Apple’s standards in reference to encapsulation and the camera cut-out and is expected to take about two weeks.  If the most recent displays are not qualified it is expected to take another month before an updated batch can complete the qualification process.
Samsung Display, as we previously noted, has been ordering additional production equipment, likely under the idea that LGD will be a smaller supplier than originally planned due to the potentially late start.  SDC has been producing LTPO displays for its customers since 2020 and is the only supplier of same to Apple.  LG Display and China’s BOE (200725.CH) supply LTPS OLED displays to Apple for the iPhone 14 and 14+, with BOE the most recent addition to this exclusive roster.  Apple’s strict requirements for displays, including the display technology and the ability to meet production yield requirements have been a problem for BOE in the past, as well as LG Display and even Samsung Display at times.

​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.

Corning (GLW) held an opening ceremony at its Gen 10.5 glass substrate plant in Guangzhou, the company’s 3rd Gen 10.5 plant in Mainland China and Corning’s 7th glass plant in China.  There is one Gen 10.5 LCD display fab in Guangzhou, which is owned by Sharp (6753.JP) and Foxconn’s (2354.TT) Chairman Terry Gou.    While Sharp has a Gen 10.5 LCD fab I Japan, the China Gen 10.5 fab had been delayed during the early stages of COBID-19, and given Corning’s careful expansion plans, Sharp has likely given the ok for the fabs phase 2 build out, which was originally scheduled for earlier this year, before the COVID-19 delay, which would double the fab’s capacity to 90,000 sheets/month and make it worthwhile for Corning to build a plant nearby.
Corning has also agreed to a strategic cooperation framework with Shenzhen based Tianma (000050.CH) to develop applications that encompass Corning’s ColdForm technology, which allows for Gorilla Glass to be processed (ion exchange, etc.) and then bent and formed without the use of what would typically be a hot molding process done before processing.  While allowing for the same automotive design shaping that hot molding allows, all of the process steps can be completed before forming, making processing considerably easier and less expensive.  Additionally both companies will conduct joint research toward the development of new products in automotive and the CE space.
 

Back on 2/27/17 we noted that Samsung Electronics (005930.KS) had verified that it would release a new Galaxy Tab S3 at Mobile World Congress, returning its tablet business to OLED displays.  Samsung had used an OLED display in its Tab s (7/2014) and Tab S2 (9/2015), but returned to LCD technology for the Tab A (3/2016) and Tab E (1/2016).  We believe Samsung Display (pvt) will be sticking with OLED displays for new tablet models and is considering using OLED for some laptop production this year.

We believe Samsung Display will be converting at least a portion of its L6 LCD production line from a-Si[1] to Oxide[2] backplane production and OLED display lines.  The L6 fab had a raw capacity of 268,125 m2 as of November 2016, which represented 7.5% of Samsung Display’s overall capacity, and 1.3% of worldwide capacity, and we believe had begun to reduce production on at least one of the three L6 lines at the end of last year.  We expect that line to be closed by May and the conversion to Oxide and OLED to begin.  We expect phase 1 of the oxide conversion to be fully ramped by April/May 2018, with lower output levels beginning this summer, and the ramp down of L6 phase 2 starting in July of this year, completed by year-end, and the conversion of L6 phase 2 to be completed by July/August 2018.  The L6 phase 3 ramp down will begin at the end of this year, with the conversion completed by 1Q 2019.

Samsung Display has yet to signal whether the L6 conversion will change the substrate size from Gen 5, so we build the changes into our model using a Gen 5 format.  As the upgraded fab will be supplying both IGZO backplanes and OLED displays, we expect the actual OLED capacity to be considerably lower than what the fab had been producing for LCDs.  We believe that Samsung will shift its LCD tablet and notebook production to its L8 Gen 5.5 lines, albeit at a reduced rate, as it continues to supply Apple (AAPL) with panels for the iPad, along with Sharp (6753.JP) and LG Display (LPL).

While expectations are that Samsung will release the previously mentioned Galaxy Tab S3 this month, there have been rumors that they will also release a Win 10 tablet line this year, although that remains unconfirmed, and we believe has supplied OLED displays to HP (HPE) and Lenovo (992.HK) for their Spectre  and Yoga Thinkpad laptops.  But the laptop market is far different than the smartphone market, and the necessity for OLED displays is less urgent than for smartphones, where the device is on for a large portion of the day.  That said, there was little OLED capacity for laptop display sizes, and yields were lower than those for smartphones, so Samsung Display had less of an incentive to expand that segment.  So what makes Samsung Display willing to step up its ‘non-smartphone’ OLED production capacity?  Most likely it is interest from Apple for its iPad line, and while an immediate move to OLED would be somewhat premature, Samsung Display could be responding to both its parent company’s demand and the potential for Apple to move to at least an OLED iPad variant sometime in the future.  Apple will be announcing new iPads at a press event in April.

All in, Samsung Display and parent Samsung Electronics, continue to push OLED displays further into their mobile lines, and reduce their exposure to LCD in small panel devices.  If we are correct in our assumptions about the L6 conversion, Samsung Display should be able to produce the equivalent of 2.6m 13.5” OLED laptop screens/quarter at the completely converted facility[3].  Apple has been averaging about 11.5m iPad units/quarter for the last two years, so we have to assume that only a portion of the iPad line could be converted to OLED over the next few years, as Samsung Display will also use the new capacity for its captive customer, but even the possibility that Apple might use OLED for its iPad line keeps a fire burning under the OLED space, and will continue to drive Samsung Display and others to add capacity.



[1] A-Si – amorphous silicon – commonly used as an LCD backplane
[2] Indium Gallium Zinc Oxide – aka ‘Oxide’ – another type of backplane
[3] 100% yield – Actual rates will be lower

While we have noted a number of comments from the Japanese press on the potential construction of a TV plant in the US by Sharp (6753.JP), it would seem that Tai Jeng-wu, the CEO, has made the definitive statement concerning the matter.  He stated that the company has not made any decision as to whether such a plant will be built, and more to the point, if there is a policy from local governments to encourage, they will advance the plan. 

Simply, the company, and in this case the final decision will likely be made by Sharp’s new parent, Foxconn (2354.TT), must receive enough incentives to make the project financially worthwhile.  We believe this would entail significant long-term tax incentives at the least, and likely some additional infrastructure incentives relating to power, transportation access, and similar resources, not unlike the incentives given by regional Chinese governments to encourage companies to locate in such regions. 

While the US trade organizations complain about the unfair competitive nature of Chinese companies due to government support, the same type of incentives will likely be offered to Sharp/Foxconn, but in this case they will be couched in political rhetoric.   Deals are always made to ‘encourage’ growth, maybe we should stop whining and encourage US companies to innovate, retrain, and invent, something we seem to be better at than most others.  After all, we did invent the telephone, light bulb, the airplane, washing machines, television, microwave ovens, industrial robots, lasers, integrated circuits, PCs, microprocessors, and social media (ok, maybe not a great last choice).