​Tianma (000050.CH) has indicated that it will be undertaking a new construction project in Wuhu City, Anhui Province.  The new facility will be a module assembly plant that is expected to cost $1.2b US in total, with an initial funding of $720m, of which 52.08% will come from Tianma ($375m) and 47.9% will come from partners including the Wuhu Industrial Investment Fund (city –Owned), and the Wuhu Jiuchuang Investment Fund (pvt).  The focus is expected to be smartphone and IT modules up to ~40” and is expected to improve Tianma’s overall profitability when completed.  No completion date was specified although we would expect between 12 and 14 months once site work has begun.
Tianma is a relatively small player in the LCD space, holding a roughly 1% share of total LCD capacity and a 0.6% share of LCD display industry revenue, but has a larger presence in the OLED space when current share is ~3.9% in the small panel OLED space, but is expected to increase to almost 7% by the end of 2024, if capacity expansion plans remain on schedule.  The company is currently building a $5.16b LCD Gen 8.5 fab in Xiamen, which would be responsible for the capacity share increase.   While the module plant does not add LCD production capacity, it is an indication that management believes that the LCD display business has decades of continuing growth, a less than sure bet in our view.
As we have noted above, while we expect LCD technology to continue to the most prevalent display technology for the next few years, Chinese panel producers seem bent on expanding what is already a majority share of that business, even if it means creating an over-capacity situation for periods of time.  What makes the LCD space more vulnerable is not competition from other regional suppliers, such as Taiwan and Korea, as expansion plans for Taiwan are small, and Korea is proceeding in the other direction, closing large panel LCD fabs, but competition amongst Chinese LCD producers themselves. 
The desire (or necessity) to produce positive results after years of government funding push Chinese panel producers to maintain high production levels, even when the market is soft, exacerbating downward pressure on panel prices, and maintain an overly optimistic view of the industry’s cyclical nature.  Some have been expanding OLED capacity, where demand continues to grow but those without the experience and expertise to produce OLED displays remain convinced that LCD technology will see increasing demand almost ad infinitum.   Capacity competition was the watchword of LCD panel producers years ago, when Chinese producers were small or even non-existent, but extended periods of over-capacity reinforced the fact that ‘If you build it, they will come’ does not always work forever.  Government funding certainly has a place when a region is trying to build an industry, but it can bring on its own problems, which are usually not seen until years later, long after those who funded the operation have moved on, leaving future local and provincial officials, company managements, and in many cases individual investors holding the bag.

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

Chinese panel producers are a complex lot.  Transactions between various controlling and non-controlling entities can make understanding ownership a difficult task especially given that fabs under a common company name may be owned by different parties.  That said, we are always on a constant search to isolate current ownership of Chinese panel producers to give us a better understanding of how much support these companies are given by government entities, as opposed to panel producers outside of China where governmental influence and financing is less or non-existent. 
Tianma (000050.CH) is one such Chinese panel producer and while we cannot be sure that every fab, executive office, sales office and support center falls under the corporate umbrella noted below, the company does give a look at current ownership as part of its 2021 annual report.  Here’s what it looks like:
Total number of ordinary shareholders: 96,674
Total number of shareholders in Previous Month: 93,422

​To summarize, state owned entities are 8 of the top 10 shareholders in Tianma, with a total of 58.87% of the outstanding common shares.  All of the entities marked in red have interlocking ownership or cross-entity holdings and while holder #7 is listed as a corporation, it has a ‘concerted action agreement’ with AVIC International Holdings to continue to invest in the company, essentially a source of funds when needed.  We assume Hong Kong Clearing is a broker holding shares in street name for individual investors, however we could find little on the only top 10 individual investor listed above.  He or she has 3 holdings with Tianma being over 85% of the portfolio but little else is known about affiliations with the company or the Chinese government. 
All in, Tianma is essentially a state-owned entity and as such we look more toward the years in which the industry faces difficult challenges to see how much government support is needed to keep the company profitable.  We do note that Tianma has been expanding capacity and will open a new Gen 6 OLED line this year, so we expect continued growth from a unit volume perspective although in previous quarters Tianma has had a relatively small share of the small panel OLED market.   

​Chinese OLED panel producer Tianma (000050.CH) has indicated that it has started production runs at irs T18 fab in Xiamen.  While this is likely test run production, it is ahead of our ramp schedule and while it will be a number of months before the fab will be at full (phase 1) capabilities, it will likely take considerably longer for Tianma to fill this fab’s capacity.  The fab itself consists of two 15,000 sheet/month flexible OLED production lines and additional room for a third line, for a total of (phase 1 and 2) of 48,000 sheets/month and has an estimated cost between $6.8b and $7.6b when completed.  Tianma runs a Gen 5.5 OLED fab in Shanghai that is primarily producing rigid OLED displays, another Gen 6 OLED line in Wuhan that was built for a full capacity of 37,000 sheets/month, but is not fully built out, and a Gen 4.5 pilot line used for R&D.
Last year Tianma began the year shipping ~1m OLED display on a quarterly basis, increasing that to between 2.2m and 2.8m as the year progressed, which gave them a share under 2% of the small panel OLED market, so the Xiamen fab will add to that share as it ramps production , however based on Tianma’s capacity last year, which based on a 6” display base, would have been ~154m units, so based on our estimates of ~9m units shipped last year, the  company’s OLED fabs are considerably underutilized or have extremely low yield rates.  This makes it more necessary for Tianma to build out customer relationships or improve yield rates in order for the new fab capacity noted above not to depress profitability further, which leads us to expect a later start for the second phase of the Xiamen fab. 
Tianma also runs a number of LCD fabs which provide much of its sales volume, although the newest Tianma LCD fab went on line in late 2017, and while all of its LCD assets are likely fully depreciated, they are heading into their 5th year of production and are likely in need of upgrades in order to compete with some of the newer LCD fabs in China.  This makes building expensive small panel OLED fabs that are producing at low utilization rates even more risky as capital has to be allocated to upgrade the LCD side in order to provide steady income, while the spending for OLED produces losses.  That said, in China the display industry is funded by the Chinese government at the provincial or city level primarily, and while those capital flows have shifted a bit toward semiconductor capacity, we expect Tianma will continue to be support with subsidies and financing from government entities until the Xiamen fab is completed, and while early individual stockholders might be happy with the results (initial price – 4/1/1995 - $1.82), current stockholders would be less so as over the last 2 years the stock has fallen from a peak of $17.90 in February 2020 to its current price of $12.07, not quite at its low (January 27,2022 - $11.83) but close to it.

​Yesterday we noted that one of China’s better known OLED panel producers, while announcing strong sales and new orders, was also reporting a net profit loss due to expenses relating to the development of products for such new customers.  In all fairness, that was certainly the exception to the rule in 1H for Chinese panel producers, who saw massive increases in net profits on a y/y basis.  While not all have given projections as to their profit for the 1st half, the table below points to those that have and the improvement over last year’s 1H results, although we note that the improvement in demand and panel prices began late in the 2nd quarter, making such comparisons a bit exaggerated.  That said, with both demand and panel prices up, Chinese panel producers were able to leverage the capacity that they have been adding over the last few years.  How long that lasts is a much more important question.  Gareth L. Powell said it well, “We never know when we’re living through the good times.  It’s only when everything turns to ashes and crap we realize how fortunate we really were.”

​A few days ago Tianma (000050.CH) signed for a syndicated loan of 6b yuan (~$856m US) to finance the second phase of its Gen 6 Rigid/Flex fab in Wuhan.  The first phase began construction in 2015 ($12b yuan or $1.7b US) and was completed almost two years ago, with the 1st product shipped in June of last year, around when the 2nd phase began its build out.  Phase one of the project has a maximum raw capacity of 15,000 sheets/month while phase two, which is expected to be completed at the end of 1Q next year, will have a capacity of 22,500 sheets/month.  Tianma also operates a Gen 4.5 pilot line and a Gen 5.5 OLED fab in Shanghai, and is planning on building another Gen 6 fab in Xiamen that is projected to begin operation in late 2022.
Currently we believe Tianma has a 2% share of the overall OLED market and a ~16.6% share of the Chinese OLED panel market, which will decrease as other panel producers in the region add additional capacity.  The Xiamen fab will be an important project if Tianma wants to maintain a significant share of the Chinese and world OLED markets.  Once the 2nd phase is operational, the fab will have a capacity (raw and unyielded) of ~31m 6” smartphone OLED display units/quarter.