​by issing new shares and using the cash to buy a controlling interest in Hefei Visionox Technology Company (pvt) a company in which it currently owns an 18.18% stake.  While this sounds a bit like the company buying itself, it does have some nuance that does not seem obvios on the surface.  Visionox, the listed company, owns two Gen 5.5 OLED lines in Kunsham and two Gen 6 OLED lines in Guan, and while we included two additional Gen 6 lines in Hebei, they are not technically under the ownership of the listed company.
In fact, the 18.18% share that Visionox owns in the Hefei fab makes them the smallest owner, with Hefei Xingrong Investment Co,, Hefei Core Screen Investment Fund, and Hefei Heping Investment Co, each owning 27.27% of the Hefei fab.  It turns out that two of the three holders mentioned are state controlled, likely the original investors that provided the capital for the fab, given their location, and the third is a private investment fund that seems to be aligned with state interests. So why would it become important to Visionox to become the majority shareholder of the Hefei Gen 6 OLED fab?
It seems that the Hefei fab is the most technically sophisticated of the Visionox fabs, and the one suplying most, if not all of Visionox’s LTPO OLED display products, which we suspect is why Visionox wants actual control of the Hefei fab.  With Apple (AAPL) the biggest prponent of LTPO OLED displays, Visionox seems to be positioning itself to have more visible control as it develops its LTPO product line, and likely less control by state -owned entities.  This would make Visionox less likely to face anti-China rhetoric that might occur if it were able to become a visible LTPO supplier to Apple (or others). 
We expect that Samsung Display (pvt) and LG Display (LPL), both of whom are providing LTPO OLED displays to Apple would somehow bring in the ‘;state’ issue, should Apple qualify Visionox in the future, with even China’s own BOE (200725.CH) facing considerable anti-China sentiment as it develops it LTPO capabilities to meet Apple’s requirements.  \While we cannot be sure about the motivation behind Visionox’s acquisition of control in the Hefei fab, it seems logial that if they are going to fund and develop LTPO capabilities, they would like to be the beneficiary of the potential profits, while presenting a more ‘global’ face should such issues come up in the future.

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

​Apple is a fan of LTPO (Low-temperature Poly-Oxide) backplane technology, a process that uses materials from both LTPS (Low-temperature poly-silicon), a common backplane technology, and LTPO.  By combining these materials and processes, panel producers can change the characteristics of OLED displays, allowing them to function at a 120Hz refresh rate.  With the screen be ‘repainted’ twice as often as usual, the chance that an image might blur as it moves across the screen is lessened, however at the same time the double refresh rate creates addition power consumption.  In order to compensate for this, LTPO can provide a lower overall power drain, and helps to keep the higher refresh rate displays from draining the battery.
That said, there are few panel producers who have the ability to produce displays with LTPO backplanes, and that limits those who wish to take advantage of 120Hz refresh rates to a small number of display producers, primarily Samsung Display (pvt), who is the leader in the space.  LG Display (LPL) also produces LTPO displays but in a more limited capacity, leaving Apple little choice but to use South Korean suppliers for its LTPO needs, with both the iPhone 13 Pro and the iPhone 13 Pro Max using the technology.  As we have noted previously, China’s BOE (200725.CH) has passed muster as a primary display producer for the iPhone, but is limited to producing LTPS displays (iPhone 13 currently) until it is able to get qualified for LTPO display production by Apple, which has yet to happen.
In the interim, China’s Visionox (002387.CH) has announced that they have launched China’s first LTPO OLED display and expects to see the display in new phones ‘soon’, putting them both in competition to garner attention from Apple and to compete with BOE, SDC, and LPL.  As BOE discovered, it can take quite a while to get through Apple’s intense qualification process, which not only considers the quality of the technology but also the ability to produce a stuffiest quantity for inclusion as a full supplier, and that means a yield that can be difficult to reach.  Visionox, while they will certainly push to develop customers on the Mainland, will have to begin the qualification process with Apple now that they have a commercial product, which can be both difficult and could require at least some capacity to be dedicated to such a project.  With that goal in mind we expect Visionox will make such an attempt although they have relatively small OLED production capacity (line in Hebei, Hefei & Kunshan) when compared to BOE and South Korean producers, so it could be some time before they would have the dedicated capacity needed to be a primary LTPO supplier to Apple.  As BOE faced a number of qualification disappointments that were regaled in the trade press, it might be best for Visionox to work with Chinese smartphone brands for a time rather than take the big step toward Apple.

​In early March Visionox (002387.CH) indicated that the company was notified by its largest shareholder, Tibet Zhihe Capital Management (pvt) that it would be transferring its shares to Visionox’s 2nd largest shareholder, the Kunshan Economic & Technological Development Zone, a city run management company that administers the special economic zone in Kunshan.  At the time the Chinese trade press (in usual fashion) spun the transaction, which moves control of the company to a state-owned entity, as a positive event that brings together ‘the resources of Hefei and Kunshan…to further increase the production capacity and market share…leading to a win-win situation and the state-owned institutions.’  
That transaction, which has been questioned by shareholders due to a potentially discounted transaction price, has been progressing at a snail’s pace, especially given the relatively poor performance Visionox shares have shown since the announcement (down from 11.52 RMB at the beginning of the year to 8.65 RMB currently and the increased state ownership that the transfer would accomplish.  It seems now that Visionox has put the transaction on hold ‘based on general market conditions’, although the announcement seems to have made little difference to the stock or shareholders.  While Visionox has a number of consequential OLED customers, they have been vague about the utilization rates at their three production fabs, using ‘ramping’ rather than specifics to answer capacity questions, but it is still a toss up as to whether the deal postponement is a positive or a negative.
From the glass half full perspective, one could make the case that the company is doing well enough they no longer see the need for help form local or provincial governments, and from the glass half empty perspective, the company’s performance and prospects are not strong enough to warrant any further investment by the state.  When 3Q results are released we expect it will be easier to see which is the case.

We have mentioned that some of China’s stock exchanges encourage and allow discourse between listed companies and shareholders or potential investors.  In most cases these are relatively simple exchanges concerning details such as current shareholder counts or clarification on public or private share offerings, but occasionally they get a bit more specific and almost combative.  Not all companies actively participate in the program, but to get an idea of the interplay in such Q&A sessions, we pull out two such conversations posted earlier today between an individual and the management of Visionox (002387.CH), an OLED panel producer in China (note:  This is a translated exchange so wording might look a bit strange).
Q            The company believes that the current stock price does not fully and reasonably reflect the company’s value.  First, it will do a good job in production and operation. However, the performance loss in the interim report is serious.  Second, it will strengthen communication with the capital market.  However, the additional approval documents have not been implemented in the past year.  What are measures to boost the current stock price?
A             Thank you for your attention. In addition to what you mentioned, there are also significant increases in product revenue and improvement in gross profit at the operating level. There are continuous introductions from customers, the supply of products from Honor, ZTE, moto, OPPO, Fitbit, and the recent support of the Hefei production line. The mass production and delivery of brand customers include the conversion of new technological innovations such as under-screen camera and high refresh rate, the layout of the medium-sized direction, the establishment of the new display technology Micro LED pilot line and the first flow of wearable samples. The piece lights up. Industrial development will not be accomplished overnight, and any measures will not take place in a day. Please pay more attention and support. Also welcome to call the investor hotline 010-58850501 for more exchanges. Thanks!
Q            Visionox shipped 14 million pieces in the first half of the year, and the utilization rate of the Gu’an production line was only 50%.  Is this because of poor product competitiveness?  Still no shortage of orders?  Can the product market development space support the production capacity of the production line?  What is the significance of increasing investment to expand production capacity?
A             Thank you for your attention. According to data from third-party organizations, in the current mainstream application areas, smartphones and smart wearables, OLED penetration rates are steadily increasing; in medium-sized laptops, tablets, and vehicles, applications are gradually expanding. Among them, institutions It is predicted that in the field of laptops and tablets, OLED shipments this year are expected to exceed 10 million units for the first time. The downstream application market of OLED has broad prospects, and the penetration rate in various fields continues to increase. At the same time, the company is actively deploying in the aforementioned directions as it continues to expand new application fields. At present, smart phones and wearable products have been widely delivered to first-line brand customers. Since the beginning of this year, the smart phone field has successively delivered Honor V40 and 50 series of flexible products, exclusively for ZTE's new generation of under-screen cameras, and Red Magic 165Hz ultra-high refresh rate screens. , Moto and other related mobile phone AMOLED screens. In the field of smart wear, we have supplied OPPO watch 2, Mi Band 6, Fitbit Charge 5 and other products. Thanks!
The reason why the ‘investor’ is a bit aggressive in trying to get answers from Visionox management is that the Visionox stock chart looks like this:

While the chart of BOE (200725.CH) China’s leading panel producer looks like this:

​While we would love to see such a system instituted for US companies, other than on social media, we expect it would not be easy for the SEC to monitor and likely a nightmare for company legal departments.  It is interesting to see how companies respond to a range of questions, with some responses helpful for clarification and others a bit more toward the hostile side.  Given the relative politeness of even the tough questions in China, we expect such a system in the US would perhaps be less polite when tough questions are asked, but it would certainly be nice to ask questions on a public forum at any time and receive a timely answer, rather than having to wait for a quarterly call.  We can dream can’t we?

​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.”