Comments from China – BOE
Display panel producers tend to be an optimistic lot, likely a function of the fact that they have billions of dollars’ worth of equipment sitting on the factory floor that needs to be running at near full capacity to generate profitable results that garner praise and bonuses. Chinese LCD panel producers are among the most confident, and while some of that optimism is a function of the need to stimulate government agencies to provide capacity expansion and operating subsidies, there is also considerable national pride, much of it well-deserved, in that China was able to achieve dominance in the LCD panel production space against some formidable competitors in South Korea, Japan, and Taiwan. Behind that conviction however, and this is certainly not limited to Chinese panel producers, is a bit of blind hope, fear of failure on the world stage, and a healthy dose of self-promotion, that sometimes leaves out some necessary details.
BOE (200725.CH), China’s largest display producer, is, as a listed company, required to disclose meetings that it has with investors and analysts, and the content discussed. Earlier this month the company disclosed a summary of the last meeting of this type it had on February 2 of this year, essentially a visit to the company’s production fab in Mianyang with 12 local and global sell-side firms, and a Q&A session. While there was considerable discussion as to the company’s performance in 2022, to us, the most relevant conversation concerned the prospects for 2023, but we summarize BOE’s most relevant comments on 2022/2023 below, using the company’s own words when possible, along with some clarifying points (red):
Question 1: What is the development trend of the flexible AMOLED industry in 2022?
In 2022, the overall flexible AMOLED industry shipments-maintained growth. The penetration rate in the field of smart phones cand notebook computers continues to increase. New application fields such as vehicles have emerged, but affected by weak terminal consumption, shipment growth rate was lower than expected; at the same time, some customers shipped entry-level products. With the obvious low-price competition, the price of entry-level flexible AMOLED products has sharply declined. Penetration is broadening but is still small relative to smartphones.
Question 2: How is the company's flexible AMOLED business progressing?
In the face of many adverse effects of the market, the company basically completed the annual shipment target, maintaining more than 30% compared with last year, especially the increase in the proportion of high-end products, in vehicles, notebook computers, etc. However, due to the pressure of depreciation and the production of Android customers, the profitability of the products has dropped sharply, and the performance of the company's flexible AMOLED business still suffers pressure.
In 2023, with the continuous growth of the company's flexible AMOLED business, and the continuous increase in client share, it is expected that the company's flexible AMOLED products will maintain substantial growth; at the same time, the company will continue to increase shipments of high-end products, improve product portfolio profitability, promote LTPO, folding, automotive, IT, etc, striving for the leading position in the flexible AMOELD business.
All in, BOE’s dance over some of the more relevant points, such as capacity additions in both LCD and OLED, and the company’s (not 3rd party) expectations for demand growth in 2023, left us wanting, although we expect such a public forum was not the place to be asking difficult questions, if one wanted to be invited back, as these, and those asked at other recent meetings with analysts were all soft-ball questions. But the lack of specifics as to what the puts and takes will be for BOE this year, and a heavy reliance on 3rd party data, seemed to indicate that BOE was either not disclosing its actual forecasts or that it does not have them. Even the company’s platitudinous comment from its last analyst meeting gave little toward what gives the company confidence to use the terms ‘rationality’ or ‘reasonable range’. Here’s the previous quote:
“As the influence of uncertain factors is gradually digested, the industrial development pattern will gradually return to rationality. The price of products will fluctuate within a reasonable range mainly due to the influence of low and peak seasons.”
BOE (200725.CH), China’s largest display producer, is, as a listed company, required to disclose meetings that it has with investors and analysts, and the content discussed. Earlier this month the company disclosed a summary of the last meeting of this type it had on February 2 of this year, essentially a visit to the company’s production fab in Mianyang with 12 local and global sell-side firms, and a Q&A session. While there was considerable discussion as to the company’s performance in 2022, to us, the most relevant conversation concerned the prospects for 2023, but we summarize BOE’s most relevant comments on 2022/2023 below, using the company’s own words when possible, along with some clarifying points (red):
- According to 3rd party consultation and institutional data, all five major display categories saw declining sales in 2022. (Monitor, Notebook, TV, Tablet, Mobile), while automotive, AR/VR, smartwatch and special displays remained stable.
- Utilization rates, which sank to about 60%, saw a slight increase starting at the end of 2Q 2022, in order to meet end of the year promotions, but remained at relatively low levels, reducing the annual production of large-size LCDs. Notebook, Monitor & Tablet panel production declined in 2022, but TV panel production was up 0.4%. Relative to pre-pandemic levels, 2022 shipments for many CE categories were up.
- The overseas promotion season performed well in the 4th quarter, and some brands were conservative as to purchasing strategies to control inventory. The inventory of TV brands continued to decline in the 4th quarter and the overall inventory is approaching a healthy water level. We question the characterization of 4Q performance as while global 2022 holiday sales were up 6.7%, and 5.3% in the US, electronics and appliance sales (US) were down 5.7% (US), and while global sales were up, volumes were down, with inflation providing the sales boost.
- In terms of inventory, according to data from 3rd party consulting agencies, the low utilization rate of panel producers continues to be lower than the shipment area, and the inventory level drops significantly.
- Looking forward to 2023, according to the forecast of consulting agencies, the demand for large-sized LCD products will return to growth, especially the large size TV market. Still too early to tell, but TV unit volumes are expected to be flat to down, so growth will be inflation related or limited to specialized TV segments.
- In terms of prices, under the influence of supply-side capacity control, in the 2nd half of 2022, the supply/demand ration of large-size LCD panels has fallen sharply in the 1st quarter of 2023. The prices of mainstream-sized products remained relatively stable. Correct so far.
- Semiconductors show that the industry will return to normal low-peak seasonal fluctuations, and thanks to current low inventory, in the 2nd quarter of 2023, as the industry turns from weak to prosperous, LCD products will have opportunities to usher in a rise in both volume and price. TV panel producers are pushing for higher panel prices in March, but demand remains weak. Still a toss-up as to whether TV set makers will buy into the potential panel price increase.
- Faced with greater depreciation pressure, the performance of OLED and other businesses continued to be under pressure. In terms of LCD, we will focus on high-value fields such as automotive, e-sports, and AR/VR, and enhance the overall profitability; significantly increase product shipments in terms of OLED and increase high-end production. The proportion of product shipments has achieved breakthroughs in the mass production of innovative products such as vehicles and foldable notebook computers. The cost of building small panel OLED capacity, particularly for participation in Apple’s (AAPL) iPhone supply chain, will continue to pressure overall OLED profitability for BOE and thus far success has been relatively limited (see our recent notes), so volumes will have to increase considerably, without major price degradation for a quick OLED profitability turnaround, a difficult task for this year.
- In terms of market share, according to data from 3rd party consulting agencies, it is estimated that the company has the largest market share of the traditional five mainstream LCD products, while flexible OLED shipments continue to grow, with the company having the number one share in China and the world (in LCD). We will continue to increase shipments of high-end in-vehicle products, where the company’s share in 3Q ’22 was 16%, the highest in the world.
- Entering the 1st quarter of 2023, in the traditional off-season, the industry is expected to maintain a low utilization rate.
Question 1: What is the development trend of the flexible AMOLED industry in 2022?
In 2022, the overall flexible AMOLED industry shipments-maintained growth. The penetration rate in the field of smart phones cand notebook computers continues to increase. New application fields such as vehicles have emerged, but affected by weak terminal consumption, shipment growth rate was lower than expected; at the same time, some customers shipped entry-level products. With the obvious low-price competition, the price of entry-level flexible AMOLED products has sharply declined. Penetration is broadening but is still small relative to smartphones.
Question 2: How is the company's flexible AMOLED business progressing?
In the face of many adverse effects of the market, the company basically completed the annual shipment target, maintaining more than 30% compared with last year, especially the increase in the proportion of high-end products, in vehicles, notebook computers, etc. However, due to the pressure of depreciation and the production of Android customers, the profitability of the products has dropped sharply, and the performance of the company's flexible AMOLED business still suffers pressure.
In 2023, with the continuous growth of the company's flexible AMOLED business, and the continuous increase in client share, it is expected that the company's flexible AMOLED products will maintain substantial growth; at the same time, the company will continue to increase shipments of high-end products, improve product portfolio profitability, promote LTPO, folding, automotive, IT, etc, striving for the leading position in the flexible AMOELD business.
All in, BOE’s dance over some of the more relevant points, such as capacity additions in both LCD and OLED, and the company’s (not 3rd party) expectations for demand growth in 2023, left us wanting, although we expect such a public forum was not the place to be asking difficult questions, if one wanted to be invited back, as these, and those asked at other recent meetings with analysts were all soft-ball questions. But the lack of specifics as to what the puts and takes will be for BOE this year, and a heavy reliance on 3rd party data, seemed to indicate that BOE was either not disclosing its actual forecasts or that it does not have them. Even the company’s platitudinous comment from its last analyst meeting gave little toward what gives the company confidence to use the terms ‘rationality’ or ‘reasonable range’. Here’s the previous quote:
“As the influence of uncertain factors is gradually digested, the industrial development pattern will gradually return to rationality. The price of products will fluctuate within a reasonable range mainly due to the influence of low and peak seasons.”
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