Everdisplay Expansion Progress
Everydisplay (688538.CH) (aka EDO, aka Hehui Optronics) released 1Q preliminary results and an update on the expansion of its Gen 6 OLED production fab, along with some details on the effect of COVID lockdowns on the company’s financials. Edo has an operating Gen 4.5 OLED fab and a Gen 6 OLED fab that is currently being expanded from 30,000 sheets/month to what will eventually be 45,000 sheets/month. Equipment move-ins have been completed and tool optimization is continuing with trial production expected next year (our timeline is July ’23). The project was financed by investments by the Shanghai IC Circuit Investment Fund (state-owned), the Shanghai Jinlian Investment Development Company (pvt?), a local investment company (unknown government connection), who together own 19.21% of EDO. Those and 14 other institutional stockholders have been holding restricted shares, which are now free to trade, representing ~24.6% of outstanding shares.
While the company indicated that it had received an increasing number of contracts for its existing facilities, it reported $151.48m in sales and a $28.37m net loss for the first quarter of this year, and indicated that it was unsure if the company would be profitable this year. While not specific as to how the losses might break down, both a utilization rate of 70% in recent months and the cost of the new line were given as potential reasons for the possible loss this year, although the company insists that the yield rate has improved by 40% over the 2020 rate. While Edo has a 3.3% share of the small panel OLED display market (1Q ’22), most, if not all of those units are rigid OLED displays, with an orientation toward automotive applications, where the company seems to have established itself and partnered with SAIC Motors (state), China’s largest auto producer, with whom it has developed what it calls ‘the industry’s first 12.8” vehicle grade OLED display panel.’
The pressure on EDO’s net profits is typical of relatively small OLED producers that engage in large new fab construction projects as overall production cash costs rise as utilization is low when the fab first opens, and depreciation begins. In this case it looks like EDO is expecting utilization to remain lower than normal for some time, although they did see some improvement in May, so we assume that on an overall basis the lower utilization is the key factor limiting profitability this year, unless the phase 3 line begins ‘official’ production before the end of the year. We assume that either the production schedule for the display developed with SAIC has yet to enter production and will be somewhat limited this year, both due to scheduling and the economic effect of the lockdowns.
Last year, and even earlier this year a number of LCD and OLED expansion projects were initiated, particularly those looking to capitalize on IT products which had been more resistant to the panel price decreases seen for TV panels. With Chinese COVID lockdowns causing both component and logistics issues and global inflation slowing overall demand, some of those projects have seen the push toward completion slowed, particularly those in Taiwan, where the attitude toward capacity expansion is far more conservative than in China. Capital in China is still available for such projects, particularly OLED display fabs, so there seems to be less concern from Chinese panel producers and more acceptance that ‘things will be better’ and industry growth will continue.
Taiwanese panel producers have considerable ‘cycle’ experience, which leads to their more conservative attitude toward capacity expansion, which Chinese producers are still competing for a place on the world stage, and while the small panel OLED display business is still in growth mode, it is now large enough that the same cycles that affect LCD display pricing will have a similar effect on OLED panel pricing, and the continued expansion of OLED capacity by Chinese producers will only exacerbate that effect. While a slowdown of such projects would certainly benefit the OLED space on a cyclical basis, we doubt the mindset would follow that path currently as the desire to unseat incumbent South Korean OLED producers is likely the current driver, especially when you know you can still receive construction and operational subsidies from the government.
While the company indicated that it had received an increasing number of contracts for its existing facilities, it reported $151.48m in sales and a $28.37m net loss for the first quarter of this year, and indicated that it was unsure if the company would be profitable this year. While not specific as to how the losses might break down, both a utilization rate of 70% in recent months and the cost of the new line were given as potential reasons for the possible loss this year, although the company insists that the yield rate has improved by 40% over the 2020 rate. While Edo has a 3.3% share of the small panel OLED display market (1Q ’22), most, if not all of those units are rigid OLED displays, with an orientation toward automotive applications, where the company seems to have established itself and partnered with SAIC Motors (state), China’s largest auto producer, with whom it has developed what it calls ‘the industry’s first 12.8” vehicle grade OLED display panel.’
The pressure on EDO’s net profits is typical of relatively small OLED producers that engage in large new fab construction projects as overall production cash costs rise as utilization is low when the fab first opens, and depreciation begins. In this case it looks like EDO is expecting utilization to remain lower than normal for some time, although they did see some improvement in May, so we assume that on an overall basis the lower utilization is the key factor limiting profitability this year, unless the phase 3 line begins ‘official’ production before the end of the year. We assume that either the production schedule for the display developed with SAIC has yet to enter production and will be somewhat limited this year, both due to scheduling and the economic effect of the lockdowns.
Last year, and even earlier this year a number of LCD and OLED expansion projects were initiated, particularly those looking to capitalize on IT products which had been more resistant to the panel price decreases seen for TV panels. With Chinese COVID lockdowns causing both component and logistics issues and global inflation slowing overall demand, some of those projects have seen the push toward completion slowed, particularly those in Taiwan, where the attitude toward capacity expansion is far more conservative than in China. Capital in China is still available for such projects, particularly OLED display fabs, so there seems to be less concern from Chinese panel producers and more acceptance that ‘things will be better’ and industry growth will continue.
Taiwanese panel producers have considerable ‘cycle’ experience, which leads to their more conservative attitude toward capacity expansion, which Chinese producers are still competing for a place on the world stage, and while the small panel OLED display business is still in growth mode, it is now large enough that the same cycles that affect LCD display pricing will have a similar effect on OLED panel pricing, and the continued expansion of OLED capacity by Chinese producers will only exacerbate that effect. While a slowdown of such projects would certainly benefit the OLED space on a cyclical basis, we doubt the mindset would follow that path currently as the desire to unseat incumbent South Korean OLED producers is likely the current driver, especially when you know you can still receive construction and operational subsidies from the government.
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