Universal Display – What we expected & what we got – Part 2
In Part 1 of our review of Universal Display’s (OLED) 4th quarter, full year 2016 and 2017 guidance, we focused on 5 specific points that we believe are key to understanding UDC’s prospects for the next few years. In part 1, we reviewed bullets 1 & 2, and in this note, we review bullets 4 & 5. We will review bullet 3 (LG OLED TV royalty in a separate note.
1. Color relating to the expiration/renewal of the Samsung Display (pvt) IP license and material supply agreements
2. A continuing increase in emitter sales, particularly red emitter
3. Some incremental improvement in LG OLED TV royalty
4. An increase in non-Korean product sales
5. A realistically optimistic view on 2017 sales that has some correlation to OLED capacity growth
4. An increase in non-Korean product sales – In this case, we are looking for growth from customers outside of South Korea, where UDC’s two primary customers Samsung Display and LG Display (LPL) are located. While UDC has agreements of varying types with almost every OLED producer, developer, or R&D project, the OLED industry is currently based on these two suppliers, who we believe currently represent 90.7% of raw OLED capacity and 92.8% of currently available OLED capacity (see Fig.1 below). That said, the longer-term objective for both the industry and UDC is to broaden that supplier base and to that end we watch ‘non-South Korean’ sales as an indicator of progress in customer diversification. We look at customer breakdown and regional metrics for help in understanding that growth, as can be seen in Fig.2 and Fig.3
1. Color relating to the expiration/renewal of the Samsung Display (pvt) IP license and material supply agreements
2. A continuing increase in emitter sales, particularly red emitter
3. Some incremental improvement in LG OLED TV royalty
4. An increase in non-Korean product sales
5. A realistically optimistic view on 2017 sales that has some correlation to OLED capacity growth
4. An increase in non-Korean product sales – In this case, we are looking for growth from customers outside of South Korea, where UDC’s two primary customers Samsung Display and LG Display (LPL) are located. While UDC has agreements of varying types with almost every OLED producer, developer, or R&D project, the OLED industry is currently based on these two suppliers, who we believe currently represent 90.7% of raw OLED capacity and 92.8% of currently available OLED capacity (see Fig.1 below). That said, the longer-term objective for both the industry and UDC is to broaden that supplier base and to that end we watch ‘non-South Korean’ sales as an indicator of progress in customer diversification. We look at customer breakdown and regional metrics for help in understanding that growth, as can be seen in Fig.2 and Fig.3
Raw OLED Capacity Share - Source: SCMR LLC, Displaysearch, OLED-A, Company Data
Universal Display - Sales to China - 2016 - Source: Company Data
While regional China sales grew each quarter during the 1st three quarters, 4th quarter Chinese sales were below earlier quarters. We believe this is a result of over-ordering of materials in 3Q, an issue that has affected Samsung Display sales over the last few years and was also likely the cause of the 4th quarter decline in ‘non-Samsung’ sales. We note also that sales to China in 2016 were up 167% on a y/y basis, a more important metric than sequential quarterly results (Fig.4). We would expect that much of the sales to China were to BOE, the largest overall panel producer in the region, the 4th largest worldwide panel producer, and the most aggressive in terms of adding OLED capacity.
BOE (200725.CH) is right at the cusp of becoming a commercial OLED producer, and as such is using more OLED materials to produce test runs, samples, and small quantities of OLED devices for potential customers, which we believe represents much of the incremental growth seen in the China region. That said, there are a number of other Chinese OLED producers that are either in low level production or are ramping capacity in 2017, 2018, and 2019, which would lead us to believe that China, as a percentage of UDC’s sales, should continue to grow over the next three years. That said, material usage growth comes from increasing capacity, but more realistically from utilized capacity and from customer demand. When a new OLED fab opens, it does not start producing with equipment at 100% of efficiency or capacity and more so, produces what is needed for customers, and in the early stages of OLED mass production, product yields are particularly low, especially for new producers.
This leads us to continue to expect substantial growth from China over the next few years, but we also caution investors not to over-expect from the region as it is both new to the OLED space, and faces considerable competition from very well established South Korean producers. A conservative view on the growth from China would be the most logical path, and one that will likely lead to more accurate estimation of UDC’s ‘non-South Korean’ growth.
BOE (200725.CH) is right at the cusp of becoming a commercial OLED producer, and as such is using more OLED materials to produce test runs, samples, and small quantities of OLED devices for potential customers, which we believe represents much of the incremental growth seen in the China region. That said, there are a number of other Chinese OLED producers that are either in low level production or are ramping capacity in 2017, 2018, and 2019, which would lead us to believe that China, as a percentage of UDC’s sales, should continue to grow over the next three years. That said, material usage growth comes from increasing capacity, but more realistically from utilized capacity and from customer demand. When a new OLED fab opens, it does not start producing with equipment at 100% of efficiency or capacity and more so, produces what is needed for customers, and in the early stages of OLED mass production, product yields are particularly low, especially for new producers.
This leads us to continue to expect substantial growth from China over the next few years, but we also caution investors not to over-expect from the region as it is both new to the OLED space, and faces considerable competition from very well established South Korean producers. A conservative view on the growth from China would be the most logical path, and one that will likely lead to more accurate estimation of UDC’s ‘non-South Korean’ growth.
Universal Display - Sales to Customer C/China - 2016 - Source: Company Data
UDC China Regional Sales - 2015/2016 - Source: Company Data
5. A realistically optimistic view on 2017 sales that has some correlation to OLED capacity growth – By ‘realistically optimistic’ we mean a growth rate akin to the growth of the industry, particularly industry production capacity, as UDC’s material sales should be at least coupled to such a metric. As a basic metric, we take the 2017 company guidance of $240m (single point) and assume ~50% of total revenue from material sales (49.9%, 59.2%. and 66.4% for 2016, 2015, & 2014 respectively) and the industry growth rate (using utilized OLED capacity) and map those metrics in Fig.5, with the dotted blue line being the incremental change in UDC material sales needed to meet the 2017 guidance.
We believe that UDC guidance is based on a number of factors which include the timing of fab construction and expansion, the adoption of individual colors by customers, the adoption of new materials by customers, the efficiency of material usage by customers, and material pricing. These are each significant variables that can affect the sales flow throughout a quarter and for the full year, as it has in the past. We are concerned that only small variable changes could put the full year guidance in jeopardy, and hence the rather wide guidance range ($230m to $250m), and we caution investors that such variable deviations are more the norm than the exception in the OLED space, particularly those that are under the control of customers rather than suppliers like UDC.
We are currently adding additional variables to our OLED industry model to allow us to further define, and in this case down to individual OLED emitter materials, the effect they might have on UDC sales in 2017 and beyond. This is a complicated task and we expect will take a few additional weeks, but we expect that it will give a level of detail and flexibility in our model that will be able to track and predict UDC sales to a degree of accuracy that we believe would be unique. Stay tuned.
We believe that UDC guidance is based on a number of factors which include the timing of fab construction and expansion, the adoption of individual colors by customers, the adoption of new materials by customers, the efficiency of material usage by customers, and material pricing. These are each significant variables that can affect the sales flow throughout a quarter and for the full year, as it has in the past. We are concerned that only small variable changes could put the full year guidance in jeopardy, and hence the rather wide guidance range ($230m to $250m), and we caution investors that such variable deviations are more the norm than the exception in the OLED space, particularly those that are under the control of customers rather than suppliers like UDC.
We are currently adding additional variables to our OLED industry model to allow us to further define, and in this case down to individual OLED emitter materials, the effect they might have on UDC sales in 2017 and beyond. This is a complicated task and we expect will take a few additional weeks, but we expect that it will give a level of detail and flexibility in our model that will be able to track and predict UDC sales to a degree of accuracy that we believe would be unique. Stay tuned.
OLED Industry Capacity vs. UDC Material Sales - Source: SCMR LLC, OLED-A, Company Data
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