HKC Gets “Listed”
The US Department of Commerce’s Bureau of Industry & Security (BIS) has added 33 Chinese companies and university labs to the ‘unverified’ list it maintains. This list is different than the ‘entities’ list also maintained by BIS, however it does not preclude US exporters from ‘engaging’ with listed parties or that there are specific foreign policy or national security concerns with those on this particular list, only that the BIS is unable to establish the legitimacy and reliability relating to the end use or end user of the items that fall under the US Export Administration Regulations (EAR) by such parties. The reasons for this inability could be an inability to contact or locate the parties involved, failure by those parties to demonstrate the disposition of items subject to EAR, or lack of cooperation by a host government with the BIS when making end-use checks.
While this listing leaves trade open, something the ‘entities’ list does not, transactions with those on the ‘unverified’ list require additional documentation, including a statement from authorizing officials of ‘listed’ parties, and cannot receive Ear regulation exceptions that might normally be available to those not on the list. What all of this legalize means is that the US government was not able to verify if the products that are being exported from the US to produce products by these companies in China are going to programs supporting the Chinese military or any program that “…are contrary to the national security or foreign policy interests of the US.” Since the US government cannot verify the end-use case, these companies and labs go on this list. If it is later found that they violate the EAR act, they will likely wind up on the ‘entities’ list, but still have the option of verifying that their products are for non-military use, which would remove them from the ‘unverified’ list.
The listing seems to be the result of the company that owns HKC’s Chongqing Gen 8.6 LCD fab (Chuzhou HKC Optoelectronics), which is owned by HKC (0248.HK) and two Chongqing government entities, is submitting proposals to US suppliers for the purchase of analytical instruments used in the display process. Given the ongoing trade friction between the US and China, such proposals likely triggered closer examination by the BIS, who remains unsatisfied as to verification that the end use of HKC’s products will not violate BIS rules. HKC has three producing fabs, although not all are completely built out. We believe the company has a 3.6% share (2022) of the global LCD panel market on an m2 basis, which would increase to ~5.3% in 2023 if they continue with current expansion plans, with ~80% of panel production oriented toward TV panels according to Trendforce.
While HKC certainly has the opportunity to verify the end-users of products produced with such equipment, they would have to open a path to any potential display projects that would benefit the Chinese military and would likely need the approval of the Chinese government to do so, if such were the case. That said, it seems a bit of a stretch to assume that HKC’s reason for purchasing display analytical equipment is rooted in some nefarious government activity (although it cannot be ruled out), and the risk that HKC takes in the possibility of having the company moved to the ‘enties’ list, would restrict its ability to be supplied by any US company without a special license, which would then become hard to procure. Corning (GLW) is a glass substrate supplier to HKC, as are a multitude of other companies either in the US or allied with the US, so we expect the addition of HKC to the UVL is more of a ‘polite’ warning that it either lets the US look behind the curtain or it could face the kind of restrictions that have cut deeply into larger companies, such as Huawei (pvt) or ZTE (000063.CH).
While this listing leaves trade open, something the ‘entities’ list does not, transactions with those on the ‘unverified’ list require additional documentation, including a statement from authorizing officials of ‘listed’ parties, and cannot receive Ear regulation exceptions that might normally be available to those not on the list. What all of this legalize means is that the US government was not able to verify if the products that are being exported from the US to produce products by these companies in China are going to programs supporting the Chinese military or any program that “…are contrary to the national security or foreign policy interests of the US.” Since the US government cannot verify the end-use case, these companies and labs go on this list. If it is later found that they violate the EAR act, they will likely wind up on the ‘entities’ list, but still have the option of verifying that their products are for non-military use, which would remove them from the ‘unverified’ list.
The listing seems to be the result of the company that owns HKC’s Chongqing Gen 8.6 LCD fab (Chuzhou HKC Optoelectronics), which is owned by HKC (0248.HK) and two Chongqing government entities, is submitting proposals to US suppliers for the purchase of analytical instruments used in the display process. Given the ongoing trade friction between the US and China, such proposals likely triggered closer examination by the BIS, who remains unsatisfied as to verification that the end use of HKC’s products will not violate BIS rules. HKC has three producing fabs, although not all are completely built out. We believe the company has a 3.6% share (2022) of the global LCD panel market on an m2 basis, which would increase to ~5.3% in 2023 if they continue with current expansion plans, with ~80% of panel production oriented toward TV panels according to Trendforce.
While HKC certainly has the opportunity to verify the end-users of products produced with such equipment, they would have to open a path to any potential display projects that would benefit the Chinese military and would likely need the approval of the Chinese government to do so, if such were the case. That said, it seems a bit of a stretch to assume that HKC’s reason for purchasing display analytical equipment is rooted in some nefarious government activity (although it cannot be ruled out), and the risk that HKC takes in the possibility of having the company moved to the ‘enties’ list, would restrict its ability to be supplied by any US company without a special license, which would then become hard to procure. Corning (GLW) is a glass substrate supplier to HKC, as are a multitude of other companies either in the US or allied with the US, so we expect the addition of HKC to the UVL is more of a ‘polite’ warning that it either lets the US look behind the curtain or it could face the kind of restrictions that have cut deeply into larger companies, such as Huawei (pvt) or ZTE (000063.CH).
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