JDI - Rearranging the Deck Chairs or Missing the Berg?JDI - Rearranging the Deck Chairs or Missing the Berg?

JDI - Rearranging the Deck Chairs or Missing the Berg? 
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Only a few days ago we noted that Japan Display’s (6740.JP) largest shareholder Ichigo (2337.JP), a $5.8b asset manager based in Tokyo that is a small (13%) part of a large Real Estate & Clean Energy management company, had decided to convert 658m Class B preferred shares to common stock that it received in 2020 when it bailed out JDI.  This increased Ichigo’s share of the common from 49.28% to 56.7%, giving it full control of JDI.  Last night JDI disclosed its 3Q results, reduced full-year guidance, and announced new funding which we detail below.
JDI gave 3Q (December quarter) guidance in November of last year, projecting sales of 75.6b¥ ($577.2m US) and an operating loss of 9b¥ ($68.7m US), although 3Q sales came in 7.8% lower than guidance and operating loss 1.6b¥ lower than guidance.  Management lowered full year guidance to reflect lower 3Q results and expected lower consumer electronics and automotive display weakness, lowering 2023 sales (March year) by 5% to 266b¥ ($2.03b US) and lowering the expected operating loss by 12.4b¥ to a loss of 47.3b ($361.1m US).  On a general basis lower smartphone and VR demand and higher material costs more than offset price increases, however, the company also announced a major refinancing and a change in the company’s focus.

• Ichigo will lend JDI 20b¥ to repay a short-term loan JDI had with INCJ (Innovation Network Corporation of Japan), a quasi-government corporate partnership that invests in a variety of industrial and technology related Japanese companies, bringing Ichigo’s loans to JDI to 48b ($366.5m US)
• Ichigo will buy 53.7b¥ of JDI debt from INCJ, and will do a debt/equity swap at 45¥, eliminating all debt owed to INCJ by JDI, while INCJ will return all Class A preferred (convertible) shares to JDI at cost, which will be cancelled by the company
• Ichigo will forgive 15b¥ of JDI debt.
• JDI will issue 173.6B in warrants to Ichigo (45¥) to finance growth through 2026.

Management also revealed plans for the company’s growth after the above financing, and while some of the goals are vague, JDI does have some products that are rather unique and could help the company to bring itself to profitability.as the global economy and the display space begin to recover.  One such product is eLEAP, an OLED display production process that does not use FMMs (Fine Metal Masks) in order to create OLED sub-pixels.  This reduces OLED material waste and the cost of both the cleaning and replacement of FMMs that are typically used to produce OLED displays, while allowing for more precise material placement which increases the amount of light generated and improves OLED display lifetime.  The eLEAP process is not limited to Gen 6, as is conventional FMM deposition, with the company receiving it first order this month and full production scheduled for fiscal 2024, with Samsung Display (pvt) the rumored (unconfirmed) interested customer.
JDI’s plans also tout its expertise in IGZO backplanes, ultra-high resolution displays, transparent displays, and automotive displays, however the competition in those areas is fierce, particularly automotive, a segment where many display producers have focused as the consumer market slowed last year.  JDI will also reduce its smartphone production footprint and is expected to allocate 10b¥ of the newly raised capital to synergistic M&A.  Here’s the full breakdown of how the new capital will be allocated:

• 50b¥     R&D to Fund Continued Creation of Global No.1 Technologies
• 37b¥     Bolster Working Capital
• 30b¥     Bring eLEAP, HMO, HUD, Metaverse, and Other JDI Proprietary Technologies to Mass Production in Scale & Fund Sustainability Initiatives
• 20b¥     Further Build Out JDI Proprietary IP
• 15b¥     Launch Rælclear, LumiFree, & Other New Businesses
• 10b¥     Targeted M&A in Synergistic Businesses
• 10b¥     DX (Digital Transformation) Investments

All in Ichigo now controls 78.2% of JDI’s voting rights and has allowed the company to eliminate all debt but has also increased its own risk level in that JDI might not be able to reach its fiscal 2026 goals.  JDI’s CEO, Scott Callon, is also the Chairman of Ichigo, and a specialist in real estate financing and restructurings, but the display space is a quirky one and there are only so many refinancings that can be done before competition and industry cyclicality take their toll.  Hopefully this new financing round takes a bit of pressure off of JDI for a while and lets the company exploit its technology, particularly on a licensing basis, but JDI has a lot to prove over the next few years.