Display Funding Continues in China
Capital funding for display projects tends to come from internal sources, a parent organization such as Samsung Electronics to affiliate Samsung Display (pvt), or TCL (000100.CH) to subsidiary Chinastar (pvt), although in China, under long-term state-level mandates and local government policies to encourage employment, funding for display projects is an integral part of China’s push to build a world class display infrastructure. In many cases the funding is part of the initial establishment of a project’s corporate structure and represents shared ownership between the panel producer and the provincial or local government, but that funding can continue even after the fab has begun mass production and can represent a portion of the profitability of the fab or the producer overall.
There have been rumors over the last two years that funding for display projects has become more difficult in China as the country has become the leader in the large panel LCD space and, until the middle of last year, was in a cycle that pushed display producers to near 100% utilization and record profits. That said, the Chinese government was not satisfied with being the leader in the LCD space and also set its sights on OLED display production and even more recently on Mini-LED and Micro-Led production and research projects, with continued funding for new capacity, despite some of the difficulties that Chinese OLED producers have faced relative to OLED process technology, competition from more established OLED producers (Samsung Display and LG Display (LPL)), and the makings of a market that could face oversupply.
As 3Q results for OLED panel producers are not available to date, we expect it will be a more difficult quarter for those that are not in the Apple small panel OLED display supply chain which includes China’s largest OLED producer BOE (200725.CH), along with SDC and LGD, and those subsidies will help to ease the losses that many Chinese small panel OLED producers will be facing in 3Q and potentially 4Q. One positive is that the subsidies given to Chinese panel producers, whether they are for new capacity or as incremental operating capital, must be disclosed if the company is public, which can help to understand the effect that such subsidies have on operating results.
Visionox (002387.CH) is a Chinese producer of small panel OLED displays. The company operates three OLED fabs, one Gen 5.5 in Kunshan, and two Gen 6 fabs in Gu’an and Hebei. Visionox has been producing OLED displays since 2015, although both Gen 6 fabs are relatively new (2021 and 2018 respectively), costing between $4.5b and $6.3b US, with the company’s share of the small panel OLED market ~5% in terms of units shipped. Visionox has been operating at a net loss for a number of years and in a recent filing disclosed that it has received $55.5m US from the Hebei South Gu’an Hi-Tech Industrial Development District Management Committee since June 2020 and is due to collect another $42.9m in subsequent quarters toward the construction and operation of just one of the company’s Gen 6 fabs. While the allocation of the subsidy was only 1.7% of operating income in 1Q, based on the remaining amount due, it will continue to support the expansion and continued operation of that fab for many quarters to follow, and this support is dedicated to one specific Visionox fab.
There are lots of ways in which subsidies can be given, both in China and in other countries, with the US favoring large tax rebate incentives while others share construction or similar costs, but aside from the initial capital subsidies that typically create a state or local majority holding in the project, operating subsidies and tax forgiveness seem to continue regardless of the operating results of the entity. Only recently have we seen public instances where managements were held responsible for a project’s demise in China, with many just continuing to lose money with flowery descriptions of ‘improving’ results and ‘continued progress’ toward profitability. Of course, other panel producers do give themselves many back-patting sessions, even when profits are scarce, but in Taiwan, Japan, and South Korea, panel producers rarely have the ability to rely on subsidies, most of which have expired years ago. There is always a day of reckoning for panel producers, and the demise of Chunghwa Picture Tube (defunct) in Taiwan, or the closing of Panasonic’s (6752.JP) display business in Japan , but those subsidies can hide a host of business issues that would likely come to light more rapidly in a non-subsidized environment.
There have been rumors over the last two years that funding for display projects has become more difficult in China as the country has become the leader in the large panel LCD space and, until the middle of last year, was in a cycle that pushed display producers to near 100% utilization and record profits. That said, the Chinese government was not satisfied with being the leader in the LCD space and also set its sights on OLED display production and even more recently on Mini-LED and Micro-Led production and research projects, with continued funding for new capacity, despite some of the difficulties that Chinese OLED producers have faced relative to OLED process technology, competition from more established OLED producers (Samsung Display and LG Display (LPL)), and the makings of a market that could face oversupply.
As 3Q results for OLED panel producers are not available to date, we expect it will be a more difficult quarter for those that are not in the Apple small panel OLED display supply chain which includes China’s largest OLED producer BOE (200725.CH), along with SDC and LGD, and those subsidies will help to ease the losses that many Chinese small panel OLED producers will be facing in 3Q and potentially 4Q. One positive is that the subsidies given to Chinese panel producers, whether they are for new capacity or as incremental operating capital, must be disclosed if the company is public, which can help to understand the effect that such subsidies have on operating results.
Visionox (002387.CH) is a Chinese producer of small panel OLED displays. The company operates three OLED fabs, one Gen 5.5 in Kunshan, and two Gen 6 fabs in Gu’an and Hebei. Visionox has been producing OLED displays since 2015, although both Gen 6 fabs are relatively new (2021 and 2018 respectively), costing between $4.5b and $6.3b US, with the company’s share of the small panel OLED market ~5% in terms of units shipped. Visionox has been operating at a net loss for a number of years and in a recent filing disclosed that it has received $55.5m US from the Hebei South Gu’an Hi-Tech Industrial Development District Management Committee since June 2020 and is due to collect another $42.9m in subsequent quarters toward the construction and operation of just one of the company’s Gen 6 fabs. While the allocation of the subsidy was only 1.7% of operating income in 1Q, based on the remaining amount due, it will continue to support the expansion and continued operation of that fab for many quarters to follow, and this support is dedicated to one specific Visionox fab.
There are lots of ways in which subsidies can be given, both in China and in other countries, with the US favoring large tax rebate incentives while others share construction or similar costs, but aside from the initial capital subsidies that typically create a state or local majority holding in the project, operating subsidies and tax forgiveness seem to continue regardless of the operating results of the entity. Only recently have we seen public instances where managements were held responsible for a project’s demise in China, with many just continuing to lose money with flowery descriptions of ‘improving’ results and ‘continued progress’ toward profitability. Of course, other panel producers do give themselves many back-patting sessions, even when profits are scarce, but in Taiwan, Japan, and South Korea, panel producers rarely have the ability to rely on subsidies, most of which have expired years ago. There is always a day of reckoning for panel producers, and the demise of Chunghwa Picture Tube (defunct) in Taiwan, or the closing of Panasonic’s (6752.JP) display business in Japan , but those subsidies can hide a host of business issues that would likely come to light more rapidly in a non-subsidized environment.
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