Shenzhen COVID Lockdown
COVID-19 is out of the news a bit as the Russian invasion of Ukraine takes precedence, but while mask mandates come off in the US and the new case rate declines after the spike seen earlier this year, China maintains a very strict lockdown policy toward COVID-19 outbreaks in order to keep the virus contained in the country of 1.448b people. Major Chinese cities are particularly sensitive to outbreaks and Shenzhen is no exception, as the 6th largest city in China and has been given the name’ “China’s Silicon Valley” due to the large concentration of technology companies that have headquarters or operations in the city. Huawei (pvt), Oppo (pvt), TCL (000100.CH), Tencent (700.HK), and ZTE (000063.CH) are all based in Shenzhen and Taiwan based Foxconn (2354.TT) has its 2nd largest manufacturing campus in the city.
On Monday the Shenzhen government imposed a one week lockdown across the city, shutting down production at plants for what is expected to be a week. Many of the companies have instituted production shifting plans to compensate for such draconian COVID responses from local governments in China, but even well planned shifts to production facilities outside of the area or the country take a toll on production goals. The good news is that the first quarter is usually the weakest for the CE space, which means there is time for any shortages that might occur to be made up before the busy 3rd quarter, but drilling down in the display space, there is one panel producer that would be exposed to such a shutdown more than any other and that is panel producer Chinastar (pvt).
Chinastar has five LCD lines in Shenzhen, which represents 75.5% of its current monthly LCD panel (m2 basis) output. Tianma (000050.CH) also has a fab in Shenzhen but is only a small part of global LCD production while Chinastar’s Shenzhen fabs represent 36.9% of global monthly LCD panel output. Assuming 7 days of shuttered production and a day on either side to bring lines up and down, that would represent ~10% of Chinastar’s 1Q Shenzhen production, or 3.69% of LCD capacity in 1Q as a worst case scenario. While we expect the fabs are not completely shut down, but Chinastar only has a Gen 8.6 fab in Guangzhou and the one it purchased from Samsung Display (pvt) in Suzhou as alternatives, so it will be difficult for Chinastar to move much of its large panel production to other fabs outside of Shenzhen.
While looked at across the 2022 year, this will be a small bump in the road, however it could influence large panel pricing if panel buyers are caught short in the near-term. Large panel prices have been declining but those declines have been slowing as large panel prices neared pre-pandemic lows and cash costs. With Chinastar’s issue, there is the possibility of a bump in LCD large panel prices that would not be based on long-term demand and could give a false sense of a potential recovery in large panel prices. We certainly don’t rule out a large panel price recovery this year, but it would have to be one based on real demand rather than one based on a short term perturbation in the LCD production cycle of a single city. According to the Taiwan tech press, most of the Taiwanese companies operating in Shenzhen will see little effect from the lockdown, although we take much of that as a bit of nationalism toward China given they will not recognize Taiwan as a sovereign country.
On Monday the Shenzhen government imposed a one week lockdown across the city, shutting down production at plants for what is expected to be a week. Many of the companies have instituted production shifting plans to compensate for such draconian COVID responses from local governments in China, but even well planned shifts to production facilities outside of the area or the country take a toll on production goals. The good news is that the first quarter is usually the weakest for the CE space, which means there is time for any shortages that might occur to be made up before the busy 3rd quarter, but drilling down in the display space, there is one panel producer that would be exposed to such a shutdown more than any other and that is panel producer Chinastar (pvt).
Chinastar has five LCD lines in Shenzhen, which represents 75.5% of its current monthly LCD panel (m2 basis) output. Tianma (000050.CH) also has a fab in Shenzhen but is only a small part of global LCD production while Chinastar’s Shenzhen fabs represent 36.9% of global monthly LCD panel output. Assuming 7 days of shuttered production and a day on either side to bring lines up and down, that would represent ~10% of Chinastar’s 1Q Shenzhen production, or 3.69% of LCD capacity in 1Q as a worst case scenario. While we expect the fabs are not completely shut down, but Chinastar only has a Gen 8.6 fab in Guangzhou and the one it purchased from Samsung Display (pvt) in Suzhou as alternatives, so it will be difficult for Chinastar to move much of its large panel production to other fabs outside of Shenzhen.
While looked at across the 2022 year, this will be a small bump in the road, however it could influence large panel pricing if panel buyers are caught short in the near-term. Large panel prices have been declining but those declines have been slowing as large panel prices neared pre-pandemic lows and cash costs. With Chinastar’s issue, there is the possibility of a bump in LCD large panel prices that would not be based on long-term demand and could give a false sense of a potential recovery in large panel prices. We certainly don’t rule out a large panel price recovery this year, but it would have to be one based on real demand rather than one based on a short term perturbation in the LCD production cycle of a single city. According to the Taiwan tech press, most of the Taiwanese companies operating in Shenzhen will see little effect from the lockdown, although we take much of that as a bit of nationalism toward China given they will not recognize Taiwan as a sovereign country.
COVID-19 - United States - New Cases/Million - Source: OurWorldinData
Aggregate TV Panel Pricing & ROC - 2019 - 2022 - Source: SCMR LLC,IHS, Company Data
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