What Does BOE Think?

What Does BOE Think?
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Chinese panel producers tend to be an optimistic lot, at least publicly, likely somewhat influenced by the fact that much of their funding comes from the state and local governments, who need to remain positive about their investments.  As listed Chinese companies are required to post at least a summary of conversations they have with analysts and investors, and maintain an on-line Q&A presence, there are times when one can get some insight into what the company is saying publicly, and at times a bit of nuance toward what they are really thinking.  Two weeks ago China’s largest LCD and OLED panel producer BOE (200725.CH) posted its analyst and investor meeting summary, which, if nothing else, gives some indication as to what the company’s near-term plans are based on.  Here is a summary of BOE’s most recent meeting with analysts and investors (139), and a few comments.

Industry Overview

• In the 1st quarter the market supply and demand gradually stabilized.
• LCD TV panel prices started to rise, driven by increased demand and promotional activities.  We would say ‘seasonal demand’ and an emphasis on promotional activities.
• Panel manufacturers adjusted production rates based on demand and focused on healthy development and dynamic control.  Not sure that ‘dynamic control’ is anything more than ‘build to order only.’
• Overall inventory levels were normal, and the industry is expected to gradually recover.  At least back to where it was before the pandemic.

Company Performance

• The company maintained its leading position in the semiconductor display industry across various applications.  BOE holds the largest share (31.5%) of global large panel LCD sales (March) and represents 57.7% of China’s large panel LCD sales.  With LG Display (LPL) #2 at 18.5% global share, BOE is certainly the leader in the large panel LCD space.
• The flexible OLED business showed steady growth, with a target of over 120m shipments for the year. Here is where BOE shines.  The company saw ~4% q/q flexible OLED unit growth in 1Q against an 18.4% decline for the industry and saw an 81.4% y/y unit increase in flexible OLED volume, against industry y/y flexible OLED growth of 27.2% (units).  For perspective, Samsung Display (pvt), the industry leader saw a 20.6% decline q/q and a 2.9% decline y/y.
• Short-term performance was affected by industry and macroeconomic conditions, but the company maintained resilient operations.  On a relative basis, yes, as BOE large panel LCD sales were down 2.7% q/q and down 30.0% y/y while the industry was down 15.9% q/q and down 36.1% y/y in 1Q.
• The company implemented lean management, resulting in improved capital structure and reduced expenses.  Companyspeak

Q&A

• Regarding industry production rates, the industry has been adjusting production rates to achieve a heathier supply-demand balance.  LCD TV panel prices have rebounded, and the production rate is expected to gradually recover.  Based on current estimates for demand and LCD panel capacity, and using an overall 85% utilization rate, there remains considerable overcapacity in the LCD space, so it is hard to call such a situation ‘a healthy supply-demand balance’.  We understand that demand estimates are likely at their lowest at this time of year and in current economic circumstances, but even with some demand improvements, LCD overcapacity will likely remain an issue this year.
• The company’s flexible OLED business has shown significant growth, and the shipment volume is expected to continue to increase.  The company aims to improve the proportion of high-end products and expand into new areas.  We give credit to BOE here as they have done a good job increasing OLED display volumes, particularly with Chinese brands.  They will have to push hard to challenge Samsung Display’s Gen 8 OLED push and a similar one from LG Display, but if nothing else, they are persistent.
• The MLED business is positioned as an important platform for the company’s next generation display development, focusing on various applications in backlighting and direct display.  BOE produces a number of LCD modules with it own Mini-LED backlighting, which puts those panels in the premium category and at a higher-than-average ASP, so we expect this segment will grow throughout 2023, but will also be somewhat dependent on the Chinese economic picture, which is a bit less vibrant than expected late last year.  It’s good business for BOE but higher-end products are in the sights of almost every panel producer and that leaves a concern over the necessity to compete on price to gain a foothold against SDC, which could impact MLED margins.
• The company’s financial performance in the first quarter improved due to cost reduction measures, lower asset impairment losses, and increased product prices.
• The company’s future capital expenditures will focus on strategic planning including enhancing OLED competitiveness, IoT solutions and upgrading manufacturing capabilities.  While BOE has been a bit more careful about capex, despite continued funding from the government, they will have to start spending on Gen 8.6 OLED capacity before the end of the year if they want to get a place in Apple’s OLED IT conversions in 2024.  The company has been working toward the development of Micro-LED displays for wearables, which could become a selling point for the Apple watch down the road, but in the interim they will have to continue to spend on LTPO small panel capacity and IT OLED.

All in and corporate speak aside, BOE’s investor meetings gave only an indication of what management is thinking about the prospects for the current year, particularly for the LCD display business.  Seemingly more confident about the growth of their OLED business, likely as Chinese brands see the company as an alternative to more expensive Samsung displays, and a growing relationship with Apple, albeit with the drama associated with that relationship.  As BOE learns more what it can and cannot do as to its Apple relationship, the company should see its small panel OLED business expand, but the OLED IT space is more of an open field, giving BOE the opportunity to gain an early foothold if it both has the expertise to build out a Gen 8.6 OLED fab that has a reasonable yield and that they can meet Apple’s typically stringent specifications, which have proved challenging for BOE in the past.  That said, they are certainly the most successful Chinese panel producer and have a dominant share of the global large panel LCD space.  Whether that proves ultimately the correct positioning over the next few years, however, is still an open question.