We collect, aggregate and analyze all the publicly traded display supply chain companies’ financial results in our Quarterly Display Supply Chain Financial Performance Report. In the case of the panel suppliers, some of the Chinese and Taiwanese suppliers did not report their Q4’16 results until late April. However, now that they have, we can report their aggregated results. As indicated:
Q1'15 - Q1'17 Display Revenues and Growth
Source: DSCC's Quarterly Display Supply Chain Financial Health Report
Q1'13 - Q1'17 Display Supplier Margins
Source: DSCC's Quarterly Display Supply Chain Financial Health Report
These results invite the question how long will elevated returns last? If we look deep into the past, as shown in the figure below, we see that in both 2003/2004 and 2007/2008 we had periods where gross margins remained above 20% for 4 consecutive quarters. This would imply we have two quarters left. Certainly, both Q2’17 and Q3’17 look to be high gross margin quarters with prices still significantly higher than a year ago. Panel manufacturers appear poised to close more older fabs as new capacity comes online in order to try and keep capacity tight. Companies focused on higher end LCDs for smartphones without OLED capacity coming appear to be the most vulnerable. TVs look to be in tight supply/demand for at least a year which should benefit all large-area a-Si suppliers. However, as more 10.5G capacity comes online in 2H’18, the large display situation may change. Until then, it appears to be one of the best times ever for display companies. In addition, with panel suppliers building capital intensive flexible OLED fabs simultaneously with 10.5G large-screen TV fabs, it is clearly the best of times for display equipment companies. We will discuss these trends more at the upcoming SID Business Conference on May 22nd.
Historical Panel Supplier Gross and Pre-tax Profit Margins
This article is an excerpt from the May 1st issue of The Display Supply Chain Monitor.
As revealed in our Quarterly Display Supply Chain Financial Health Report, which includes a pivot table of all the key results released by publicly traded companies in the display supply chain along with 5-20 slides per company consisting of charts and analysis, a significant number of companies released their Q1’17 earnings results last week. Two companies, BOE and TCL/CSOT, released both Q4’16 and Q1’17 results last week. As a result, it has been a busy past few days for DSCC digesting all this info.
Q1’17 revenues were 3% ahead of consensus and earnings were 45% ahead of consensus Pre-tax profit, net profit and EBITDA margins were all the highest in at least 4 years. AUO management said on the call that this upward business cycle for the display industry may be the longest in the history of the display industry resulting in elevated margins through the year. We made similar comments in a February 13th blog in response to sharp downgrades by Bernstein and JP Morgan, indicating results would grind higher.
AUO guided to 95% utilization, and reported greater than that. They also guided to large-area shipments down mid to single digits and they were down 4%, but average size increased. They guided to low single digit increases in ASPs and they wre up 2.5%. They guided to flat small/medium shipments and they were up 2%. Their component costs were down 1.8%.
For Q2’17, AUO guided for utilization to remain high, similar to Q1 which was over 95%. They guided large-area panel shipments to be down low to mid single digits on capacity limitations and demand for larger sizes. They indicated small/medium panel shipments would remain flattish. Bullish BoAML indicated Q2’17 revenues would be up 1% Q/Q.
For 2017, expect supply/demand growth to be tight all year. Expecting 5% demand and 3% supply growth on an area basis. Their CapEx expected to be up 24% Y/Y to $1.77B. Supply very tight for bezel-less and 65”/75”. For LTPS, although pricing pressure is significant in smartphones, they are allocating LTPS capacity to 13.3” NBs as well. They expect in-cell to rise from 20% - 30% to 40%-50% of their smartphone panel shipments.
On OLED wearables, traditional watch volumes down past 2 years, Swiss watch exports down. 11 types of smartwatches recently introduced at BaselWorld Watch conference. AUO was designed into 9 of those smartwatches. New smartwatch has a narrower bezel. Expects smartwatch shipments to ramp to 1M units per quarter in 2H’17.
BOE’s revenues reached a new record high of $3.4B in Q4’16 and fell 6% Q/Q in Q1’17 to $3.2B, which was up 69% Y/Y. Gross profits fell slower than revenues on higher prices, allowing gross margins to rise to a new high of 29%. Operating income reached a new high of $429M, up 36% Q/Q and over $632M higher than Q1’16. Operating margins also reached a new high of 14%. Net profits of $350M in Q1’17 were also a new high, up 37% Q/Q and over 2000% Y/Y with net margins at 11%.
In addition to displays, BOE also has a monitor and TV OEM business as well as an Intelligent System and Health Services division and has been continuously making investments. Display devices (includes OEM business) was 88% of 1H’16 revenues and 89% of CY 2016 revenues. However, just looking at the panel business, panel revenues 78% of Q4’16 revenues at $2.64B and 71% of Q1’17 revenues at $2.25B. Based on DSCC surveys, BOE’s #1 application on a revenue basis is mobile phones with a 34% share in Q4’16 and a 35% share in Q1’17. TVs were flat at 28% with ASPs rising 2% to $81.3. BOE’s TV panel shipments are around 75% at 32”. On an area basis, TVs dominate with a 54% share in Q1’17, down from 56% in Q4’16. Monitors and tablets gained share in Q1’17 with TVs weaker in Q1.
BOE’s Capex was over $2B per quarter in both Q4’16 and Q1’17. Free cash flow was -$1.7B in Q4’16 and -$1.1B in Q1’17 due to the high capex. The net change in cash was also down over $1B in each of these quarters. It had to issue debt to cover the Capex, amounting to $2.4B in Q4’16 and $1.04B in Q1’17. Fortunately, BOE Technology has a large cash position, over $7B, and a large market cap, over $20B. However, its debt continues to rise causing it debt to equity position to reach a new high of 89%. However, due to its cash position, its net debt/equity ratio is just 26%. BOE Technology also benefits from local co-investors to share the burden of these investments. BOE has often bought these companies out as the business becomes profitable. It has also received around $100M per year in asset and R&D subsidies from the central government and receives even larger subsidies from local governments.
Canon’s revenues rose 24% Y/Y in Q1’17 to $8.6B, its fastest annual growth in years. While its office business rose just 2% and its camera business rose 5%, its Industry/Other business rose 129%. This business consists of its lithography, evaporation, network camera and newly acquired Toshiba Medical Systems businesses and a host of other smaller industrial businesses as well. Operating margins also jumped for this division from 2% to 6%. It sold 20 litho tools in Q1’17, up from 12 in Q4’16 which we believed generated around $310M in revenues. For evaporation, we believe they sold over $400M worth in Q1’17 resulting in total display equipment revenues of $725M and the #1 spot in display equipment. For 2017, they are expecting to sell 86 litho tools v. 37 in 2016.
China Star (CSOT)
China Star is a subsidiary of TCL and only limited information is made available to the public.
China Star’s revenues rose 11% in Q4’16 to $1.03B, its first quarter over $1B. In Q1’17, revenues were down 8% Q/Q while rising 44% Y/Y to $950M. It reported EBITDA results for the first time in Q1’17 which were $376 million producing EBITDA margins of 40%. The company expects its 2017 net profits to rise 50% over 2016.
In Q4’16, its T2 8.5.5G factory reached full production and it began small volume shipments from its new LTPS fab in Wuhan, T3.
Note, it has spun Wuhan off into a separate company that is now publicly listed in Hong Kong. In Q1’17, Wuhan did $118M in revenues, up 30% Q/Q. Wuhan T3 is expected to reach full production by the end of 2017.
CSOT also indicated its 10.5G project started in November and T6 is expected to begin mass production of 43”, 65”, 70” and 75” panels in Q2’19. Its flexible OLED fab, T4, has been launched and will begin production in 2020.
Jusung Engineering announced its preliminary Q1’17 results last week. Revenues were $65.7M, up 46% Y/Y while falling 6% Q/Q and 6% ahead of consensus. Operating income was $10.9M resulting in 17% operating margins, the highest in at least 4 years. Pre-tax profits were $12.8M, resulting in pre-tax margins of 19%, also the highest in years and likely a record. Revenues were led by displays at $35.8M or 54.5% of revenues. According to Dongbu Securities analyst Hul Kwon, Jusung should win LGD’s E6 encapsulation business in Q2’17. For Q2’17, Jusung’s revenues are expected to be $69.7M, up 6% Q/Q and 17% Y/Y. Operating income is expected to be $11.8M, up 8% Q/Q and 50% Y/Y.
LG Display’s revenues fell 10% Q/Q while rising 23% Y/Y to $6.1B. Its revenues were 12% ahead of consensus. Gross margins rose from 20% to 24%, the highest in at least 4 years. With their ASPs declining Q/Q, it appears that the shift in gross margin was largely a result of a mix shift, with lower margin mobile phone shipments down on seasonal weakness and higher margin TV panels up. Operating margins reached 15% with operating income a record high of $891M. EBITDA did rise 8% Q/Q and 113% Y/Y with EBITDA margins rising from 20% to 25%. Growth was certainly impressive Y/Y, but without the non-operating gains EPS was down 17% to $1.65. Net income was $589M, 36% above consensus.
LG guided to ~5% decline in panel shipments on an area basis, and they were down 6.5%. However, producible capacity was down 6.1%, higher than expected, due to allocating capacity to R&D, converting 8.5G and 6G LCD lines to OLEDs, etc. Utilization of that capacity was flat at 82%. They also guided to an increase in blended ASPs. However, blended ASPs were down 5% on smartphone panels under pricing pressure and lower than expected smartphone volumes which carry higher ASPs on an area basis. It is also more difficult for LG Display to raise prices on its LCD and OLED TV panels to its largest customer LGE.
We believe LG sold 12.5M TV panels in Q1’17, making it the #1 TV panel supplier. In terms of revenues by applications, TVs rose 5% and mobile fell 5%, with monitors gaining 1% vs. notebooks/tablets. The shift in mix between TVs and mobile explains the changes in ASPs/area.
LGD generated over $1B in cash flow from operations for the second consecutive quarter. Its cash position fell by $364M.
In terms of guidance for Q2’17, it expects Q1’17 shipments on an area basis to be similar to Q1’17 with TV panel shipments flat to down on trends towards larger panels. Prices are expected to remain stable.
For all of 2017, we believe they are targeting 52M TV panels. They indicated their 60”+ panel volumes will grow 30%. They are targeting more than 10M flexible OLED panels in 2017. CapEx is expected to rise more than expected, they have not yet published their 2017 CapEx data. However, ~70% will go to OLEDs. They expect OLED TV panels to show positive EBITDA in 2017 and positive EBIT in 2019. OLED TV panel production is expected to be 300K/qtr. in 1H’17 and 500K qtr. In 2H’17. OLED TV input capacity is expected to reach 60K substrates/month in 2017. Flexible OLED production at E5 is expected by the end of Q2’17. Flexible OLED production at E6 is expected to start in 2H’18. LG also announced it will start production of OLED lighting panels on an old 5th gen line at 15K substrates/month in 2H’18. LGD’s ADR stock fell 8% on the day earnings were released. Unfortunately, the day earnings were released, a story came out that indicated LGD’s flexible OLED quality was poor and would not be designed into Apple until 2019. In addition, CLSA downgraded the stock after earnings from market perform to underperform.
Revenues fell 1% Q/Q while rising 26% Y/Y to $6.3B. OLEDs drove the quarter with OLED revenues up 12% Q/Q and 32% Y/Y. LCDs were down 17% Q/Q while rising 17% Y/Y. OLEDs were 61% of revenues. Operating income fell with revenues, down 2% Q/Q, and up $1.35B vs. Q1’16. Operating margins were maintained at 18%, vs. -4% in Q1’16. OLEDs accounted for 65% of operating margins.
DSCC believes SDC sold 80M rigid OLEDs and 17M flexible OLEDs for smartphones in Q1’17. Despite seasonal weakness in the smartphone market, OLED revenues continue to grow on strong demand as brands look to sell more OLED-based smartphones which command higher ASPs and generate higher margins. OLEDs appear to be the only display category growing in Q1’17 in smartphones. Samsung’s OLEDs have achieved double-digit Y/Y revenue growth for at least the last 5 quarters and are expanding into more markets. We also showed SDC’s Q1’17 shipments for smart watches, touch bars, VR glasses, tablets, notebooks and digital cameras.
We also believe Samsung sold 8.8M LCD TV panels. LCD revenues were strong Y/Y as Samsung’s yield issues are in the past and prices are significantly higher for large-screen TVs which are also in high demand, although Q1’17 was seasonally weak compounded by a sluggish Q1 Chinese market.
Samsung’s OLED operating profits were up 1% Q/Q and 86% Y/Y in Q1’17 on higher revenues and Samsung’s dominant position in this market. On the other hand, LCD operating profits were down 8% Q/Q in Q1’16 on lower revenues. OLEDs accounted for a 65%/35% share advantage of Samsung’s operating income. OLED operating margins did decline from 21% to 19% on some seasonal weakness while capacity expanded, leading to lower utilization. LCD operating margins are approaching OLEDs at 19% vs. 16% as large-screen, high end TV panel prices continue to rise. In the figure below, we see that OLEDs have accounted for greater than a 50% share of Samsung's operating margins since Q3'15. In Q4'15 - Q2'16, LCDs suffered operating income losses while OLED operating income remained in the black.
Samsung's Display's Revenues and OLED Share
Samsung’s Q2’17 CapEx rose 7% Q/Q and 143% Y/Y to $3.6B. Samsung is outspending the competition in OLEDs, at least in 2017, widening its capacity advantage. Samsung has not yet announced its 2017 target, but is on pace for $14-$15B.
In Q2’17, we believe SDC will produce 15-16M flexible OLED smartphone displays for Apple, but may not be able to ship them due to fingerprint technology issues. Non-Apple shipments are expected to be 80M (15M flex/65M rigid) in Q2’17, down from 97M in Q1’17 due to reductions in orders from Chinese brands Oppo and Vivo where the market has slowed. SDC guided to intense competition in mid-range and lower price categories with LTPS LCD in oversupply. In LCDs, we expect LCD TV panel volumes to rise to 9.2M units in Q2’17 as demand improves. Strong focus on most profitable categories - large-size, UHD and curved.
For all of 2017, for LCDs Samsung will continue to focus on UHD, large sizes, bezel free, etc. DSCC expects Samsung to ship TV 37.8M LCD TV panels in 2017, down 20% from 2016 on the closure of L7-1. In the case of OLEDs, SDC will continue to focus on flexible OLEDs and expanding OLEDs into new applications. For smartphones, rigid target is 350M, flexible target is 160M. Shipment targets for other applications are revealed in this report. With utilization down in Q2’17, there maybe some opportunity to increase other applications more.
Shortly after Apple’s earnings release on Tuesday, May 2nd, Apple CEO Tim Cook appeared on CNBC to announce that the company would create a new $1 billion fund for US companies that do advanced manufacturing. When we consider some other industry developments in recent weeks, we think that this investment might include investment in display manufacturing.
Subscribers to DSCC’s Quarterly Display Supply Chain Financial Health Report can read more detailed analysis of Apple’s Q1 earnings; the company beat analyst expectations with earnings per share of $2.10 but disappointed some with a small decline in iPhone unit sales. Apple’s balance sheet as of March 31, 2017 carries a whopping $256 billion in cash and marketable securities against less than $100 billion in debt, so this new $1 billion investment may seem like chump change to Apple. Still, as they say in Washington, “a billion here and a billion there, and pretty soon you’re talking about real money”.
In the CNBC interview, Cook said that the fund’s first investment would be in a US venture later this month, but he did not name the venture. "By doing that, we can be the ripple in the pond. Because if we can create many manufacturing jobs around, those manufacturing jobs create more jobs around them because you have a service industry that builds up around them," Cook said.
This new investment comes on top of a $1 billion commitment in January to SoftBank Group’s $100 billion technology fund, which also includes Apple supplier Foxconn. Foxconn CEO Terry Gou is reported to be close friends with the head of SoftBank, Masayoshi Son, and Son was pictured in December after a meeting with then-President-elect Donald Trump showing some plans for Foxconn investment in the US.
Softbank CEO Masayoshi Son in December meeting with Trump (source: fortune.com)
While we have reported several times on the possibility of a Foxconn investment for LCD TV manufacturing in the US, it may be more likely that the first big Foxconn investment is oriented toward making iPhones rather than TVs. Consider the sequence of events:
For nearly the entire flat panel era, display industry manufacturing has been based almost entirely outside the US. The Society for Information Display’s DisplayWeek conference (http://displayweek.org/), though, has maintained its place as the preeminent event in the display industry. In the SID/DSCC DisplayWeek Business Conference on May 22nd, industry leaders will be discussing the possibility of display manufacturing in the US. As reported last week, JobsOhio has stepped up as an event sponsor, and JobsOhio’s Ted Griffith will be participating on a panel session in the conference. Whether the first Apple investment is announced before the conference or later in May, we are sure to have some provocative discussions.
There appears to be new momentum towards an investment in flat panel display manufacturing in the USA, as Foxconn chairman Terry Gou made a somewhat surreptitious visit to the White House last week. Gou has previously expressed his desire to build a plant here, and was quoted during the week of President Trump’s inauguration as saying about such an investment: “There is such a plan, but it is not a promise, it is a wish” (Display Supply Chain Monitor, 01.23.2017). Now as the Trump Administration has concluded its first 100 days, Gou has apparently met with White House officials.
We first received notice of this visit from a story in Nikkei Asian Review written before the meeting was to take place. According to Nikkei, Gou would meet with President Trump to discuss his acquisition of Toshiba’s memory business and plans to build “a highly automated TV panel facility” in the US. Nikkei also quotes an unnamed source in saying that “when Gou visited Washington in late February, the Taiwanese tycoon met Trump's son-in-law Jared Kushner”.
While the Nikkei story predated the actual meeting, Washington Post reporter David Nakamura managed to see Gou departing the White House, leading to this tweet:
Taiwan’s TVBS and their reporter Jessica Ni managed to capture video of Gou’s departure from the White House after his visit, available at this link: http://news.tvbs.com.tw/politics/723486. In the video, Gou responds to Nakamura’s question about whether he met with President Trump: “My memory is not good; maybe I already forgot.” The Post reported that Gou’s meeting at the White House extended more than two hours, but that the meeting was not listed on the president’s public schedule released by the White House.
While there has been no public statement from Foxconn on the status of their plans for a US plant, there is great interest in the project from people within the industry and at least one US state hoping to host the large investment. At the upcoming SID/DSCC Business Conference during DisplayWeek 2017 on May 22nd at the Los Angeles Convention Center, JobsOhio has come forth to be a sponsor of the conference, and will participate on a panel session about the industry and this opportunity. In describing their approach, JobsOhio gave the following statement:
“Interest in display industry manufacturing in the United States continues to grow, and we believe there is no better destination for this industry to thrive than Ohio,” said JobsOhio Managing Director for Information Technology Ted Griffith. “Sponsoring the SID/DSCC Business Conference is an opportunity to meet with industry leaders and showcase what the advantages are of doing business here. We look forward to sharing how Ohio’s resources, location, talent and longstanding record of success make it the best location for a successful U.S. display manufacturing hub.”
For our part at DSCC, we heartily welcome JobsOhio as a conference sponsor, and look forward to a great discussion at the business conference about the industry’s future in the US.
Now that Korean equipment suppliers have released their Q4’16 earnings results, we are able to make some pretty interesting comparisons between FPD equipment companies as well as determine the performance of the sector as a whole in our Quarterly Display Supply Chain Health Report.
Aggregating the company results for dedicated FPD equipment companies as well as the FPD equipment and FPD equipment/Other divisions of bigger/more diversified companies, we show the FPD equipment market up 26% Q/Q and 69% Y/Y as shown in Figure 1. Clearly, it was a great quarter and possibly a record quarter for the FPD equipment market.
Figure 1: Q1’15 – Q4’16 FPD Equipment Revenues
Source: DSCC's Quarterly Display Supply Chain Financial Health Report
By company, Applied Materials had the highest quarterly revenues of $452M and a 16.4% share as shown in Table 1, followed by Canon at an estimated $430M and Nikon at an estimated $380M. SFA Engineering, ULVAC and AP Systems rounded out the top 6. The leading customers in Q4’16 were Samsung’s Tangjeong A3 OLED fab, HKC’s 8.6G a-Si fab, BOE’s Ordos LTPS LCD fab and Tianma’s 5.5G OLED fab. Nikon and Canon revealed that 36 litho tools were installed in Q4’16 with Nikon accounting for a 67% share. We identified those tools by fab and show 10 tools going to a-Si LCD fabs, 10 tools going to LTPS LCD fabs and 16 tools going to OLED fabs. By substrate size, 10 tools were at 8.5G+ with 26 tools at 6G or smaller.
Table 1: Q4’16 FPD Equipment Revenues, Share and Growth
For 2016, based on the suppliers below, we show FPD equipment revenues rising 51% to $8.4B. Only Coherent's revenues are significantly mixed with non-FPD businesses. As we account for other suppliers, largely in the color filter, cell, module and automation markets, the FPD equipment market should be over $12B. The growth of 51% may likely remain the same however. Of the suppliers below, Nikon led with $1.44B, up 111%, followed by Applied Materials at $1.21B, up 28%, and Canon at $1.05B, up 67%. It is not surprising that litho suppliers Nikon and Canon were in the top 3. The number of litho tools used in LTPS and oxide fabs increases significantly relative to a-Si, outpacing the growth of deposition tools. We expect to see Nikon and Canon remain at the top in 2017 due to the number of new LTPS backplane fabs as well as a result of the high price for 10.5G litho tools. Fortunately, we hear the TACT of the Nikon 10.5G tools is improving over their 10G tools, but panel manufacturers have little choice but accept Nikon’s prices due to the lack of a competitor at 10.5G. Canon will also significantly benefit from its evaporation business through its Tokki subsidiary. With Canon expected to gain share in exposure tools and sell out its evaporation capacity, we believe they should be #1 with well over $2B in equipment revenues in 2017. It is fortunate that Nikon and Canon are doing well in FPD exposure tools as their camera businesses are hurting. Applied Materials should also have another good year with its encapsulation tool set to grow rapidly as flexible OLED capacity takes off. Applied’s CVD tools will likely account for the highest share of its revenues with PVD, eBeam test, eBeam review and new tools under development also contributing. SFA Engineering, ULVAC and Coherent rounded out the top 6 for 2016.
Table 2: 2016 FPD Equipment Revenues, Share and Growth
In terms of financial performance for the sector as a whole:
Table 3: Valuation Parameters for FPD Equipment Companies
Table 4: Q1’17 Stock Price Growth
The Quarterly Display Supply Chain Financial Health Report also compares and aggregates FPD equipment supplier results for bookings, backlog, inventories, liquidity, cash flow from operations and free cash flow. Results are provided in Powerpoint slides and an Excel pivot table. Market share is provided by supplier, technology, substrate size, etc. in the lithography, excimer laser annealing and OLED deposition markets in the Quarterly OLED Supply/Demand and Capital Spending Report. These segments are also forecasted out to 2019. Contact firstname.lastname@example.org for more information. For those interested in learning more about the FPD equipment market, executives from DSCC, Applied Materials and Kateeva as well as OLED panel suppliers BOE Technology, LG Display and Royole will be presenting at the SID Business Conference being managed by DSCC on May 22nd in LA, CA during SID’s Display Week.
OLEDs are potentially a dream come true to the smartphone industry, enabling manufacturers to raise prices by improving display performance, increasing display sizes and enabling innovative form factors like curved, flexible, foldable, rollable, etc. We expect OLEDs to enable greater differentiation in the smartphone industry for years, which should keep prices high. OLED panel suppliers should be major beneficiaries, as smartphone brands will be clamoring for OLED panels for years until the market is saturated with OLEDs, and even then there will be opportunity to differentiate and create strong demand for more advanced form factors. With OLED demand expected to be tight until the market is saturated, which panel suppliers and brands are likely to benefit?
Figure 1 shows smartphone shipments in 2016 and 2017. As indicated, the top 5 players are Samsung and Apple and Chinese brands Huawei, Oppo and Vivo with the Chinese brands enjoying the fastest growth. As shown in Figure 2, in 2016, Samsung consumed most of the OLED smartphone panels at 264M or 72%. Oppo and Vivo each accounted for 11% of the OLED volumes. 0% of Apple’s panels were OLED with Huawei at just 2%.
Figure 1: Smartphone Shipments by Brand
Figure 2: 2016 Smartphone Display Procurement by Brand
In 2017, OLED smartphone panel shipments are expected to grow 42% to 525M. Samsung is expected to consume 55% of smartphone panel shipments in 2017 or 290M as shown in Figure 3. Apple is expected to consume 75M or 14% of OLED smartphone panel shipments followed by Oppo at 63M and a 13% share and Vivo at 55M and a 10% share. Oppo and Vivo have secured supply with Samsung. Conversely, Huawei’s share of OLED panel shipments is insignificant and is expected to remain behind that of Oppo and Vivo. Huawei is not engaged sufficiently with Samsung and will likely need to wait until BOE ramps from 2020 to capture significant OLED volumes. As shown in Figure 4 we believe it will take until 2020 for Huawei to secure enough OLED capacity to enable OLEDs to account for a majority of their panel procurement. We expect Apple to quickly ramp to 100% OLED, following Samsung, which will limit the number of OLED panels available for other brands as the OLED smartphone market climbs to over 1.2B units in 2021 as shown in Figure 5. In fact, we show Apple and Samsung accounting for 72% of 2016 OLED smartphone panel shipments, 70% in 2017, 72% in 2018, 64% in 2019, 57% in 2020 and 51% in 2021. Thus, the OLED smartphone market will basically move from a monopoly to a duopoly with Samsung and Apple controlling at least a 50% share through 2021. But what does the panel supplier situation look like? Can any panel suppliers disrupt this duopoly and who will be the 3rd OLED supplier to Apple?
Figure 3: 2017 Smartphone Display Procurement by Brand
Figure 4: 2016 - 2021 OLED Smartphone Panel Procurement Forecast
Figure 5: 2016 - 2021 OLED Smartphone Panel Procurement
In our Quarterly OLED Supply/Demand and Capital Spending Report, we track and forecast OLED fab glass input, yield and output by fab by application. This enables us to track each panel suppliers’ shipments by application. Mobile OLED output share is shown in Table 1. As indicated:
Table 1: Mobile OLED Output Share by Panel Supplier
With the FPD equipment market booming in 2017, we are often being asked by investors:
2017 vs. 2018 OLED Fab Activity
In 2017, we believe 250K substrates of monthly TFT/OLED input capacity will be installed as shown in Figure 1 and in the Q1’17 issue of our Quarterly OLED Supply/Demand and Capital Spending Report. This data is based on surveys of OLED manufacturers and equipment and materials suppliers. In 2018, the number is expected to rise slightly to 252K substrates. However, in 5.8” unyielded equivalents, the difference will be much more significant with 2017 at 47.3M per month vs. 2018 at 60.1M per month, a 27% difference also shown in Figure 1. This difference can be attributed to differences in substrate size with 2017 featuring 5 out of 19 installations below 6G. On the other hand, in 2018, just one installation out of 17 will be below 6G. In addition, there are expected to be two installations for TVs at 8.5G in 2018 vs. none in 2017. Thus, given that larger glass sizes result in higher tool prices, we should see a nice increase in fab equipment spending from 2017 to 2018 in OLEDs. We should also add that evaporation market leader Tokki will increase its capacity by two ½ G6 systems from 2017 to 2018 and its total capacity by 1 unit.
Figure 1: 2017 vs. 2018 OLED Installations (Install Basis)
How about on a PO or bookings basis? Assuming a 9-month lead time between PO and install, we show 2017 on a PO basis at 272K substrates of monthly input capacity vs. 2018 at 208K, a 31% difference as shown in Figure 2. We also show 2018 below 2016. However, we should note there is still likely a wide margin of error on 2019 fab schedules/2018 PO timing and, in many cases, PO to install timing has been longer than 9 months. In terms of 5.8” equivalents on a PO basis, we also show 2017 leading with 2018 and 2016 quite similar. So, it looks clear from our data that 2018 OLED spending will exceed, not fall below 2017, which will result in 2017 leading in bookings. Which quarter will be the peak quarter for OLED bookings? We show peak OLED equipment bookings occurring in Q3'17 with POs for well over 100K substrates of OLED equipment being issued.
Figure 2: 2017 vs. 2018 OLED Installations (PO/Bookings Basis)
2017 vs. 2018 LCD Fab Activity
In the case of LCDs, we believe 2017 will be a stronger year than 2018, although more capacity may get pulled in from 2019 if equipment makers are able to pull in their delivery timing. As shown in Figure 3, we expect 16% more LCD capacity installed in 2017 vs. 2018 in terms of # of substrates, but just 2% more on a 55” equivalent basis due to more 10.5G capacity being installed in 2018 than 2017. In 2017 and 2018, BOE will install 120K capacity at 10.5G with China Star installing 75K. These installations should consume all of Nikon’s 10.5G exposure tool capacity at their current rate of 1 tool per month. Nikon will need to significantly boost their output in order to enable LG Display, Foxconn or HKC to install 10.5G capacity in 2018. LG will reportedly have its 10.5G fab completed in Q2’18, but we still don’t see them installing equipment until 2019. However, as a result of these 10.5G projects in 2019, 2019 should be another strong year for LCD equipment spending. While 2017 may be slightly larger than 2018 in LCDs, we believe higher OLED spending will push the 2018 market above 2017.
Figure 3: 2017 vs. 2018 LCD Installations
For more detailed information on OLED equipment spending, please see our Quarterly OLED Supply/Demand and Capital Spending Report. For a detailed look at all equipment and panel suppliers financials, please see our Quarterly Display Supply Chain Financial Health Report. In addition, the OLED and LCD equipment market outlook will be a major topic at the SID/DSCC Business Conference on May 22nd.
Note, this article is a subset of a larger article that appeared in our newsletter.
Those readers who saw my last article on UDC may have been prepared to be disappointed at their earning release on Thursday, February 23rd. In fact, it looked like the market in general was prepared to be disappointed, as the stock dropped more than 5% during Thursday’s trading. But unlike their Q3 earnings release, their Q4 earnings release and conference call pleased investors, and the stock jumped as much as 22% in Friday’s trading, peaking at an all-time mid-day high of $82.50 before settling to end the day up 20% at $81.00.
In addition to the earnings release, UDC announced its first-ever dividend of 3 cents per share, and indicated that they intend to issue quarterly dividends going forward. Although undoubtedly a positive sign, the value of the dividend (a yield of 0.15% at a stock price of $80) is trivial compared to the signal it sends that UDC intends to continue to grow profits and return cash to shareholders.
The bigger news, of course, was the earnings release, and clearly UDC had a strong Q4 with earnings of $26 million or 55 cents per share, compared with street expectations of 44 cents. Revenues came in at $75 million, leading to full-year revenues of $199 million, near the top of UDC’s guidance range of $190-200 million.
The figure below shows the main income statement highlights for UDC for the last two years. The see-saw pattern in revenues and earnings stems from the Samsung royalty deal, which pays out in Q2 and Q4 of each year, and amounted to $60 million in 2015 and $75 million in 2016.
UDC Quarterly Income Statement Highlights, 2015-2016
It should surprise no one with knowledge of the display industry that UDC saw 94% of its Q4 revenues come from South Korea, with the two biggest customers being Samsung Display and LG Display. Perhaps the surprise comes in the other direction, that they managed to pull 6% of revenues from sources outside of South Korea. Material sales and royalty revenue from China came in at $1.8 million for Q4 and $7.2 million for the full year, growing 122% year-over-year as panel manufacturers BOE and Tianma are accelerating their efforts to bring OLED displays toward volume production. Revenue in the US was $1.9 million, mostly technology development and support revenue resulting from UDC’s acquisition of Adesis in July. Adesis continues to bring in contract revenue, and UDC CEO Steve Abramson indicated that while it was not likely to grow, it was likely to continue at a pace similar to that in the 2nd half of 2016, which would amount to $6-7 million per year.
While UDC does not disclose details of its transactions by customer, they do show the percentage of revenues from top customers, allowing us to construct the picture below of major revenue streams by customer:
UDC Quarterly Royalty & Material Revenue by Customer, 2015-2016
It would appear that the material sales pattern is only loosely connected to the panel maker production, and this is consistent with what we know about the product and its use in the production process. However, the total annual figures for the two companies provide some insight to OLED industry costs. Total revenues from Samsung in 2016 were 63% of all UDC revenues, or $125 million. Based on an estimated total output of 375 million panels, this translates to a revenue of 33 cents per panel. From LGD, 2016 revenues were 28% of the UDC total or $56 million, and assuming that nearly all of this was for TV (it’s fair to say that LGD shipments of OLED for the Apple Watch and other products were negligible compared to TV) then for the 900,000 OLED TV panels shipped in 2016 UDC recognized $62 per panel.
Looking at material sales, UDC reported total material sales of $29.2 million, up 5% over Q4 2015, with an unusually large portion of the sales coming from developmental material. UDC states that their margins on material sales have consistently averaged 70-75%, and this is consistent with their reports on commercial material sales, but margins on developmental materials are lower, only 46% for the full year 2016. UDC commented that materials costs increased in Q4 2016 largely because of the introduction of new phosphorescent emitter products, but also commented that this start-up or ramp-up cost factor would not persist in coming quarters.
In UDC’s earnings call late Thursday afternoon, CEO Steve Abramson and CFO Sydney Rosenblatt highlighted UDC’s opportunity as the OLED industry grows. Abramson listed the many panel makers with plans for new capacity, and the beginning of a “multi-year capex cycle”. On OLED TV, Abramson said that LGD’s production would be increasing from 900,000 in 2016 to 1.5-1.8 million in 2017 to 2.8 million in 2018, lining up closely with DSCC estimates. In our white paper on Quantum Dots issued earlier this year, we estimated OLED TV as 1.7 million in 2017 and 2.6 million in 2018.
In much of their communication before this week’s earnings release, UDC had indicated that after two successive years with little to no growth (0% growth in 2015 and 4% growth in 2016), the company could expect significant growth in 2017. Abramson referred to “double-digit revenue growth” in his comments, and Rosenblatt issued the following main points for 2017 guidance:
One of the questions on the earnings call asked UDC management if they were being conservative in their revenue outlook. Based on my pre-earnings analysis (from one week ago), I had the same question. With 50% growth in OLED input area, we should expect more than 18% growth in material sales revenue. The high end of UDC’s guidance would represent about 26% growth in materials sales, while with a 50% increase in area even with quarterly price decreases of 3% we should expect 32% Y/Y growth. Abramson correctly stated that material sales will depend on the timing and ramp of new capacity, and we agree that there is some uncertainty about the specifics, but I found the UDC guidance too conservative.
There are a few items on UDC’s balance sheet worth noting. First, they have a big pile of cash: $328 million, or $7 per share, equivalent to more than a full year’s revenues and more than two years of expenses. UDC has said in the past that this cash would be used to fund acquisitions and improve its IP portfolio, and in 2016 UDC consolidated the acquisition of the portfolio of BASF and also acquired the contract research company Adesis. On Thursday’s earnings call, although CFO Rosenblatt highlighted the cash on the balance sheet, he did not mention acquisitions, so perhaps that activity will not be a major part of 2017. One the other hand, the cash will be used to pay dividends, but not very much is needed: the $0.03 dividend will cost UDC about $1.4 million.
UDC carries a surprisingly high amount of inventory, which is consistent with their strategy on capacity to highlight their ability to reliably supply the customers’ needs. Longer-term investors may remember, though, that UDC took a $33 million inventory write-off in Q2 2015 as they decided to exit the host material business. While the current inventory level is much lower at $17 million, it still constitutes more than 6 months of inventory on a forward-looking basis. As UDC introduces new emitter materials, they may have a risk that older materials also become obsolete and require write-offs.
UDC certainly faces challenges in 2017, but clearly benefits from the coming wave of OLED products and capacity. As announced earlier this month, UDC will be doubling capacity at PPG’s manufacturing facility for phosphorescent OLED materials, and the company will need to manufacture new materials cost-effectively while managing a more complex product line. Perhaps no task on their annual checklist is more important than a renewal of the Samsung licensing agreement, which will continue to supply 38% of UDC revenues in 2017 per the mid-point of their guidance. The existing agreement expires on December 31, 2017, so look for UDC to announce its renewal soon, and look for UDC to benefit this year from the tremendous increase in the OLED display market.
The stock price of OLED emitter materials provider Universal Display Corporation (ticker symbol: <OLED>) jumped last week on new analyst coverage from Susquehanna’s Mehdi Hosseini. Hosseini rated the stock a “Positive” with a price target of $100, helping the stock jump nearly 5% on Wednesday, February 14th. <OLED> shares were priced at $72.15 at market close on Friday, up 13% for the week, and up 28% year-to-date, and close to their all-time high of $73.82 which they hit on August 1st of last year.
Perhaps it’s not a coincidence that <OLED> is again hitting a peak just ahead of its earnings release on February 24th: last year <OLED> hit all-time high just before it’s 2nd quarter earnings release on August 4th. As I related in a prior story on this company (“Cubs Finally Win But For OLED It’s Still Wait ‘Til Next Year”, DSCM 11.07.2016), UDC has a history of disappointing investors in its earnings calls. In order for UDC to avoid this history repeating, they will need to show that they can take advantage of the great wave of OLED capacity coming online to drive growth in revenues and earnings. In that context, what UDC says about 2017 will be much more important to investors than their results in Q4 2016.
In its Q3 earnings call in early November, UDC maintained their full-year revenue guidance of $190-200 million. The mid-point of that guidance implies a Q4 revenue of $71 million, which includes $37.5 million of royalty revenues from Samsung’s licensing agreement. Considering the various sources of revenue to UDC, the Q4 revenues might look like the figure below:
UDC Revenue by Source 2015-2016 (Q4 mid-point of guidance)
Such a picture would represent 14% year-over-year revenue growth, a tremendous improvement from the 23% Y/Y decline reported in Q3. Unfortunately, though, the biggest part of that revenue growth comes from the Samsung licensing royalties, increasing 25% Y/Y from $30 million in Q4 2015 to $37.5 million in Q4 2016. Take out the Samsung royalties, and revenue growth is only 4% Y/Y.
There are many reasons to be optimistic about the prospects for OLED, and almost as many reasons to be optimistic about the prospects for <OLED>. As subscribers to DSCC’s Quarterly OLED Supply Demand and Capital Spending Report will know, panel makers will be installing and/or ramping 16 different fabs for the production of OLED in 2017 alone, with additional fabs starting in 2018-2021. While some of these are merely research and development lines, many of these fabs will add substantial capacity to the industry, and industry capacity for OLED will grow at a CAGR of 52% from 2016 – 2021, as shown in the figure below
OLED Input Capacity 2016-2021
As the figure shows, input area in 2017 alone will increase more than 50% Y/Y. It is charts like these for OLED that have industry analysts optimistic about <OLED>. Even at its current price, the company’s stock has a price/earnings ratio of 84; obviously at the Susquehanna target price of $100 the P/E would be over 100. In order to justify the rarified air of such a stock, UDC will need to translate the potential for OLED growth into real revenues and earnings.
Breaking down some of the revenue numbers in the chart above, UDC’s 2016 revenues can be grouped as follows:
The opportunity for upside lies in new phosphorescent emitter products with higher prices, which could drive revenue growth higher than area growth. Against this the downside is the relentless price pressure faced by all companies in the display materials industry. One other item to watch is the Samsung royalty agreement, which expires at the end of 2017. DSCC sources indicate that the main components of a new agreement have been in place, but until they announce the new agreement, the expiration will remain a concern.
UDC issues its Q4 earnings report with a conference call on Thursday, February 24th. Subscribers to DSCC’s Quarterly Display Supply Chain Financial Health Report will see a full analysis of the results in a weekly update on Friday.
PSSI Drops 2% on Morgan Stanley Report, Significantly Underperforms - DSCC Says Not a Turning Point as Earnings & Revenues Will Grind Higher on Richer Product Mix, Stable/Rising Prices and Lower Costs
On a weekly basis, I try and explain display stock price movements in our weekly newsletter. Last week was a particularly difficult week for display stocks, so I thought I would try and explain what happened and why it may be unwarranted.
The Panel Supplier Stock Index (PSSI) fell 2.1% the week of February 6th – February 10th while the US large cap stock index (SPY) rose 1.2% and the emerging market index (EEM) rose 1.2% as shown in Figure 1. As indicated in Figures 2 and 3, only CPT and BOE enjoyed stock price appreciation last week, up 3% and 1% respectively. Meanwhile, 5 suppliers – AUO, Innolux, Japan Display, HannStar and LG Display – suffered declines ranging from -3% to -7%. What happened? There were two reasons for the decline. First, the dollar strengthened after weeks of declining on signals from President Trump of significant corporate tax cuts and tax reform combined with infrastructure spending which could accelerate US market growth and inflation. As a result, last week the $US gained:
Overseas company market values typically fall when the dollar strengthens, as their businesses are then worth less in $US. However, this is offset by anticipated higher export opportunities as their products get priced lower in $US which benefits exporters. The 2.2% decline in the $US from Dec. 30th through February 3rd, helps explain the 11% increase in the PSSI over that time. If the dollar continues to recover and gain ground, the PSSI will likely lose ground. However, the 0.9% increase in the DXY doesn’t explain why 5 display stocks suffered 3% - 7% declines last week alone.
Figure 1: Panel Supplier Index vs. S&P and EEM (5/2/16-2/10/17)
Figure 2: Latest Panel Supplier Stock Index Results (5/2/16 – 2/10/17)
Figure 3: Feb. 6 – Feb. 10 Display Company Stock Price Performance
The large declines in display stocks can primarily be attributed to a Morgan Stanley report that double downgraded LG Display’s stock from a Buy to a Sell on February 6th, and was widely reported by Barron’s. The Morgan Stanley report includes Figure 4, which shows that panel price increases slowed to 1% in January. Morgan Stanley interprets the slowing price growth as a sign that the market has peaked. Shawn Kim from Morgan Stanley wrote that
“Supply is unlikely to tighten for 40”+ panels following aggressive customer inventory restocking after LCD capacity closure and elevated panel prices impacting demand elasticity. Chinese 8G fabs incremental output should ramp up from 2H’17, while pricing of small-size panels may prove hard to maintain, as we anticipate a reduction in utilization when OLED smartphone builds begin in 2H.”
As a result, Morgan Stanley lowered the price for LG Display’s stock on the KOSPI to 26,000 Won from 29,550 Won, implying a 12% price cut.
From our standpoint, it is early to make that call. 2017 will clearly be a profitable one for panel suppliers and 2018 should be profitable as well. First, panel prices are still rising. Yes, the ASP growth has slowed, but we are still seeing price increases. Witsview reported on February 20th that 49”-50” prices were still rising and reported no price reductions. Innolux said in its earnings call that 50”+ prices were still rising nicely. Companies reported blended double-digit price increases on an area basis in Q4'16. Innolux reported a 15% Q/Q increase in blended ASPs in Q4'16, LG reported a 16% increase and AUO reported an 11% Q/Q increase. With February prices significantly higher than October prices, etc., it is hard to believe that ASPs will decline Q/Q in Q1'17. So, profit margins should improve further in Q1'17 as costs also fall.
Figure 4: Blended Large-area M/M Price Changes
Second, the mix is still shifting to larger sizes and higher resolutions. Innolux indicated in its call that it expects its average TV size panels to grow by 2.5” in 2017 with the industry average growing around 2”. LG calculates demand rising by 5% on an areas basis in 2017. In addition, as we show in the next article in our 2/3/17 issue of The Display Supply Chain Monitor, blended ASP growth actually improved for all Taiwan suppliers in January on the mix shift from small/medium to large-area and within those categories themselves.
Third, there is minimal supply growth expected in 2017. Both LG and Innolux have stated in their earnings calls they expect supply growth to be modest. Innolux indicated low-single digits and also said it expects 50”+ demand to be very tight in the next few quarters. As a result of this continued demand for larger sizes (50”+) and higher resolution (4K and 8K), Innolux even indicated 2018 does not look too bad. They expect to remain profitable as costs continue to fall.
Fourth, yes, costs are falling and should fall faster than prices throughout all or most of 2017. So, we expect to see margins continue to expand in 2017. As shown in Figure 5, gross and operating margins are up nearly 100% from Q3'16 to Q4'16 with Q4'16 based on the companies who have reported so far - LG Display, Samsung Display, Innolux and JDI, and we expect them to stabilize at these or higher levels for the rest of the year.
Figure 5: Gross and Operating Margins, Q1'14 - Q4'16
Source: DSCC's Quarterly Display Supply Chain Financial Report
Do improved margins and earnings deserve a sell call? We don’t think so. Panel suppliers are shifting to a richer product mix, which should keep blended prices up. They even re-accelerated in January for Taiwan suppliers. We see panel supplier revenues grinding higher, and earnings continuing to grow as brands and consumers demand larger and higher resolutions across most categories.
Financial analysts are divided on the panel supplier outlook. As shown in Figure 6, BoAML believes operating margins haven't peaked yet, they expect them to peak in Q2'17 and remain at elevated levels throughout 2017 and 2018. On the other hand, JPMorgan expects a sharp decline in operating margins although still positive.
Figure 6: AUO Operating Margin Forecast
Source: JPMorgan and Bank of America Merrill Lynch
From our standpoint, the outlook remains healthy in large-area panels until 2019 when multiple 10.5G fabs ramp, which could worsen in 2020 when even more 10.5G capacity comes online. However, we expect a number of older fabs to continue to come offline as that happens. In addition, 10.5G fab ramps should be limited by Nikon lens capacity, which could significantly delay and capacity ramps for the latecomers. See this article/blog for more info.
In the case of small/medium panels, yes, there is a lot of OLED capacity coming online. However, the entire smartphone market will eventually shift to OLEDs, especially when flexible OLEDs come to market resulting in more rugged, lighter, larger and foldable/rollable smartphones. The demand for OLEDs will be high, so we don’t necessarily see significant price reductions in OLEDs until 2H’2019 or even 2020. OLEDs are the best thing to happen to the smartphone industry enabling smartphone suppliers to raise prices based on the OLED performance, size and form factor. Demand should be very high and supply will be constrained until the smartphone market is saturated with OLEDs. This phenomenon has occurred in TVs and in desktop monitors before it with LCDs and CRTs. This will be similar as smartphone brands will look to migrate as quickly as possible to enable higher prices. There will be lots of room for differentiation based on form factor, and average sizes will grow which should keep blended prices high. Panel suppliers will also be able to price higher and enjoy higher margins. There is a substantial difference between LTPS LCD and flexible OLED panel prices. However, unlike TVs which are very price sensitive, consumers can justify spending more on smartphones due to their critical nature and that they are paid off in payment plans, plus there is a large commercial smartphone market as well.
TThe outlook is less rosy for LCD smartphone panel suppliers. When there is enough OLED smartphone supply, what happens to LCD smartphone suppliers? There will always be demand at the low end of the market for less expensive feature phones and smartphones. As other suppliers chase more advanced smartphones, companies like HannStar and CPT are making a killing in the feature phone and low-end smartphone market where there are shortages. However, at some point, this market will be served with OLEDs or LTPS LCDs rather than a-Si LCDs that could eventually cause a-Si LCD suppliers to have to exit this market. When this happens, we would expect to see more fab closures or repurposing of those fabs to OLEDs or LTPS LCDs. LTPS LCDs might eventually have the same problem when there is sufficient flexible OLED capacity to service the low end market, unless JDI and others create flexible LCDs or flexible organic TFT LCDs. These and other similar subjects are explored in our Quarterly OLED Supply/Demand and Capital Spending Report.
Back to last week’s results,
This blog is an excerpt from the February 13th issue of The Display Supply Chain Monitor. Contact email@example.com for a sample issue.