Vertical Divider
JDI, a New Beginning, an OL(E)D Strategy
April 22, 2019 Five years ago, the “handwriting was on the wall” and JDI’s management ignored the signs. JDI doubled down on LCD technology and made a meager effort to pursue OLEDs. They were the largest supplier of LCDs to Apple and argued that OLEDs weren’t ready for the smartphone market. As a result of this misreading, JDI was not ready when Apple started using OLEDs and the company has been close to bankruptcy. Their recovery effort has been to seek new funding sources. Recently announced agreements providing financing both to continue operations and for a 6thGen OLED fab. Some of the agreements are MOU’s and others more specific, but there is sufficient capital to remain in operation until the agreements are finalized between June and December. There are a number agreements, but most significant is that INCJ, the government organization that is JDI’s largest shareholder, will release control and revert to a minority interest. INCJ, who will also provide bridge financing until the deals are completed. |
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The Suwa Consortium will become the largest shareholder, and is comprised of TPK (41.8%), a leading Taiwan-based touch system provider, Harvest Tech Investment Management (34.5%), a sub of Harvest Fund Management, a $130b Beijing investment manager, and Cosgrove Global and Topnotch Corporate Ltd (23.6%), both of which are family offices operated by the Tsai family, the founders of Fubon Financial.The hope is that TPK’s customer base in China will facilitate sales of JDI’s China LCD business and Harvest’s funding capabilities will finance the OLED production fab. Suwa will be issued 840m new shares at 50¥, a significant discount to the close (79¥), and at the bottom of the 52 week range (50¥ to 175¥), which will generate 42b¥, or ~$375m US, and 18b¥ in converts ($160m US) that will add an additional 360m shares. The agreement also leaves open the option for an additional conversion of 20b¥ (~$179m US) which would add 400m more shares, if Harvest is able to raise the capital with a new fund. The bonds are zero coupon, 5-year maturity, exercisable at maturity, with 50¥ conversion price for all.
Assuming both bond issuances have occurred and the INCJ conversions are made JDI plans to use the capital as follows:
Table 1: Sources and Uses of Funds
Assuming both bond issuances have occurred and the INCJ conversions are made JDI plans to use the capital as follows:
- The OLED R&D will be used to further the company’s research in OLED display production,
- The OLED capex will used for the pilot line that JDI operates in Mobara, Japan, which is expected to supply small panel OLED displays over the next 12 months.
- The capex for automotive will help to develop LTPS production processes specific to interior control panel and entertainment displays
Table 1: Sources and Uses of Funds
Source: Company
INCJ’s bridge loan awaits government approval and will be paid back on completion. INCJ will also provide a maximum of 107b¥ ($955n US) in guarantees for JDI and a 20b¥ short-term loan ($178m US) and will refinance 25b¥ of existing unsecured bonds into a 77b¥ ($688m US) long-term loan and 75b¥ ($670m US) in converts. 30b¥ ($268m US) of subordinated loans with INCJ will remain as is. No mention as to the dilution to public shareholders was made. The total financing would generate 117b¥ ($1.05b US) in additional capital, including the exercise of all conversion. The pre and post position for the major shareholder is shown in the next table.
Table 2: Pre and Post Funding Ownership
Table 2: Pre and Post Funding Ownership
While the general specs for the interim financing from INCJ are well defined, details of the transactions with Suwa are still under development and a number of government agencies will need to give approval before finalization. JDI does not expect to file with CFIUS (committee for Foreign Investment in the US), which has cast a skeptical eye on the acquisition of US companies by Chinese companies or nationals, but JDI does have an office in the US and while the production of LCD displays should not be considered a security risk, the Commerce Dept. will likely ask the deal to be reviewed by CFIUS. Given the control by Chinese organizations, CFIUS might feel it necessary to 'rule’ on the transaction, but given the desperate nature of the bailout, back-channel negotiations with the Japanese government will likely carry significant weight. Apple may also weigh in since they would be forced to write almost $900m that it pre-paid to JDI to help finance an LCD fab.
While JDI’s senior management could be questioned on their reading of the market, the company has always been a leader in small/medium LCD panels. However, Samsung dominates OLED small/medium panels. LG and the Chinese are adding capacity so JDI is late to the market and with little experience, they will be challenged to come up to speed quickly. Moreover, a 15K/month OLED fab requires ~$4b in capital, significantly less than the 232 billion-yen ($2.1 billion) bailout by the group. In addition, as more and more smartphone OEMs in China switch to OLEDs for their premium and high-end smartphones, excess LTPS LCD capacity will put pressure on JDI’s existing revenue base. Getting JDI to profitability will be no slam dunk and will need a progressive management capable of navigating not only the capacity issues but the requirement for flexible and foldable displays, for which JDI has no experience.
While JDI’s senior management could be questioned on their reading of the market, the company has always been a leader in small/medium LCD panels. However, Samsung dominates OLED small/medium panels. LG and the Chinese are adding capacity so JDI is late to the market and with little experience, they will be challenged to come up to speed quickly. Moreover, a 15K/month OLED fab requires ~$4b in capital, significantly less than the 232 billion-yen ($2.1 billion) bailout by the group. In addition, as more and more smartphone OEMs in China switch to OLEDs for their premium and high-end smartphones, excess LTPS LCD capacity will put pressure on JDI’s existing revenue base. Getting JDI to profitability will be no slam dunk and will need a progressive management capable of navigating not only the capacity issues but the requirement for flexible and foldable displays, for which JDI has no experience.
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Barry Young
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