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Why the Display Business Often Doesn’t Make Sense
May 10, 2020
Over the past month, there were reports that OLED panels used in tablets and notebooks attracted the attention of Chinese panel makers that were building Gen 6 rigid fabs. Samsung, which up to now had a monopoly on the business that was ~3m mid-size panels/year in 2019. Using our projection of OLED tablets and notebooks and subtracting the foldable forecast (as shown in our article on foldable displays, we arrive at a cumulative revenue forecast thru 2025 of $90m. Projecting out to 2030 raises the total to $318m cumulatively. We assume that the BOE and EverDisplay Gen 6 rigid fab capex begins in 2020 and revenue starts in 2021. We assume that Samsung’s market share would come down from 100% to 50% by 2026 and maintain that share thru 2030. EverDisplay is assumed to utilize an existing fab, so the calculations herein, show the return on the greenfield fab built by BOE. A Gen 6 fab has a capex of ~$4b each and the free cash flow would come from net profits plus annual depreciation. The next table shows the calculations for profit margins of 5%, 10%, 15% and 20%.
Table 1: Gen 6 Fab Tablet/Notebook Profit Margin
May 10, 2020
Over the past month, there were reports that OLED panels used in tablets and notebooks attracted the attention of Chinese panel makers that were building Gen 6 rigid fabs. Samsung, which up to now had a monopoly on the business that was ~3m mid-size panels/year in 2019. Using our projection of OLED tablets and notebooks and subtracting the foldable forecast (as shown in our article on foldable displays, we arrive at a cumulative revenue forecast thru 2025 of $90m. Projecting out to 2030 raises the total to $318m cumulatively. We assume that the BOE and EverDisplay Gen 6 rigid fab capex begins in 2020 and revenue starts in 2021. We assume that Samsung’s market share would come down from 100% to 50% by 2026 and maintain that share thru 2030. EverDisplay is assumed to utilize an existing fab, so the calculations herein, show the return on the greenfield fab built by BOE. A Gen 6 fab has a capex of ~$4b each and the free cash flow would come from net profits plus annual depreciation. The next table shows the calculations for profit margins of 5%, 10%, 15% and 20%.
Table 1: Gen 6 Fab Tablet/Notebook Profit Margin
Source: OLED-A
Trying to justify a new fab, when the capex is not subsidized, using the OLED tablet/notebook market is impossible as the NPV remains negative over 10 years, even when the net profit is 20%. Over the last 5-years net profits in the panel industry have averaged less than 5% and recently have been negative. Since there is already excess capacity in the OLED industry and utilization rates are often less than 60% or 70%, there is little justification of growing demand, which can be satisfied with the existing capacity. The only way the new fab makes financial sense is due to the Chinese government’s subsidy of ~80% of the capex for a new fab. In that case, the NPR of the panel makers capex investment would range from $66m at 5% net profit to $1.85b at 20% net profit.
Table 2: Net Present Value for Gen 6 based on 80% Subsidy and No Subsidy
Source: OLED-A
Given the Chinese governments continuing policy of subsidizing new capacity investment, panel makers in Korea, Japan or Taiwan remain at a significant financial disadvantage and must rely on superior technology to compete.