As the process of domestic substitution accelerates, what is the current situation of A-share polarizer companies?

In recent years, with the release of high-generation production capacity in mainland China, competition in the LCD panel market has become increasingly fierce, accelerating the reshuffle of the industry. Korean panel manufacturers have successively shut down LCD production lines, which has increased the concentration of the industry, mainly reflected in the concentration of market share to mainland Chinese manufacturers. Industry organizations predict that China's LCD panel market share will exceed 50% this year.

The transfer of the LCD panel industry to China will certainly drive the development of the upstream industrial chain, and polarizers, as the upstream materials of LCD panels, will also benefit. However, according to the author's inquiry, under the situation of insufficient supply in the domestic polarizer market, A-share related companies are unable to get rid of the current loss situation?

There is a large space for domestic substitution

As a key component in LCD production, the market demand for polarizers is significantly affected by the development of the downstream panel industry. Although the growth rate of LCD panels has slowed down in recent years, it is still the main source of demand for polarizers. IHS expects that polarizers will maintain a year-on-year growth rate of about 6% from 2018 to 2020E, with the growth momentum mainly coming from the growth in demand for LCD panels and the high growth of OLED panels.

Due to the high technical threshold of polarizer production, the mainstream polarizer manufacturers are still concentrated in Japan and South Korea. Since 2013, LG Chem, Sumitomo Chemical, and Nitto Denko have been the three giants in the polarizer manufacturing industry. With the development of the polarizer industry in Taiwan and mainland China, the market share of the three giants has also dropped from 72% in 2014 to 66% in 2018. The market share of domestic companies such as Sanlipu and Shengbo Optoelectronics has increased from 0% to 8%. However, compared with the market share of domestic panel production capacity, the supply of local polarizers is still relatively tight.

In recent years, Chinese panel manufacturers have continued to release new production capacity, with production capacity concentrated in mainland China, and the global LCD TV panel production capacity competition landscape has changed dramatically. According to Qunzhi Consulting data, in the first half of 2020, Chinese mainland panel manufacturers accounted for 55.5% of the global TV panel market, an increase of 9 percentage points over the same period last year.

As panel production lines shift to mainland China, leading to the accumulation of upstream industrial chains, Japanese and Korean companies are gradually withdrawing from the polarizer market. From the development history of polarizers, the prosperity of the polarizer industries in Japan, South Korea, and Taiwan all benefited from the strong demand for local panel industries. It is an inevitable development trend for upstream and downstream to be highly coordinated, and for panel factories to drive industrial agglomeration by supporting local supply chains.

Not long ago, LG Chem divested its polarizer business and sold it to Shanshan Technology, a domestic A-share company. In addition, Nitto Denko has gradually closed some low-profit polarizer factories and turned to cooperating with domestic companies to provide polarizer-related technical support. While international brands are gradually fading out, domestic polarizer manufacturers are divesting other assets and focusing on developing polarizer products. In October last year, Shenzhen Textile planned to divest related assets of property management and printing and dyeing businesses to bet on the polarizer industry.

It can be seen that with the rapid development of the domestic LCD panel industry, my country's polarizer industry has also accelerated its development. However, my country's polarizer self-sufficiency rate is still very low, and there is a large gap in supply. In particular, there is a large space for domestic substitution in the large-size polarizer market. It is expected that mainland polarizer manufacturers will usher in a good development opportunity.

Why is it difficult for A-share companies to get rid of their current loss-making situation?

At present, domestic polarizers are actually in short supply and there is a large production capacity gap. However, there are relatively few domestic polarizer manufacturers in China, and there are only two companies listed on the A-share market: Sanlipu and Shenzhen Textile (Shengbo Optoelectronics). However, in the context of supply exceeding demand in the market, the operating performance of Sanlipu and Shenzhen Textile is not satisfactory.

In the past two years, under the trend of domestic substitution, the revenue of the two polarizer companies listed on the A-share market has also increased significantly. Among them, Sanlipu's revenue increased from 880 million yuan in 2018 to 1.448 billion yuan in 2019, a year-on-year increase of 64.60%; and Shenzhen Textile's polarizer business revenue also reached 1.43 billion yuan in 2019, an increase of 71.80%.

Compared with the substantial growth in revenue, the gross profit margins of the two companies have declined year by year. From 2017 to 2019, Sanlipu's gross profit margins were 25.98%, 17.97%, and 16.60%, respectively; while Shenzhen Textile's polarizer business gross profit margins were 9.19%, -5.29%, and 0.18%, respectively, which are lower than Sanlipu.

As for the reason why the gross profit margin has been declining year by year, industry insiders pointed out that due to the lack of domestic production of upstream raw materials for polarizers, unstable batch quality, and immature technology, the added value that domestic polarizer companies can create is very limited, and it is even more difficult to increase prices.

What is more noteworthy is that compared with their foreign counterparts, the polarizer production lines of the two A-share companies face the problem of insufficient competitiveness. Industry insiders pointed out that the width of the polarizer determines the production capacity and cutting efficiency, and wide-width production lines are the trend of the future. At present, there are 5 main production lines with different cutting widths for polarizers, namely 500mm, 650mm, 1330mm, 1490mm, and 2500mm. Among them, 500mm and 650mm are collectively referred to as narrow widths, and the other three are collectively referred to as wide widths, of which 2500mm is currently called ultra-wide width. The width of the polarizer production line has a great impact on production capacity. Wider production lines are a key factor in competitiveness. Wider production lines can be used in the manufacture of large-size TV polarizers. The large-size TV market is also the fastest growing panel market in the world.

Main production lines and production status of A-share polarizer companies

However, at present, whether it is Sanlipu or Shengbo Optoelectronics, the widest width of the production line is 1490mm. Theoretically, the maximum area of ​​polarizers that can be produced by the 1490mm TFT polarizer production line is 65 inches. However, compared with the 2500mm TFT polarizer production line, the polarizer cutting utilization rate used in the production of LCD panels larger than 43 inches is lower, so the unit material cost is higher.

Taking Sanlipu as an example, its subsidiary Hefei Sanlipu Optoelectronics' wide-width (1,490mm) TFT polarizer production line (capacity of 10 million square meters) was put into production at the end of October 2016, and mass production began in 2017. In 2019, it achieved revenue of 621.9798 million yuan and a net profit loss of 69.0426 million yuan. Compared with 2018, the loss increased by 47.7593 million yuan.

In order to get rid of the current loss situation, the two A-share companies continue to adjust their product structure and accelerate the construction of ultra-wide polarizer production lines. Shenzhen Textile's Q3 net profit is expected to increase by 198%. Shenzhen Textile said that the product order structure adjustment of its subsidiary Shenzhen Shengbo Optoelectronics Technology Co., Ltd. has been effective, production capacity has been increased, average gross profit margin has increased, and the main polarizer business has continued to reduce losses year-on-year.

In addition, Sanlipu plans to raise no more than 1.1 billion yuan in a private placement in February this year to invest in the construction of an ultra-wide 2500mm LCD polarizer production line. Sanlipu believes that the market size of polarizers for TVs is huge, and to become a global first-tier polarizer company, it must strive for market share. The 2500mm production line planned for private placement will further solve the scale problem, and after reaching a corresponding scale, gross profit will be significantly improved.

However, the construction period of polarizer production line is generally 2-3 years. By then, Sanlipu and Shenzhen Textile may face fierce market competition.

Supply and demand tend to be loose, and there is downward pressure on prices in the future

At present, the global supply and demand ratio of polarizers is in a tight balance, but 2020 may be a turning point. IHS expects that 10 new polarizer production lines will be put into operation by 2022. On the demand side, the global new production capacity of LCD panels in 2020 was 21 million square meters, while the withdrawal of production capacity reached 36 million square meters, and the annual panel production capacity area decreased by 15 million square meters. "Overall, by 2022, the supply and demand of polarizers will tend to be loose, which will cause the production capacity of polarizers to exceed demand by 24%, turning into overcapacity. Due to overcapacity, there will be downward pressure on the price of polarizers in the future, which will benefit panel manufacturers such as TCL Huaxing." A person related to TCL told Jiwei.com.