Market Insight

[Display Dynamics] Display line construction financing challenges in China

April 02, 2018

Chase Li Chase Li Senior Analyst, Display Manufacturing Technology

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Key findings

  • Due to strong support from the government, many Chinese companies aggressively expanded LCD and AMOLED capacity from 2016-2017. However, due to tight fiscal policy, Chinese central government and state banks deployed stricter rules and regulations on loan applications, local land usage, bank business, and local states' financing platform. Some companies might face difficulties financing their recently announced fabs and ongoing construction.
  • Blephone sold 51% of its share to Tatfook, possibly to fund current LCD and AMOLED construction.

Tatfook, a company in the electroforming FMM business, reportedly will acquire 51% share of Chongqing Blephone, a company in the cell phone business. Tatfook announced its collaboration with Chongqing Image Tech building a Gen 5 LCD fab and a Gen 4.5 AMOLED fab in Liuyang, Hunan, China. This acquisition might be Blephone’s attempt to fund its ongoing display line construction. If so, financing might be a serious problem for newcomers wanting to start their display manufacturing businesses in China.

The Chinese government announced its display manufacturing support in its 13th Five‑Year Plan for 2016 to 2020— specifically, to upgrade manufacturing industry layout and develop semiconductor and related technology. As a result, many Chinese companies aggressively expanded their capacity in both LCD and AMOLED by building new display production lines with strong government support.

Aside from companies leaving display manufacturing, there are many newcomers like Chongqing Blephone, Chongqing Image Tech, AHZ Electronics, Lens Tech, and others that would like to build their own display lines with the benefit of Chinese government funding.

This scenario slightly changed at the end of 2017 when the Chinese central government and state banks deployed stricter rules and regulations on loan applications, local land usage, bank business, and limiting local states’ financing platforms. Those policies already had an impact on the financing of several ongoing projects and might continue influencing Chinese panel makers’ expansion plans in 2018 and even in 2019.

Business model of building a production line in China

To get a better understanding of how the new regulations influence ongoing construction and panel maker expansion plans, it helps to know how a production line is funded in China.

Unlike geographically concentrated display production lines in Korea, production lines in China are more likely to be spread among different locations and funded by local states. As a basic requirement for support from local government, panel makers must establish a new subsidiary in the place where the fab will be built. After establishing the new company, both the panel maker and the local government invest in the new company; those funds are used to start construction. Local state financing platforms are typically used to invest funds. This still leaves a big financing gap as the display manufacturing industry needs billions of US investment dollars. The gap will be filled by bank loans using the construction land for mortgages. The land is typically given to the newly formed company for free by local states.

Consider Trenso’s flexible AMOLED Gen 6 line as an example. After Hunan Trenso was founded in 2017, Lens Tech and the local government continued funding the new company. It has CNY 3 billion registered capital, with only 10% from Lens Technology and 90% from local states. The entire projects might cost around CNY 36 billion, with the CNY 33 billion gap filled by bank loans. This example makes the following points clear:

  • During 2016-2017, it will only cost a company a little to get the entire display fab built.
  • With financing mostly from local states and local banks, building new fabs in China is very sensitive to central government policy and state banks.

Financing challenges of building display fabs in China

Starting from the end of 2017, the Chinese central government and state banks started to deploy the following regulations (and others) for land usage and loan applications.

  • Much tighter control of local land use for industry and housing purposes
  • Strict limitations on the business and size of local government financing platforms
  • Decreased leverage rate, increased loan interest rate, decreased mortgage loan rate, and more serious loan application censorship
  • Limitations on the total loan amount a bank can give per year

The regulations are intended to control local states’ deficits, prevent the housing-related real estate market from overheating, avoid systematic financial sector risks, and prevent investment in older undesirable production industries (such as oil, energy, and steel).

As a result, it is expected that panel makers will receive less funding from local states and banks in China. The pressure of financing a fab in China has largely transferred to panel makers, which will eventually affect construction progress.

Impact on line construction

Financing impact depends on each project’s details and each panel maker’s financial position.

For projects by high-performing panel makers located in big and well-funded cities, financing might not be a big issue since panel makers and the local state government can fill the financing gap. However, as financing difficulty increases, local governments and panel makers might renegotiate terms. These fabs are still likely to be built on time or slightly behind schedule.

Projects with less well-funded companies might face some difficulties in financing, but they are still very feasible. They are likely to be built, but with longer delays.

For projects carried out by third-tier companies or new entrants, whether those lines will be built or not depends on local government and the details of those lines. Lines using smaller glass size with old equipment from Samsung Display or LG Display might face more financing challenges, especially with loan applications.

Projects in the early planning phase might be delayed by panel makers until getting funds becomes easier again.

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