Don't Underestimate Universal Display's New BOE Deal

Universal Display  (NASDAQ: OLED  ) just announced a new agreement with BOE Technology Group, the largest LCD panel producer in China and one of the top five display makers in the world. This sounds like great news -- and it is -- so why did the market initially push shares of Universal Display down around 1% in Tuesday's early trading? (The stock ended the day up nearly 3%.)

First, keep in mind this is "just" an expanded evaluation agreement, so it doesn't bear anywhere near the same weight as the long-term licensing and material supply agreement Universal Display signed with Samsung  (NASDAQOTH: SSNLF  ) in mid-2011. And while Universal Display said this deal will allow it to both "broaden its collaboration with BOE and supply additional" phosphorescent OLED display materials, such an evaluation agreement isn't likely to have a significant positive impact on Universal Display's material sales in the near future.

BOE is still a small OLED player...
BOE has a modest AMOLED line in Ordos for producing small and medium AMOLED displays. In addition, BOE only recently invested in a large-screen AMOLED pilot line at its Hefei-based G8.5 fab. Using the new pilot line, BOE developed the 55-inch OLED TV module sample exhibited at SID 2014 Display Week less than a month ago.

Universal Display, BOE, Samsung, LG Display

BOE's 55" 4K OLED television prototype at SID 2014 Display Week, Credit: oled-info

Meanwhile, BOE's South Korean competitors continue to extend their respective leads in the OLED industry: Samsung, for one, already produces tens of millions of small and medium-sized OLED displays for its Galaxy series devices. Meanwhile, LG Display  (NYSE: LPL  ) only a few days ago confirmed plans to pump another $788 million into ramping up its own large-screen OLED TV production by the second half of this year.

... but don't underestimate its influence
At the same time, however, investors would be wise to heed the incredible long-term implications of Universal Display's evaluation agreement with BOE.

As BOE Technology Chairman Wang Dongsheng noted in a press release: "UDC is the leading phosphorescent OLED material supplier. Through establishing close partnership, we hope to push forward the development of OLED industry together with UDC and other industry partners."

This meshes with LG Display CEO Han Sang-beom's statement last week that Chinese tech manufacturers are "trend setters" in the global OLED industry. That's why he also suggested LG Display is working to forge deals with key Chinese players to supply OLED panels and accelerate OLED TV adoption. The end goal, an LG Display official later revealed, is to bring OLED TV prices down to a mere 10% premium to competing LCDs.

That's just fine for Universal Display. But Universal Display investors should be particularly encouraged that BOE  -- which notably commanded a 56% share of all display panels used in mainland China in 2013 -- wants to pursue OLED manufacturing independence on its own terms. 

In the end, this not only serves as further validation of Universal Display's flagship technology, but also will ultimately diversify its revenue stream and reduce its overreliance on Samsung and LG Display. As a longtime shareholder myself -- and considering Universal Display's past volatility in the face of chunky quarterly sales -- I'm happy to wait patiently for BOE to establish itself as another key player in the OLED space.

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