Submitted by Trey Miller as part of our contributors program.
Everyone knows that the mobile phone market is one of the fastest growing segments of the technology sector, but few people have been able to profit from this growth. Over 4.6 billion cell phones are currently in use around the world, double the number of six years ago. Because 80% of mobile phones use touch screen panels, the touch screen market is one way that investors have been able to profit.
Indeed, touch screens are one of the fastest growing areas of electronics manufacturing, expanding at 14% a year and expected to exceed $9 billion by 2014. Though touch screens are mainly used in phones and tablets today, future applications could include medical equipment, interactive medical charts, electric appliances, remote control devices, and display boards on cars, boats, and planes. Such growth and potential make touch screens an attractive investment option, but American investors are somewhat limited in their choices.
The major supplier of touch screens to Apple is Samsung, but Samsung is not listed on the NYSE or the NASDAQ. Other companies that make touch screens include LG Display (NYSE:LPL) and Panasonic (NYSE:PC), but these companies also make many other products, so investing in them is not a way to specifically invest in touch screens.
Then there is Sollensys (OTCQB: SOLS), a mid-cap company with headquarters in South Korea that had its effective IPO in September 2012 when it signed a merger agreement with a Nevada shell corporation so that it could be traded in the US. Sollensys makes touch screen panels, which are the main components of touch screen modules. The company also has plans to license its touch screen technology to other manufacturers, with a signed agreement for its first licensee factory in Guatemala.
Sollensys is a small company swimming in a sea crowded with larger, sharp-toothed competitors. Its success—perhaps its very survival—depends on whether it can achieve its ambitious expansion goals over the next couple of years. But for investors willing to face the risk, it does offer targeted exposure to the undeniable growth of the touch screen market.
Founded in South Korea in 2010, Sollensys manufactures three components of touch screen modules: glass, touch sensor panels, and LCD displays. It puts these components together and sells the combined product for use in 3.5-inch, 4-inch, and 10.1-inch mobile devices, including iPhones. It also produces custom sized panels for customers who request them. CEO Gwan-je “Frank” Woo built the company on the premise that touch screens would lead the next generation of digital devices, just as keyboards have led the previous generation of digital devices. He explained, “The keyboard system has led the whole world for 50 years. Touch is a technology that will lead for the next 50 years.”
Efficient Production and Betting on the High End
Sollensys’ key advantage appears to be its touch screen production system, which checks for imperfections and prevents total failure of a part during the manufacturing process. As a result, the company claims a screen defect rate in its two existing factories of less than 5 percent compared with an industry average of 30 percent.
Because of its lower defect rate, Sollensys says it can provide finished products to customers in less time and at a lower cost than its competitors. Sollensys’ screens are designed for high-end phones and tablets, although it forecasts market penetration in a variety of consoles, kiosks, and industrial applications. It believes the low-cost cell phone market is losing ground as people demand increasingly sophisticated devices with high-performance touch screens. Accordingly, the company’s screens use capacitive technology, which provides higher performance and durability than the more conventional resistive technology. Sollensys executives are betting that the trend toward more sophisticated touch screens will only accelerate going forward.
Touch screens were slow to gain acceptance when they were first introduced in the early 2000s- the years of the PDA craze. They began to take off after Apple introduced the first iPhone in 2007. Samsung, LG, Motorola, and other global brands quickly followed suit. Today, touch screens are a $16 billion market, and it is expected to double by 2018. Some 888 million touch screen panels will be sold this year, and the figure is expected to rise by 50% to 1.3 billion by 2014. Smartphones account for 75% of the demand, with tablet computers next on the list.
Users of these products are demanding ever more complex features, such as flexible screens and 10-finger recognition. High-tech niches like these are where Sollensys expects to derive future profits. The company holds a portfolio of 29 patents for touch screen technology. It has a stable of in-house designers and engineers examining existing products for shortcomings that its own technology could be used to fix.
The patent portfolio helps protect against competition, but it also creates another potential income stream: licensing. A new $15-20 million factory that the company is planning to build in Guatemala will be the first factory to produce Sollensys touch screen panels using the company’s technology under license. Sollensys has signed an agreement with the Guatemalan government to build the factory stretching over two blocks under a 25-year government concession. The factory will make touch screens ranging from 3 to 10.1 inches, and hopes to produce 500,000 screens per month, which adds up to $5 million in monthly exports alone. Construction is due to begin this year, and will last seven to nine months.
Guatamala is centrally located for exportation of its products to North and South America. And of course, production in a low-wage country will also keep costs down. Guatamala welcomes the factory, as the facility will add 90 new jobs to the economy and provide high-tech job training.
“They not only bring capital, but knowledge. These companies become schools for Guatemala and provide technical skills,” said Luis David, director of Invest in Guatamala, which tries to draw foreign investment into the country. Sollensys will send its engineers to the Guatemalan plant to provide training for six months to a year. After that, when production begins, Sollensys will receive a 2% royalty per product. Total production from Sollensys’ three plants in South Korea, China, and Guatemala is estimated to reach 1.5 million units per month. The company is also exploring licensing deals in Turkey, Russia, and Southeast Asia.
Strong growth in the smartphone and tablet sector has intensified the competition to supply touch screens and their components to Apple, Samsung, and other end-product suppliers. Two of Sollensys’ main touch screen panel competitors are AU Optronics (NYSE: AUO) and LG Display (NYSE: LPL). AU Optronics was the first mass producer of TFT-LCD panels in Taiwan and offers a large variety of sizes ranging from just 1.2 inches to 71 inches. It has nine factories in Asia and two in eastern Europe. In 2008, it began production of solar panels as well as touch screen panels, yet the solar business remains a minor part of its business. LG Display is an even bigger company, with 117 operations worldwide, including eight factories in South Korea. In addition to touch screens, it manufactures appliances like washing machines, refrigerators, cleaners, and air conditioners. Still, screens and mobile communications technology make up about 65% of its revenue (they are 86% of AU’s revenue). In 2011, LG Display’s worldwide market share was 33% of notebook computers, 24% of panels for television, and 26% of total TFT-LCD panels. It got over a billion dollars from Apple in an agreement to supply LCD panels.
Despite industry growth, however, both these companies incurred a net loss in the last four quarters, especially AU, which lost 17% of its sales. AU has lost about 75% of its stock value in the last five years, and LG Display has lost 38%. Analysts have conflicting views about these companies, with some rating the stocks at “strong buy” and others at “hold” or “sell.” LG Display has one “strong sell” recommendation, but JP Morgan counters, saying that the company could gain up to 60% from its current value, with fears over cuts of Apple orders are overstated. Sollensys does not have analyst coverage at this time.
Another hurdle both competitors face is litigation. In September, 2012, AU Optronics was fined $500 million for participating in a price-fixing conspiracy for thin-film transistor LCD panels. Two executives received prison sentences. In December 2010, the EU fined both LG Display and AU Optronics for their part in an LCD price-fixing scheme. Nevertheless, both companies continue to have a presence in an expanding market, and some analysts believe LG Display is ripe for a turnaround this year.
Investors are Watching Now—Will Sollensys Perform?
As one of the largest over-the-counter IPOs of the past 12 months, Sollensys has attracted significant investor attention and appreciated without a lot of publicity. The company is in a market with outstanding future potential, but its success depends on gaining market share… and the competition is fierce. Its ambitious goal is to generate a quarter-billion dollars in revenue by 2015. Now that it is traded in the US market, investors will be able to judge for themselves whether it stays on track to meeting its target.