Quantum Dot Dark Horse
By: Clay Chase, SD Torrey Hills Capital
Friday, April 10, 2015
Dark Horse (noun):
1) a racehorse, competitor, etc., about whom little is known or who unexpectedly wins.
2) a person who reveals little about himself or his activities, esp one who has unexpected talents or abilities.
There have been some very interesting developments on the quantum dot front over the past month or two since we last reported on QTMM in our 2015 Consumer Electronics Show (CES) Travel Digest - and we wanted to take this opportunity to bring everyone up to speed - and give you a sense of what we have been observing in this rapidly developing and very fluid market space. Also, we feel that based on where the industry looks to be heading we wanted to restate what we see as the key value drivers held presently by San Marcos, TX based Quantum Materials Corp. and to further explain how these drivers have set the Company on a course that we believe will soon “converge” with the expanding quantum dot universe in a way that very well could propel QMC right to the front lines of the flat panel display market's rapid integration of quantum dots to power the next generation of flat panel color displays.
Yes, that is a bold statement - so let's back up a minute and lay out some of the framework that we believe supports this thesis. If you remember from the CES Travel Digest (and if you haven't read that yet you should do that now so you understand what quantum dots are and the context of the truly massive market potential these emerging nanocrystalline semiconductor materials represent - link here), many of the major consumer electronic giants (ie: Samsung, LG, TCL, Sharp, and many others) came to the Las Vegas convention center this January and proceeded to unpack (and prominently display) an impressive fleet of next generation flat panel displays with color technology driven by quantum dots (yes they also brought plenty of OLED powered sets as well, and we'll talk about that in a bit). Now we all know that CES acts as the CE industry's showcase to launch new technology/product innovations but it also has traditionally been a venue they can “test market” new ideas and depending on the reception you either see these “ideas” get integrated into commercial manufacturing lines - or if the reception is not so great - some of those new tech directions get summarily shelved. Well, based on the amount of ink post CES along with the follow on press releases from the consumer electronics industry cognoscenti, quantum dots got a MAJOR ENDORSEMENT from product representatives at the show and we are seeing the industry moving quickly to both produce and put quantum dot driven sets on the shelf at your local neighborhood electronics store. The most recent evidence to this fact is the frequency of TV spots for Samsung's new “SUHD line” which is accelerating now on a number of both network and cable channels. You have likely seen a few of these ads yourself (with the tagline of “The Best TV Deserves the Best TV”) as they are ramping up the media buy on this ad to prep the market for this new line of “Super” displays that incorporate both 4K resolution and high color gamut (thanks to quantum dot technology). If you haven't seen it yet, here's a link to the spot here. We fully expect many of the other panel manufacturers to follow suit soon with their own "next gen panel powered by quantum dot" ads - but as Samsung has the deepest pockets, they are moving first with the media blitz.
This is the first plank of our quantum dot platform - the fact that after several years of the “promise” of quantum dot powered tv's, we are now seeing the manufacturers “walking the walk” and not just “talking the talk” on the integration of quantum dots into flat panel displays - and while we do see that the price tags of these new sets is still pretty high (~$3K+ range for the 50inch plus category), we know that this is simply page 1A of the consumer electronics playbook where they bring the sexy new technology out in the higher price band of the product line for the first year or so as they know there is a certain percentage of the buying public that is not price sensitive and will pay the higher list prices just to have the latest and greatest new tech before the rest of the world gets in - and then a year or so later they start dropping the prices and ramping up the volume for mass market penetration. So we see good volume in 2015 for quantum dot TV's but expect the numbers to really get interesting in 2016. Several industry research groups have been weighing in recently with their estimates to the rapid growth of the quantum dot market with the “guestimate” numbers being roughly a $5 billion per year industry by 2020 - here's the link to one of these reports here. That's some pretty significant growth folks when you consider that the current quantum dot market is a very small fraction of that number (we have seen current estimates in the $300-400 million/year range comprised primarily of very high priced per gram ($2K-$10K/gram) medical diagnostic/optical technology applications).
The next plank in our QTMM thesis is the fact that quantum dots seem to be gaining traction against the gold standard in flat panels - that standard of course being OLED based technology. Now OLED has held the high ground on top line picture quality for several years now and with the amount of money the two majors (Samsung and LG) have poured into dedicated fabs and the number of technologies/vendors that support this format we realize that even though prices have not been brought down much yet for these sets due to what we understand have been the inability to reduce high scrap rates of OLED panel's - this is still going to be a viable format in the industry for some time to come and after seeing a number of these sets at CES we can see why as they are pretty awesome. But, there are still some wrinkles with OLED that are proving tough to iron out which include high consumer price tags, difficulty in bringing down production costs and some crystal stability issues - that we see have opened the door for quantum dots to establish a beach head. To add some “color” to this point we are including a recent blog post from a formerly die-hard OLED supporter that has now pivoted over to the quantum dot camp after seeing a Samsung head to head comparison between OLED and QD's which highlighted many of the attributes that quantum dots bring to the table (article here). We also wanted to bring to your attention another recent article citing the benefits of quantum dots vs. OLED wherein quantum dots were shown to be 2.5 times brighter than standard LED and had a picture quality 2 times better (per a Samsung Gulf Electronics GM) than OLED. A link to that article is here.
So far we have talked mostly about the industry direction and not Quantum Materials Corp. specifically - so let's take a minute to see what they have been up to over the last couple of months. In early February of this year, QMC came out with what we saw at the time as a very material announcement wherein they stated their ability to produce “heavy metal free” green and red quantum dots (they don't need to produce blue as most manufacturers are replacing the white LED backlight in their designs with a blue LED and using the red and green quantum dots to produce the R and G in the RGB spectrum). At this time, there is still plenty of discussion in the market as to whether or not the consumer electronics industry is going to go “cadmium based” or “heavy metal free”. From where we sit and what we have read and gleaned, the market is dead set on going “cad free”, so the fact that QMC was able to produce heavy metal free quantum dots “with increased uniformity and enhanced stability” is a big deal and put them in a very exclusive club of manufacturers that can do this AND do it in a high volume production process. This is the key - as the ability to produce heavy metal free quantum dots is out there and can be done by a number of other quantum dot manufacturers, but it is our belief that QMC's proprietary “continuous flow chemistry” patents for high volume, low capital (and what we understand to be relatively low operating) cost production is a key value driver in differentiating themselves from competitors. In that release QMC stated they had been producing and shipping samples of these cad-free dots to a number of consumer electronics manufacturers for testing. The fact that at this stage of the game many of these manufacturers were still in the dev stage of integrating quantum dots into their designs made us confident that the supply agreements for future product build up was still very much in play and that is the next plank in our thesis - which is the fact that QMC has focused on high volume production scale up and not product design. Now, several of QMC's competitors have focused more on product design and integration and that strategy has worked out well so far as several of them have been named as suppliers to electronics manufacturers in the early stage of the product adoption cycle. Our contention here is that now that the CE manufacturers are seeing that this technology has legs, the discussion has progressed to the more advanced, “next generation” integration techniques and the key product parameters are not drop in design capability but are now starting to center on: overall quantum dot performance, ability to rapidly scale up annual capacity and the biggy of course - price per gram - which are all categories that QMC has focused their efforts and we believe they will score highly against their competitors in each of these specification categories. Among much of the topical evidence we see on this front is the fact that the DOW/Nanoco partnership has made several less than stellar announcements of late related to their joint quantum dot manufacturing facility in Cheonan, South Korea as well as the fact that Samsung has chosen not to purchase quantum dots from them. Here is a copy of the recent news on these developments here.
We realize this is a long post and we are almost done, so stick with us a bit longer because we're getting to the really good part now: “Convergence”.
So if we put on our best pair of night vision glasses and try and look into the not too distant future, we see a massive opportunity opening up for QMC (as well as several of the other quantum dot manufacturers that can produce high quality, low cost heavy metal free quantum dots - let's face it, this is very likely going to be a rapidly expanding industry and we certainly don't expect to be the only supplier in the game) as they have now built a very solid platform to come to market with. A big part of that platform is the fact that they will be taking delivery of a second micro-reactor in Q2 that has an annual capacity of 2 tonnes/per year (that's 2 million grams!). Combined with their first pilot reactor, this will put them at an annual capacity of 2,250 kilograms (or 2.25 million grams per year). This metric also puts them in rarified air as we are not aware of very many other companies in the space that have claimed this level of annual capacity. Stephen Squires, QMC's CEO, has oftentimes stated to us in conversations that his primary goal has been to be in a position to supply large quantities of high performance quantum dot's that match manufacturers' design specifications - and that is where we see the Company positioned at this time: being at the “convergence” of high quantity demand with the ability to supply that demand - and it look as if that date is either here now - or coming very soon.
So now we get to the title of this post “Quantum Dot Dark Horse”. Well frankly, if you look at the handicappers odds on QTMM, they certainly aren't expecting this horse to finish up in the front of the pack (share price of $0.15 and market cap of US$44 million vs. Nanoco's market cap of US$364 million), and that's actually really OK with us as this current market price looks like a fantastic entry position - and given where we see them positioning themselves with their patented manufacturing/processing methods and low capital cost scale up abilities - we see a very bright future indeed for QMC and their shareholders over the next couple of quarters as this industry gets past its infancy and moves towards the mainstream (and we haven’t even talked about quantum dots in solid state lighting, anti-counterfeiting, solar energy and a host of other applications that will likely follow on closely behind the flat panel industry).
In fact we liken QMC to that kid in high school that we all sort of knew. You know the type - really didn't get noticed much, didn't really hang out with the “popular kids”, didn't go to all the cool parties. Really just kept to themselves, kept their head down, did good in school and you never heard much about them after graduation - until of course when the ten year reunion came around and you find out that “kid” is now living in an eight million dollar house in Silicon Valley and just took his IP tech/software startup public to the tune of several billion dollars. Yep, we see a lot of that “kid” in Quantum Materials Corp. at this time and expect the rest of the world to see that soon as well!
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