Shulou(Shulou.com)11/24 Report--

The eve of New World.

Photo source @ Visual China

As one of the representatives of the high-tech industry, the panel is now replicating the "supply-side reform" that has been staged in traditional industries such as coal and steel.

Over the past few decades, the panel industry has been familiar with its asset-oriented, long-cycle and high-cost characteristics, so the cyclical nature of the industry has been paid more attention. However, its high gross margin, high-tech, high-growth side is relatively less perceived.

In fact, the current operating environment of the panel industry is similar to that of the coal and steel industries before and after the supply-side reform.

At the beginning of supply-side reform, almost all of the coal industry, including China's Shenhua, Shaanxi coal industry and other industry leaders, are facing many problems such as income growth, profitability and so on. For example, China Shenhua, which now enjoys unlimited scenery in the capital market, has also faced the dilemma of negative business income growth for two consecutive years, single-digit growth in one year, and huge losses in successive years.

Similarly, there is steel. After the supply-side reform started in 2016, the industry concentration increased continuously through merger and reorganization and elimination of backward production capacity, giving birth to industry giants such as Baowu Iron and Steel and Hebei Iron and Steel. With the continuous elimination of low-end production capacity in the industry, the operating data of industry enterprises and the performance of stock prices in the capital market have rebounded strongly.

The once cyclical nature of the panel industry was once similar to traditional industries such as coal and steel-when the market was good, the industry made a big profit, and when the market was bad, we lost together. All the glory is prosperous, the other is damaged.

But now in China's panel industry capacity accumulation, the widest range of applications in the field of LCD, the balance between supply and demand is quietly tilting: Samsung, LG, JDI and Taiwan factory Youda Optoelectronics have withdrawn or made it clear that they have closed the LCD production line, while large-size LCD with stronger profitability, after BOE and TCL enterprises concentrate on building the Gaoshi line, the industry concentration is extremely high.

With fewer players, the bargaining power of enterprises will be enhanced, and the motivation of the reincarnation situation in the past cycle is weakening. the deepening of "supply-side reform" is already rewriting the investment logic of panel companies. If investors continue to look at the industry with heavy-cycle investment logic, I am afraid they will eventually be educated by reality.

Break into the gate of the "New World"Chinese panel industry catch up with the advanced every day, not advanced every day." More than a decade ago, Chinese LCD panel companies were often reduced to negative examples. Head enterprises such as BOE fell into losses because of long-term high-intensity investment, and it was common for outsiders to blame them.

At that time, foreign-funded enterprises relied on technological patents and brand advantages to carry out strategic suppression and systematic blockade of Chinese enterprises. In the round of card war, Chinese enterprises once had to catch up behind the giants. However, after nearly 20 years of evolution, China has occupied the absolute C position on this stage, and is in the world leading level in technology, scale, management and other dimensions.

Thanks to the strong growth of Chinese companies such as Beijing Oriental and TCL Huaxing, China ended the 17-year dominance of South Korean companies in this key field in 2021 and has continued to take the lead ever since.

Source: Omdia

From the dominance of Japan, to the struggle for hegemony between Japan and South Korea, to the rise of Taiwan, and then to the victory of China. Over the past 20 years, Chinese enterprises have won the first place in the world in a field that has a bearing on the lifeblood of the country's information industry. There is an open line and a dark line in this matter.

The bright line is that Chinese companies have won a resounding victory in the competition with Japanese, Korean and Taiwanese companies. The dark line is that the process of defeating Japanese and South Korean companies is itself a "supply-side reform". Many investors see the success of Chinese panel companies, but ignore the success, the industry cycle attribute will be gradually weakened, thus entering a new cycle of sustained and stable profits.

In other words, investors usually only pay attention to the open line of industrial transfer, but ignore the dark line of industrial evolution logic. As a result, the capital market acknowledges the strength of the current leading enterprises, but investors generally still look at the panel industry in the traditional re-cyclical perspective, believing that it is still difficult to escape the cycle disaster, and selective neglect of the cycle weakening caused by the concentration of the industry pattern.

You know, in the first half of 2023, three Chinese companies, BOE, TCL Huaxing and HKC (Huike), occupied the TOP3 of the industry, with a market share of nearly 70%, and controlled the absolute voice of the industry.

From an external point of view, had it not been for the outbreak of household consumer demand brought about by the epidemic and the US-led quantitative easing stimulus policy, the withdrawal of Japanese, South Korean and Taiwan companies such as Samsung would have been faster, and the pattern of the top three Chinese enterprises would have come sooner. The sharp rebound in the industry in 2021 masked the shortcomings and problems of backward production capacity, and after the tide receded in 2022, Japanese, South Korean and Taiwan companies began to accelerate their withdrawal.

Within the industry, the large-size TV panel production capacity of major enterprises has basically stopped expanding. On the demand side, the demand of the large-size market continues to recover. Under the tripartite superposition, the periodic fluctuations of the industry have begun to converge.

This means that the panel industry will soon enter a new profit cycle. This is a "new world" that is no longer disrupted by a large number of competitors and is no longer so rolling.

02 puncturing cycle reincarnation from CRT to LCD at the beginning of this century, the mainstream display technology has undergone round after round of "arms upgrading". The new production line enjoys a more efficient economic cutting advantage through larger glass substrates, and at the same time, the iteration in the accuracy of lighting equipment also makes the end products have competitive advantages in energy consumption and color, which greatly promotes the progress of the industry and consumer experience.

However, the industrial upgrading from G1 to G10 generation line always revolves around the main line technology of LCD. From the birth of technology to stable mass production, the industry has experienced enough time and attempts; from the market and user choice, comprehensive specification experience and cost required manufacturing capacity has also been scaled and solidified. The mainstream display technology has entered the micro-iterative period.

Moreover, with the commissioning of the Gaoshi generation line, the amount of investment in the industry is also becoming more and more huge, and the scale of more than 45 billion is prohibitive to onlookers. At present, the glass substrate corresponding to G11 has an area of nearly 10 square meters and a thickness of 0.5mm, which puts forward stringent requirements for upstream suppliers' transportation or supporting factories. "expanding a higher generation line" has also become a trend rarely talked about in the industry.

From the income statement of the existing panel players, depreciation cost is the "big head" that has to be considered, and with the landing of investment in the new production line, the proportion of depreciation will increase. However, when the industry enters a mature period, the stock depreciation of the first-mover players will expire ahead of schedule, which will have a cost advantage for the newcomers under the premise of technical micro-iteration. Therefore, for newcomers, the economic account between investment and return is not cost-effective. For example, the depreciation amount of BOE in the first quarter of 2023 is about 8 billion yuan, which is a very frightening figure for any company that wants to enter this field.

Whether it is the subjective consideration of the return on investment, or the objective aspect of the law of industry development, it is very difficult for new players to enter the panel industry.

Moreover, some of the opponents who used to face each other have now become a new relationship of competition and cooperation. Most typically, in 2020, TCL Huaxing acquired a 60 per cent stake in Samsung's only panel factory in China and a module factory. Nowadays, TCL Huaxing and BOE are also important suppliers of Samsung TVs and high-end mobile phones.

The "fight and kill" relationship between industries has begun to become a multi-level cooperative relationship.

At the same time, the change of industrial pattern drives the whole supporting supply chain to migrate to the mainland as a whole, such as modules, polarizers, glass and so on, which not only realizes self-control, but also presents a strong trend of the supply chain as a whole. At present, Chinese mainland shows that the localization amount and self-sufficiency rate of special materials have reached nearly 60%. Take polarizers as an example, the production capacity of Chinese manufacturers of polarizers has exceeded 50% of the world in 2023. Display driver chips, liquid crystals, glass substrates and other related production capacity also continue to concentrate to the mainland. The improvement of the localization rate of the upstream supply chain has further consolidated the competitive advantage of mainland panel manufacturers.

On the whole, as mentioned earlier, the "supply-side reform" of coal and iron and steel after clearing the production capacity has formed a competitive pattern dominated by the head enterprises. Judging from the actual situation of these industries, after the market reshuffle, the cyclical fluctuation will turn to the trend of year-round moderate growth.

Prior to the sharp fluctuations in panel prices, the root cause is the "mismatch of theoretical production capacity and demand". The construction cost of panel production line is often tens of billions of yuan, and the construction cycle can reach several years. Compared with the current demand, its capacity release is lagging behind and has obvious "bullwhip effect". However, when the industry pattern is solidified, the whole industry begins to pursue the "adaptation of actual production capacity and demand" with the new mode of fixed production.

At present, the leaders of the panel industry are all Chinese enterprises, and the top three hold 70% of the market share. The market erosion of ups and downs over the past years has also made industry players eager to return to the track of rational and steady growth. This is highly consistent with the direction of the current government. It is also of great benefit to the promotion of enterprises, industries and national science and technology strategies.

To sum up, whether it is objective market changes, or subjective corporate consciousness, the panel will usher in the tipping point of cycle weakening and profit strengthening. The new industry environment has required enterprises to put stable and sustainable profits in the first place. The better performance of the head company and the better performance of the stock price and market value of the company in the capital market are already predictable.

03 breaking the shackles of valuation is different from consumer electronics such as mobile phones, PC and Pad. TV has movie experience requirements but no portable restrictions, low price elasticity, relatively stable demand, and 10% stable replacement demand every year.

The volatility of TV annual shipments is relatively low, and consumers' sensitivity to prices is relatively "passivated", which has fluctuated within plus or minus 6% over the past decade. Even in 2022, known as the "cold winter of consumer electronics", TV shipments fell by less than 4 per cent, with smartphones falling 11.3 per cent (IDC) and PC plummeting 16.2 per cent, the biggest year-on-year decline in history.

Today, the large-size LCD TV panel market is in a stable profit period after bottoming out, which means that industry leaders will continue to benefit in the future. And the dividend for large panels is not short-term, but long-term.

Driven by large size, after less than a year of cycle adjustment, TCL Technology reported that it had turned a loss into profit, and in the second quarter it achieved a net profit of 890 million yuan, while the semiconductor display business lost 2.15 billion yuan in the first quarter, while in the just released third quarterly report, the semiconductor display business has achieved a net profit of 1.82 billion yuan in a single quarter, which has been greatly improved compared with the same period last year and the quarter-on-quarter comparison.

At the same time, the LCD sector is also structurally divided. With the increase in consumer demand for large-size TVs, the demand for sizes 55 inches and below has been replaced by large-size growth such as 65-75-80 + inches, which shows that the process of large-size TV panels is still accelerating. In May, the weighted average size of TV panels exceeded 50 inches for the first time, an all-time high. Omdia's research also points out that the market's pursuit of larger sizes is irreversible.

In terms of price increases, the price of TV panels of 55 inches and above has risen by more than 20% since February, of which the price of 55 inches and above panels has risen by more than 50% this year. It can be seen that the larger the size, the greater the increase.

Large-size panel "volume and price double rise" to drive the overall recovery of the industry, as the leader of large-size liquid crystal panels, TCL Huaxing is the only TOP3 in the first half of the year to achieve shipments and shipping area increased enterprises. At present, the area share of TCL Huaxing products with sizes 55 inches and above has increased to 79 percent, 55 inches, 75 inches, and 65 inches, respectively, and the market share of high-end TV panels such as shadowless screens and 120HZ has firmly ranked first in the world.

Today, 60% of TCL Huaxing's revenue comes from large-size products. Based on the average price increase, the company's large panel business will bring at least 20 points of gross margin improvement.

Price and depreciation are directly related to the economic benefits of panel manufacturers, while prices rebound, production line depreciation gradually expires, two-way go, profits pick up, cash flow improves. In 2022, TCL technology cash and cash equivalents reached an all-time high of 33.676 billion yuan. At the same time, the net cash flow generated by its operating activities also showed signs of improving day by day, rising by 27.5% in the first three quarters of this year to 16.14 billion yuan.

It can be predicted that, as the competitive pressure of panel companies slows down in the future, their gross profit margin will gradually move closer to the data of the prosperity cycle, which means that the "technological attributes" of their product prices and profitability will be more obvious. financial data and valuation levels are more like technology companies. This is a very tempting thing for investment.

In the previous capital markets, the PB of the panel index has been in a range of 1-2 times in the past five years, and it is rare in history to be more than 3 times. Strong cycles and excessive capital expenditure have been suppressing the imagination of the capital market to the panel industry.

Another fact that is very friendly to investors is that historically, panel duo BOE An and TCL Technology have maintained a generous dividend practice. In the past five years, the ratio of cash dividend to net profit has exceeded 20%. Since listing, the total dividend of BOE has exceeded 19 billion yuan, and TCL technology has more than 12 billion yuan. From the perspective of dividend yield, it is higher than Ping an Bank, Ningbo Bank and other joint-stock banks, but the level of capital expenditure of the two industries is not the same.

Professional investors know that one of Buffett's most important stock selection criteria is companies that can stand the test of time in the economic cycle and preferably offer high dividends. Holding stocks with long-term stable dividend income means that investors can get a "safety pad" against market fluctuations. In the macro environment with increased uncertainty, the growth of corporate profitability, the number and stability of cash dividends are all important indicators that long-term investors pay more attention to.

At present, JD.com Fang and TCL Technology, both PB and PE, only have a historical score of about 10%, which is at the bottom of history. It can be predicted that its valuation will rise with the improvement of corporate profitability, which will attract the attention of more growth investors. And its high dividend characteristics also help to enhance the attractiveness of insurance, industry and other long-term large funds, as well as more value investors.

To sum up, panel companies represented by TCL technology are ushering in a "new story" and gradually replacing the original "old thinking". The improvement of its cash flow and the continuous increase in the amount of dividends can further change its traditional image in the eyes of investors.

These exciting expectations are likely to happen in the near future, and at the moment, it is a rare "sowing time".

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