Panel prices have been falling since 2021Q4 and are now at the bottom of the five-year history. at the same time, the upgrading of the company's product-end structure has been smooth, and the main business profit margin of the smart screen is expected to be significantly repaired against the background of scissors difference. In addition, the company is actively expanding its business boundaries and achieving breakthroughs in smart connectivity, smart home, full-category distribution and photovoltaic business, which is expected to open up long-term growth space. It is estimated that the company's EPS from 2022 to 2024 will be HK $0.49, 0.60, 0.72 respectively. Using the segment valuation method, the company will be given a target price of HK $5.50, maintaining a "buy" rating.

With the upgrading of the company's product structure, the mid-and high-end transformation has achieved a lot. Under the circumstances of repeated epidemic situation and weakening demand in the domestic market, the overall scale of retail sales in the industry is under pressure. According to Ovi data, online and offline sales of 2022H1 color TV industry are + 0.9% and 32.8% respectively compared with the same period last year. Since last year, the company has changed its strategic thinking to focus on the middle and high-end market and accelerate the upgrading of its product structure: 1. In line with the trend of large screen, the proportion of large smart screen sales is increasing rapidly. According to the company announcement, 2022Q1 China market smart screen sales of 65 inches and above accounted for 35.9% (year-on-year + 14.4pcts), of which 75 inches and above smart screen sales were + 125.8% year-on-year, much higher than other sizes. 2. Deep cultivation of Mini LED and QLED new display technology, to consolidate the company's advantages in Mini LED display technology, the spring launch of three new QD-Mini LED smart screen products, the company currently accounts for more than 5% of Mini LED+QLED product technology. The upgrading of the product structure has led to a significant improvement in the company's ASP. According to Ovi data, the online and offline prices of 2022H1 TCL brands are + 12.4% and 29.7% respectively compared with the same period last year, and the industry average prices in the same period are 15.8% compared with the same period last year.

The overseas market share continues to rise, and the European market is growing brightly. Since the beginning of this year, monetary policy in the world's major economies has tended to tighten, consumer subsidies have withdrawn from the superimposed epidemic, and global logistics has not yet returned to normal, and overseas market demand has been under pressure. In this context, the overall operation of the company is sound, and its market share has increased rapidly, effectively hedging the pressure brought about by the downward demand from overseas. According to the company announcement, the growth rate of companies in the European market is eye-catching, with 2022Q1 sales + 16.1% year-on-year. Considering that the company has successfully entered the European mainstream channel and ranked among the top three in France and other places, it is expected that the experience and achievements will be gradually replicated to the United Kingdom, Italy, Poland and other places, thus driving the sustained growth of the company's overseas business. The North American market was dragged down by the industry, and the company's sales declined slightly, but its market share steadily increased to 14.4%, putting it in second place.

Panel prices continue to decline, and profit repair is expected under the trend of scissors difference. Under the impact of global panel price increases, the company's cost pressure is highlighted. In 2021, the company's overall gross profit margin is 16.7%, year-on-year-2.3 pcts; continuing business return net profit rate is 1.6%, year-on-year-2.0pcts. With the commissioning of the new production line, panel prices have declined rapidly since the fourth quarter of last year, and as of June 2022, panel prices of all sizes have fallen by more than 50% since the high point in mid-2021, the lowest level in five years. With the decline in panel prices, the company's profitability is expected to repair quickly, and we expect gross profit margin to be restored to 2020 levels by the end of the year.

The diversified layout of innovative business is expected to open the second growth curve. Based on its own channels and brands, the company diversifies to expand its business boundaries and achieve breakthroughs in smart connectivity, smart home, full-category distribution and photovoltaic business:

1. Photovoltaic business: upstream and downstream coordination, abundant orders on hand, strong certainty of annual performance. The company focuses on household distributed photovoltaic projects, sets up experienced teams, forms industrial coordination with TCL Central, and makes full use of Central's advantages in the field of silicon wafers and components to achieve rapid volume expansion. 2. Full-category distribution business: rely on TCL electronics overseas channels, brand advantages, improve the intelligent IoT full-category layout. In 2021, the company's full-category distribution income reached 6.37 billion yuan, + 71% compared with the same period last year.

Risk factors: panel prices are rising rapidly, product prices are falling sharply, and overseas demand is lower than expected.

Investment advice: panel prices fell faster than expected, panel prices of all sizes fell back to the lowest level in five years, and the company's main business profitability of smart screen is expected to be significantly repaired. We raised our EPS forecast for 2022-2024 to HK $0.49xpx 0.72 (the original forecast for 2022-2023 was HK $0.47x0.57). From a long-term perspective, the company has the advantage of integrated supply chain, and the global TV share is expected to continue to increase; Internet business profitability is strong, and it is expected to achieve steady growth based on TV advantages and gradually transform into an Internet company; diversified business layout is expected to open up long-term growth space. Using the segment valuation method, it is estimated that the company's hardware and Internet business deduction non-net profit in 2022 will be HK $340.73 million respectively, in which the hardware business refers to Skyworth Group and Hisense Video valuation level, and based on a certain margin of security, it will be given 8x PE in 2022. The profit end of the Internet business is expected to maintain a growth rate of more than 20% in the next three years. With reference to the level of comparable companies in the industry, and based on the principle of prudence, the annual profit growth rate of 0.75x PEG,2022 is expected to be about 20%, corresponding to 15x PE.

Taken together, the company is given a target market capitalization of HK $13.7 billion, corresponding to a target price of HK $5.50, maintaining a "buy" rating.