TCL Group recently disclosed its 2018 annual report. The company's revenue was 113.36 billion yuan, up 1.6% year on year; net profit after net profit and net profit after deducting net profit were 3.468 billion yuan and 1,587 billion yuan respectively, with year-on-year growth rates of 30.17% and 33.32% respectively.

During the reporting period, the gross profit of the Group's main business decreased by 9.41% year on year due to falling panel prices, while net profit after deducting non-return and net profit continued to grow due to various cost cuts.

In January 2019, the Group's major asset restructuring plan was reviewed and approved by the shareholders' meeting. It will divest smart terminals and supporting businesses and further focus on semiconductor display and materials business.

Furthermore, the company reviewed and approved the “Plan on the Repurchase of Certain Public Shares” in January. The total amount of shares to be repurchased is not less than 150 billion yuan and not more than 200 billion yuan. From the initial repurchase on February 14 to March 5, the company has repurchased a total of 46.76 million shares, accounting for 1.08% of the company's total share capital, with a total transaction amount of about 478 million yuan.

Focusing on the semiconductor display and materials business and repurchasing shares, is the recession cycle in the panel industry nearing its end?

Financial Overview: Structural adjustments reduce expenses, deduct 30% increase in non-profit

In recent years, TCL Group has continuously adjusted its business structure. After restructuring and divesting 39 non-core companies last year, the number of employees dropped from 89,750 to 31,645. The integrated core business mainly includes industries such as semiconductor displays (mainly Huaxing Optoelectronics) and smart terminals.

In 2018, due to falling panel prices, Huaxing Optoelectronics's sales revenue declined year on year, and gross profit margin narrowed markedly; the smart terminal business group improved in 2018, the color TV business (TCL Electronics) continued to grow, and the losses in the mobile communication terminal business narrowed. Overall, the gross profit of the Group's main business fell 9.41% year on year to 20.394 billion yuan.

Despite the decline in gross profit, various expenses have been reduced, and the Group's net profit after deduction has continued to grow.

Financial reports show that due to exchange rate fluctuations, the company's financial expenses in 2018 were reduced by about 692 million yuan compared to the previous year, a year-on-year decrease of 41.56%. In addition, sales expenses, management expenses, and R&D expenses decreased by 6.56%, 8.06%, and 2.13%, respectively.

In January 2019, the Group's major asset restructuring plan was reviewed and approved by the shareholders' meeting. It will divest smart terminals and supporting businesses and further focus on semiconductor display and materials business. After the restructuring was completed, the company's main business structure was adjusted to three segments: semiconductor display and materials business, industrial finance and investment venture capital business, and emerging business groups:

How is the company's semiconductor display business operating? How is the relevant production line construction progressing? After the sharp decline in panel prices, as supply and demand conditions improved, how did the industry pattern change?

Huaxing Optoelectronics: Panel prices fell, gross profit fell 40%

The core operator of the Group's semiconductor display business is Huaxing Optoelectronics.

According to data compiled by Guoxin Securities, in 2018, Huaxing Optoelectronics ranked fifth in the global LCD TV panel ranking by shipment volume and shipping area. The top four in terms of shipment volume were BOE, LGD, Inntron, and Samsung, and the top four in terms of shipping area were LGD, Samsung, BOE, and Inntron.

In 2018, Huaxing Optoelectronics's two 8.5 generation lines - T1 and T2 projects continued to maintain full production and sales, with a total investment of 3,593 million glass substrates, an increase of 7.95% over the previous year.

However, due to the concentrated release of production capacity in the early stages, the industry is oversupplied, and panel prices have continued to decline since the second half of 2017. Take 55-inch LCD panels as an example. According to data, panel prices began to fall after peaking in May '17, and reached 145 US dollars/piece in December 2018, a year-on-year decline of 17.61%.

Financial reports show that in 2018, Huaxing Optoelectronics's main business revenue was 27.537 billion yuan and gross profit was 5.076 billion yuan, down 9.64% and 40.26% from the previous year respectively. Revenue and gross profit accounted for 24.53% and 24.89% of the Group's main business, respectively.

South Korea's production capacity withdrew, LCD industry supply and demand improved?

The development of display technology has undergone three major changes: black and white CRT tubes → color CRT tubes → LCD (liquid crystal displays) → OLEDs (organic light emitting diodes). Currently, OLED technology is developing, and production costs are higher than LCD due to low yield.

The downstream applications of LCD are mainly TVs, mobile phone screens, IT products, in-vehicle industrial control, etc., of which TV demand accounts for about 70%. With the popularity of high-definition and large-size televisions, high-generation cables have a more competitive advantage in economic cutting efficiency, and the global LCD industry is moving towards 10+ generation lines.

The annual report shows that in November 2018, the company's 11th generation line-t6 project was put into operation. It mainly produces new large-size display panels such as 65 inches and 75 inches. Construction of the 2nd 11-generation line-T7 project, which is positioned as an 8K and OLED large-size display panel, has begun.

Over the past 8 years, with the entry of Chinese panel manufacturers, industry supply has increased, LCD panel profits have gradually declined, and South Korean manufacturers, such as Samsung, have gradually withdrawn from LCD competition and switched to OLEDs.

New production capacity has been reduced, and the original production capacity has been withdrawn. Some brokerage research reports believe that the supply and demand pattern of the industry will improve. Guoxin Securities “expects that the tight balance between supply and demand in the industry will be repeated after the second quarter of '19, which will help large-size LCD panel manufacturers improve their profit levels.”

OLEDs are known as “next-generation display technology” and have self-emitting characteristics, while flexible OLEDs, in addition to having self-emitting characteristics and better display effects, can be bent, folded, and stretched at any time.

With the gradual increase in the penetration rate of OLEDs and breakthroughs in related technologies, will LCDs gradually withdraw from the historical stage like CRT video tubes?

Flexible panels were mass-produced in '19, and industry competition is fierce

After Samsung proposed the concept of a “foldable screen,” flexible OLEDs began to be included in future plans by panel manufacturers.

In terms of the OLED screen layout, in June 2017, Huaxing Optoelectronics plans to invest 35 billion yuan to begin construction of the 6th generation flexible LTPS-AMOLED display panel production line (T4 project for short) in Wuhan. The annual report shows that the company's T4 project will achieve mass production in 2019, with a planned production capacity of 45K/month.

In terms of the progress of flexible panels in China, manufacturers such as BOE and Shentianma have now been able to mass-produce and ship, and Huaxing Optoelectronics is slightly behind.

According to the announcement, BOE has announced the construction of 4 6th generation flexible AMOLED production lines for OLEDs, with 4 lines planning a monthly production capacity of 192K.

Among them, the 6th generation flexible AMOLED production line in Chengdu achieved mass production and shipment of products in October 2017, and now the overall yield is over 70%. The sixth generation flexible AMOLED production line in Mianyang is under construction and is expected to be put into operation in 2019. The estimated production dates for the 6th generation flexible AMOLED production line projects in Chongqing and Fuzhou are in 2020 and 2021, respectively.

Wuhan Tianma's 6th generation LTPS AMOLED production line under Shentianma has the ability to produce both rigid and flexible AMOLED screens. Rigid screens were officially mass-produced and shipped to brand customers in early June 2018, and flexible screens have already been mass-produced. At the same time, the company is actively promoting the construction of the sixth generation LTPS AMOLED production line phase II project (Wuhan). After the second phase of the project is completed and put into operation, the 6th generation LTPS AMOLED production line project and the sixth generation LTPS AMOLED production line phase II project will collectively form the capacity to produce 37.5 thousand flexible AMOLED display panels per month.

In addition, the Vishino Gu'an G6 AMOLED production line, with a design capacity of 30K/month, is currently in a climbing state; the Hefei G6 AMOLED production line has a design capacity of 30K/month, and construction began in late December 2018.