On December 13, 2012, we had a conversation with Mr. Wu Yongjun, representative of Shenzhen Konka Securities, about the company's business progress. Comment: The company is in a period of improving its performance, and the number of boxes shipped with television products is growing faster than the average market rate, and the market share gap between domestic peers has narrowed. The profit growth rate exceeded the average growth rate of the industry, and gross margin was higher than the industry average, showing an upward trend. The company's gross margin remained between 15% and 16%. The reason for the improvement in performance was that the overall production, supply, and sales industry chain was compressed, the response speed was accelerated, the response time was reduced, and the cumulative losses were much reduced. Technology is being followed up quickly, and management and manufacturing capabilities have improved; management has been strengthened; new products have become the key. Different models of new products have different purposes, some for volume, some to make money, and others to deal with competitors; the overall speed of introduction of new products by the company has increased, and production and sales capacity has improved. Japan's decline has given up competitive space for domestic manufacturers, according to data from the “2012 Smart Home Appliance Market Demand Research Report”, Sharp's share of LCD TV sales fell to 3.4%, Panasonic's share of the plasma TV market also fell from 23.9% to 11.2%, and Sony LCD TV sales fell from 30% to less than 18%. The decline in Japanese companies' share brings market opportunities to other color TV companies, and the fall in sales of Japanese companies in the Chinese color TV market will release a market gap of 10 million units. Domestic brand smart TVs already occupy nearly 40% of the market share of flat screen TVs and have become the dominant force in the market, while domestic color TVs already account for 80% of smart TVs. Zhongyikang predicts that in 2013, domestic smart TVs will grow rapidly on the basis of this year, and sales volume of 26 million units is expected in 2012. The fall of Japanese brands has provided market space, and the company's overall revenue has risen this year. Smart TVs have become a key profit point. Global TV manufacturers are vigorously promoting smart TVs and raising the level of gross margins. According to the DispaySearch report, smart TVs accounted for 20% of total global TV shipments in the first quarter of 2012, up to 36% in Japan, 30% in China, more than 29% of smart TVs in Western Europe, and 18% in North America. From a regional perspective, China has become the world's largest smart TV market, with shipments of nearly 3 million units. At present, the awareness of smart TVs among domestic consumers has reached 80%. According to the Pioneer Industrial Research Institute, global smart TV sales will reach 52.85 million units in 2012, accounting for 20% of total global TV sales. Domestic market: In 2011-2015, the compound annual growth rate of smart TVs was 61%, and the number of companies grew by more than 50%. According to data from Aowei Consulting, in the first half of 2011, there were more than 130 smart TV products in the domestic market. The penetration rate of smart TVs reached 7.5%. Konka's smart TV business accounts for 20%. As a leading manufacturer of traditional TVs, Konka has strong brand strength and a pioneering advantage in the smart TV field. The time when the company launched an important innovative “big new product” is before May 1st and 11th, and new product judgment and sales feedback are critical; gross margin can reach 30%-40%; in the overall industry, product convergence, strategy convergence, price convergence, brand traction and ability to develop new products are the key; the company has been actively making technical reserves and moving in the direction of new technology products. Currently, the company's highest-end product is 84-inch smart TVs, which were only launched in September and October, with a gross margin of over 50%, but shipments are extremely low; next, large 65-inch and 32-inch smart TVs are shipped at 200 million. The state of TV and smart TVs next year Better than this year, promoting direction for fellow business owners. The panel side is worried in the short term. In the medium to long term, panels account for about 80% of the cost of color TV products. According to Dispaysearch statistics, the price of Opence panels continues to rise, showing a trend of continuous price increases. Prices for 32-inch, 42-inch, and 46-inch panels have risen by 4%, 10.7%, and 1.4%, respectively. The current increase in panel prices is supported by demand, and there is a possibility that panel prices will continue to rise. The company believes that panel prices are bullish, and the procurement cycle is much shorter. It used to take a month and a half, and overseas market purchases are mainly concentrated on large sizes. BOE procurement mainly focuses on 32 inch small sizes. Upstream procurement is continuously improving, negotiation capabilities are increasing, and upstream procurement screening is of high quality and affordable; 50% of the modules are self-made, and large panels can contribute more than a dozen points to gross margin; small panels are a few points. Companies with significant advantages in three- and fourth-tier channels have more than 20,000 dealers across the country. Small dealers use cash in stock. The development of e-commerce is conducive to reducing dependence on Suning and Gome; the marketing characteristics are a combination of multiple promotion methods. In addition to advertising campaigns, terminal blocking features are obvious, and methods such as promoting new products and star effects are superimposed, which strongly boosted sales. The company's sales model in the tertiary and fourth-tier markets is through dealer agents. There is no bargaining pressure from chain stores in the primary and secondary markets, and the gross margin of television products can be kept above 20%. The company is in a period of improving its performance. The number of third- and fourth-tier dealers will increase, and dealers with higher efficiency will be replaced by those with low efficiency. The company already has the ability to adapt to policy adjustments. After being driven by household appliances going to the countryside for a few years, color TV has basically become popular in rural areas. The renewal and replacement rate of home appliances and the growth characteristics driven by consumer preferences are becoming more and more clear. Brand advantages are obvious, and home appliance companies with large-scale channels will continue to benefit. After the end of the policy, Konka will take countermeasures in three areas: the first is to balance prices. Prices are stabilized through measures such as resource adjustment and policy inclination, and price differences after subsidies are abolished are eliminated. The second is to strengthen terminal channel construction. Third-tier and fourth-tier markets, such as counties and townships, have unique characteristics that are different from the primary and secondary markets. There is no penetration of chain stores such as Gome and Suning. Konka refrigerators will invest more in the construction of stores and the like in these markets to improve terminal channels. The third is to step up terminal promotion efforts. Combining the characteristics of the tertiary and quaternary markets, diversified promotion methods are used to further stimulate sales. The end of the policy of going home appliances to the countryside will inevitably cause changes in purchasing power. In response to this, the company concentrates superior resources and flexibly adjusts market strategies, and targeted product marketing will stimulate product demand to a certain extent. The company's price advantage is remarkable. Konka's positioning is popular, the average price is the lowest, and the pricing capacity is strong in the level 3 and 4 market. The gross margin of the same model is far higher than the level 1 and 2 market. The company has an absolute advantage in the level 3 and 4 markets. The competition in the tier 1 and 2 markets is fierce, and the differences are constantly narrowing. The company's main export targets are basically stable and fluctuate slightly; exports are mainly small-sized televisions, with a gross export margin of 10% and sales of more than 2 billion dollars. The profit of the white power business for the whole year is generally. Currently, white electricity has only entered the third and fourth level markets, and has not entered the primary or secondary market; the revenue growth rate is not too fast. The mobile phone business is not optimistic and barely maintains a break-even balance, and smartphones have no obvious advantage. The risk indicates that competition for black electricity is incandescent, and channels are highly concentrated. The profit forecast anticipates earnings of 0.17, 0.20, and 0.26 yuan per share for 2012, 2013, and 2014. Considering the company's future performance growth rate expectations and industry conditions, we believe that PE 17 times 2012 is more reasonable and gives the company an “increase in weight” rating.