Core views
The company is a global leader in TV and IFPD foundry. In 2023, IFPD foundry was affected by a high base and declining industry demand. Revenue scale and share declined. Emerging categories such as smart TV OEM and displays contributed to revenue growth, and profit margins declined in the short term due to rising panel costs and product restructuring. The company announced a new round of equity incentives, with a wide range of incentives, stable performance assessment targets, and a recovery in industry demand. It is expected that smart TVs and emerging categories will maintain rapid growth in 2024, while the IFPD business will reach an inflection point.
occurrences
On April 8, 2024, Kangguan Technology announced the 2024 Stock Options Incentive Plan.
The company plans to grant a total of 266.632.72 million stock options to incentive recipients, accounting for about 3.89% of the total share capital. The total number of incentive targets, including directors and supervisors, core management personnel, core technical (business) personnel, and other employees determined by the board of directors to require incentives is no more than 2154.
On April 9, 2024, Kangguan Technology released its 2024 annual report.
In 2023, the company achieved revenue of 13.447 billion yuan (YOY +16.05%), net profit of 1.283 billion yuan (YOY -15.37%), and net interest rate of 9.54% (YOY-3.54pct); of these, Q4 achieved revenue of 4.885 billion yuan (YOY +95.04%), net profit of 418 million yuan (YOY +13.20%), and net profit of 8.55% (YOY-6.18pct).
Brief review
1. Revenue analysis: IFPD may have reached an inflection point, TV & innovative displays contributed to growth 1) Intelligent interactive display: sales volume of 1.98 million units (YOY +80.4%), with an average price of 1942.81 yuan (YOY -49.5%), achieving revenue of 3.841 billion yuan (YOY -9.0%), accounting for 29%. The volume increase is mainly due to a high increase in shipments such as OEM for e-sports displays with lower average prices.
In terms of smart interactive tablets, shipments fell 23.5% year on year, and revenue decreased by 32.6% year on year, mainly due to the high base and decline in industry demand. However, the company maintained the number one shipment volume in the world (EN) in 2023, and the company increased its efforts to develop emerging markets and began contributing in the second half of 2023. At the same time, as the European and American markets enter the renewal cycle, IFPD demand will reach an inflection point; in terms of professional displays, shipments increased 173.9% year on year, mainly for products such as e-sports display foundry and medical displays. The company's e-sports display ODM covers different bases, models, resolutions, sizes, etc., to meet the needs of users with different consumption habits. In 2023, the OEM shipment volume of e-sports displays was 1,429,900 units (YOY +241.39%), and sales rose 169.97%; medical displays are located in hospitals and health centers in most provinces and cities, and shipments are expected to maintain a high growth trend.
2) Innovation category: sales volume of 700,000 units (YOY +272.3%), average price of 1374.40 yuan (YOY -38.5%), achieved revenue of 962 million yuan (YOY +128.9%), accounting for 7%. In 2023, the company's own brand “KTC” display ranked 7th in sales in the domestic online retail market and 4th in the e-sports segment (AVCRevo); “Hao Li” commercial tablet market share ranked second in China (Lotu Technology); “FPD” ranked at the top of the LED makeup mirror category and creative gift lists for many months in a row, and online sales were stable. The company will increase investment in innovative display products in the future, and it is expected that its revenue scale and share will continue to increase.
3) Smart TV: Sales volume of 7.92 million units (YOY +15.4%), average price of 974.42 yuan (YOY +3.7%), achieved revenue of 7.717 billion yuan (YOY +19.6%), accounting for 57%, and volume and price have risen sharply. In the smart TV ODM business, sales volume was 7.31 million units (YOY +35.3%), with an average price of 996.78 yuan (YOY -3.9%), achieving revenue of 7.290 billion yuan (YOY +32.0%), accounting for 54%. In 2023, the company's OEM shipment volume ranked fifth in the world (Rotu Technology) among manufacturing suppliers, and the new customer Element contributed 661 million yuan in revenue; in terms of design and processing OEM business, the shipment volume was 610,000 units (YOY -60.6%), with an average price of 704.27 yuan (704.27 yuan) YOY +16.8%), achieving revenue of 426 million yuan (YOY -54.0%), accounting for 3%. The proportion of large sizes increased, with sales volume of 50 inch and above 2,064,500 units (YOY +102.80%), accounting for 38.78% (YOY+18.56PCT). As the company's manufacturing and supply chain capabilities improve, customers are more willing to choose ODM's overall product solutions.
4) Parts sales: On the premise of guaranteeing its own production needs, the company provides local customers with localized procurement or sells parts that do not meet production requirements to earn a certain price difference and achieve revenue of 927 million yuan (YOY +86.8%), accounting for 7%.
2. Profit analysis: cost and structural adjustment combined with increased cost investment, profit level is under phased pressure I. Gross profit side: cost rise+structural adjustment, gross margin decline
Affected by rising panel costs and product restructuring, the company's gross margin declined in the short term. The gross margin in 2023 was 17.83% (YOY-3.30pct), of which Q4 gross margin was 18.23% (YOY-8.89pct). By product, the gross margin of smart interactive display in 2023 was 25.92% (YOY -3.24%), the gross margin of the innovative display was 14.42% (YOY -4.99%), and the gross margin of smart TV was 15.41% (YOY -2.09%); by region, the gross margin of domestic sales in 2023 was 15.17% (YOY -2.14%), and the gross margin of export sales was 18.34% (YOY -3.59%).
Panel price supply and demand are still tight in the first half of 2024. Panel prices are expected to be high and low throughout the year, and the gross margin level will remain stable in 2024.
II. Cost side: Build your own brand and increase investment
The cost ratio for the 2023 period was +1.58 pct year on year, and Q4 was -3.52 pct year on year. Among them, the Q4 sales/management/ R&D/finance expenses ratio was -0.51/-1.29/ -1.09/-0.62 pct year on year, mainly due to the sharp increase in revenue for Q4 innovative displays and smart TVs, while the increase in cost scale was less than revenue.
The company is speeding up the layout and construction of innovative displays and private brands, and the cost rate is expected to increase during 2024.
III. Net profit side: Net profit margin declined, and the net interest rate for 2023 is expected to remain stable at 9.54% (Yoy-3.54pct) in 2024, of which the Q4 net interest rate is 8.55% (YOY-6.18pct), mainly due to a decrease in gross margin and an increase in expense ratio.
Combined with changes on the gross profit side and expense side, net interest rates are expected to remain stable in 2024.
Investment suggestions: Interactive tablets expand new customers in new markets, TV foundry benefits from growing demand in emerging markets, rapid revenue expansion in independent brands and innovative categories, and broad future growth prospects and profit margins. We predict that in 2024-2026, the company will achieve net profit of 13.78/15.82/1,888 billion yuan, corresponding EPS of 2.01/2.31/2.63 yuan, and the current stock price corresponding PE is 13.80/12.02/10.52 times, maintaining a “buy” rating.
Risk analysis
1) Decline in market demand: In terms of smart TVs, the global TV market has entered a stage of stock competition. Market demand overdraft effects in developed countries and regions such as Europe, America, and Japan are gradually showing. At the same time, high inflation has led to a decline in residents' actual purchasing power, and demand for TV shipments will continue to be sluggish. According to TrendForce Jibang Consulting data, global TV shipments in 2023 were about 195 million units (YOY -2.7%), a record low in nearly ten years. In terms of smart interactive tablets, IDEEN data shows an overall decline in IFPD shipments for global education and conferences in 2023, and industry competition gradually intensified.
2) Panel price rebound: Inventory of top panel manufacturers continues to decline, and combined production cuts have increased, forming a support for market supply and demand. According to AVC Revo data, the price of TV panels of various sizes began to stop falling in October 2022, then experienced a slight increase in price. Compared with September 2022, the average price of 75/65/55/50/43/32 inch TV panels increased by a total of $67/68/50/40/17/11 in January 2024.
3) RMB exchange rate fluctuations: Long-term exchange rate fluctuations will affect the business strategies of foreign trade enterprises. The US dollar exchange rate fluctuates greatly in the short term. According to data from the China Foreign Exchange Trading Center, the current spot exchange rate of the US dollar to the RMB is above 7.2, which is at a high level compared to the same period last year.