Core views
The company released a quarterly report. Revenue grew by double digits, and performance fell by more than 20%, in line with expectations. It was mainly due to rising machine prices driving up TV business revenue, but active inventory clean-up led to structural adjustments and panel costs continued to increase, so profit margins declined in stages. We believe that as inventory removal in North America comes to an end and sporting events approach, the company will launch themed marketing activities and increase shipping efforts. The cost increase of superimposed Q2 panels will narrow and the price of the whole machine will continue to rise. It is expected that subsequent shipment growth and profit margins will gradually recover, and Q2 is expected to show an inflection point in business improvement.
occurrences
On April 22, 2024, Hisense Vision released its report for the first quarter of 2024.
In 2024Q1, the company achieved operating income of 12.702 billion yuan (YOY +10.61%), net profit to mother of 467 million yuan (YOY -24.81%), and a net margin of 3.67% (YOY-1.73pct).
Brief review
1. Revenue analysis: The average price of the whole machine increased markedly. TV revenue grew steadily in 2024Q1, achieving main business revenue of 11.859 billion yuan (YOY +14.91%), Qianzhao Optoelectronics's revenue of 556 million yuan (YOY +39.80%, 2023Q1 combined revenue of 398 million yuan), and other business revenue of 842 million yuan (-27.56%). The TV business is expected to achieve steady double-digit growth in revenue.
In terms of sales volume, in terms of domestic sales, according to Lotu Technology data, the total shipments of the three traditional brands (including sub-brands) of Q1 Hisense, TCL, and Skyworth bucked the trend by 5.2% (the industry fell 0.9% year on year). Due to Hisense's high base for the same period last year, while referring to Aowei Cloud Network data, Q1 online and offline KA retail sales volume is expected to decline by single digits. In terms of export sales, according to EXPECTED data, Hisense's global shipments fell 3% year on year in January-January, mainly affected by inventory removal in North America. Europe and emerging markets maintained steady growth, and export shipments are expected to drop slightly.
Looking at average prices, in terms of domestic sales, according to AVC Revo data, Q1 China's online retail prices rose by single digits year-on-year. Aowei Cloud Network data showed that Hisense's Q1 online and offline KA retail prices were +22% and +15%, respectively, mainly driven by an increase in the share of large size+high-end products. The average domestic sales price is expected to rise 20%. In terms of export sales, due to shipping factors, overseas costs and price transmission are lagging behind domestic sales, and competition is intensifying overseas, especially in North America. It is expected that the average increase in export prices will be less than that of domestic sales.
2. Profit analysis: The profit level is declining in the short term, and the long-term improvement trend can still be expected I. On the gross profit side: structural optimization and average price increase, gross margin will still decline 2024Q1 gross margin of 15.76% (YOY-2.41pct), mainly due to rising panel costs and phased product structure adjustments due to inventory clean-up.
In terms of cost, according to AVC Revo data, the 2023Q4 panel price increased by an average of about 40%, the 2024Q1 increased by an average of about 30%, and the cost pressure continued to increase. In order to cope with rising cost pressure, brands raised the price of Q1 machines to hedge part of the cost impact.
Looking at the structure, in terms of domestic sales, Hisense's high-end products have achieved remarkable results, and the share of large-scale and high-end products continues to increase. According to Aowei Cloud Network data, the share of sales of 70 inch and above Q1 Hisense TVs increased by 7 pct and 11 pct year over year, while the share of online and offline KA's Mini LED sales increased by 1 pct and 3 pct year over year, and the share of sales increased even more. In terms of export sales, overseas gross margin declined in stages due to the company actively cleaning up inventory for sporting events and phased product structure adjustments.
II. Expense side: Expense control is better, and the cost rate is reduced during the period
The cost ratio decreased by 1.25 pct year on year during 2024Q1, with sales, management, R&D, and finance expenses ratios of -0.64/-0.18/-0.43/-0.005 pct year on year, respectively.
III. Net profit side: The pace of shipment affects profit margins. Short-term profit is under pressure. Net profit to mother net profit of 467 million yuan (YOY -24.81%) was achieved in 2023Q1, with a net margin of 3.67% (YOY-1.73pct), mainly due to short-term structural adjustments due to strategic inventory clean-up, and increased panel cost pressure, leading to a phased decline in profit margins. We believe that as inventory removal in North America comes to an end and sporting events approach, the company will launch themed marketing activities and increase shipping efforts. The cost increase of superimposed Q2 panels will narrow and the price of the whole machine will continue to rise. It is expected that subsequent shipment growth and profit margins will gradually recover. Shipment volume and share will continue to grow throughout the year, and profit levels are expected to continue to rise.
Investment advice: Hisense Video adheres to the high-end product strategy, and recently launched the Xinghai Big Model and new full-scene display products to further lead the development of large screens and high-end products, and continuously optimize the product structure and profit level. Furthermore, the European Cup will open in June. As an official sponsor, Hisense is expected to achieve channel expansion and high-end breakthroughs through brand marketing and new product launches. We predict that in 2024-2026, the company will achieve net profit of 25.18/30.48/36.86 billion yuan, corresponding EPS of 1.93/2.33/2.82 yuan, and the current stock price corresponding PE is 13.86/11.45/9.47 times, maintaining a “buy” rating.
Risk analysis
1) Decline in market demand: 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.
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 March 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 7.1, which is at a high level compared to the same period last year.