Investment logic of Zhaochi Co., Ltd.: TV ODM leader, benefiting from Walmart's acquisition of Vizio, catalytic sports events, and panel price increases are expected to reach an inflection point. Competitive barriers have been strengthened throughout the LED industry chain, benefiting from the growth in downstream direct display & back-display demand, which is expected to increase.
The Megachi ODM business has gone through the cycle, and the LED layout has formed a long curve: the company is a leading global TV ODM company and a large technology group with a full LED industry chain layout. TV ODM contributes mainly to sales revenue, and overseas is the main OEM market. The company has successively laid out the LED packaging/LED chip manufacturing/COB display sectors, and is highly competitive in the LED sector. The company achieved revenue/net profit of 171.7/1.65 billion yuan in 2023, and the CAGR in 2019-2023 was 8.9%/12.4%, respectively.
LED sector: vertical integration to build moats, downstream driving helps growth.
Industrial chain: Breakthrough in midstream COB packaging technology, and the downstream application side ushered in growth. The middle and downstream of the LED industry chain are chip manufacturing/LED packaging/downstream applications respectively. Chip manufacturing is currently showing a trend of localization and concentration; COB technology yield breakthroughs in LED packaging have increased rapidly in small-pitch applications; application-side lighting accounts for the largest proportion, contributing the biggest increase in the display field.
Driver 1: Small pitch and mini LED direct display volume. On the application side, the volume of small-pitch displays and mini LED direct display TVs jointly drive direct display growth; on the cost side, breakthroughs in COB technology have further helped commercialize small-pitch televisions.
Driver 2: Mini LED backlight & increased automotive demand. Mini LED backlight TVs have become the focus of various manufacturers, and as prices continue to drop, the replacement of LCD has been further improved; with its obvious performance advantages, the market penetration rate continues to increase, and the number of car companies with Mini LED layouts continues to increase.
Zhaochi: Chip manufacturing+LED packaging+COB shows the layout of the entire industry chain. On the LED chip side, GigaChi Semiconductor continues to expand production and is leading its peers in profitability; on the LED package side, GigaChi Optoelectronics covers full coverage in the field of lighting/display/backlighting, and continues to expand production+technological innovation to build competitiveness; on the COB display side, Gaochi Crystal Display accounts for half of the industry's production capacity, leading the industry to reduce costs.
ODM sector: leading TV foundry, multiple benefits and resonance.
Zhaochi: The leading ODM foundry, with significant advantages in the North American region. Zhaochi is the world's leading ODM manufacturer and is highly competitive in the North American market. According to Lotto data, in 2023, MegaChi shipped 10.5 million units worldwide, accounting for 9.9% of the global ODM market.
Catalysis: The acquisition of Vizio is beneficial, and the sports year+ panel price increase incubates industry opportunities. Walmart announced the acquisition of Vizio in February 2024. As ONN's largest TV foundry, Zhaochi is expected to enter the Vizio supply chain; the OEM industry is expected to usher in opportunities under the wave of international sports event catalysis and panel price increases in 2024 on the industry side.
Investment advice and profit forecast: We believe that Megachi TV's ODM base market is stable, and LED vertical integration capabilities continue to deepen to open up room for long-term growth. We expect the company to achieve net profit of 21.35/25.40/2,952 billion yuan in 2024-2026, an increase of 34.4%/19.0%/16.2% year-on-year. The first coverage gives an “gain” rating.
Risk warning: Downstream shows demand falling short of expectations, TV ODM shipments falling short of expectations, increased industry competition, and errors in the calculation process.