As a leader in the display circuit segment, Zhaochi Co., Ltd. initially mainly manufactured TV OEM and home audiovisual products. In recent years, it has completed vertical integration of the entire LED industry chain and opened up a second growth curve. In this report, we clarify the core strengths of Zhaochi and further summarize the company's current growth opportunities in various businesses.
The main business is steady+the increase is clear, starting a new growth cycle. The company is a first-tier global TV ODM enterprise. The smart display business has a stable revenue and profit base, the LED industry chain layout is incremental, and it has mastered competitive advantages in all aspects. In 2023, the company's revenue increased 14.2% year on year, and net profit to mother increased 38.6% year on year. Among them, the LED business had a CAGR of 20.8% since 2018, maintaining a relatively rapid growth rate. Currently, the company is adapting to Mini LED backlight+direct display dual-line development opportunities and reaping the dividends of rapid growth in the industry.
Core highlights: The cost reduction of Mini LED has arrived, and the entire production chain of Zhaochi is collaborating to release profits. At the industry level, the key for Mini LED to stand out from high-end display technology is the inflection point of pioneering cost reduction to commercialization. There have been technological breakthroughs and cost reductions on the supply side, from chips and light panels to the sealing and testing process, which in turn has driven the demand-side penetration rate and market size growth, as well as the release of profits in various parts of the industrial chain. Specifically, when it comes to Zhaochi shares, the company has completed vertical integration in the LED industry chain. It has joined forces to achieve technological breakthroughs in the upper, middle, and downstream links, making the overall cost reduction of Mini LED a reality. This is one of the key elements for Gaochi to seize the first-mover advantage under the current Mini LED wave. Subsequent companies are expected to open up the profit scale chain more quickly and enter the harvest period of revenue and performance.
LED business: Megachi has blossomed more in the upper middle and lower reaches. Specifically, 1) Upstream chip sector: The LED chip industry is highly concentrated and has a stable share. Megachi semiconductor's market share is in the first tier, and it is the only chip manufacturer in the industry that has a large profit after full production and sales throughout the year. The profit margin is expected to improve further in the future as the share of high-end products increases. 2) Midstream packaging: Packaging is the most flexible and diversified link in the LED industry chain. Megachi Guangyuan achieved mass production of Mini LED backlight modules earlier in China, has mastered the resources of leading customers and already occupies a high share. 3) Downstream backlight+direct display application: As the main application direction of LED, demand for Mini LED TVs has exploded in the backlight market in recent years, and supply-side cost reductions have led to an abundance of new products and improved cost performance. 65-inch TV prices have fallen into the mainstream consumer band of 3,000 yuan, and Megachi has benefited from the increase in global mini LED TV orders; in the direct display market, Mini LED (small pitch display) application scenarios are expanding. The penetration rate is expected to increase rapidly in the future as production lines are developed.
Traditional business: Demand for TV ODM is picking up, and online popularity is contributing in multiple increments. Starting with TV ODM, Zhaochi's scale is relatively stable. The “cash cow” business supports the company's expansion. Looking ahead, TV ODM is showing a trend of attracting leading manufacturers and manufacturers in mainland China. Zhaochi is the first tier of global TV ODM companies, and is expected to benefit from a recovery in TV demand and an increase in orders from North American customers during the year. In addition, the company's smart home networking business has gradually expanded to Internet incremental services such as IoT smart terminals, popular online applet distribution, and short drama production and distribution, comprehensively forming more profit growth points.
Investment advice: As the Mini LED penetration rate accelerates and the company usheres in growth opportunities, the entire industry chain layout has entered a harvest period. We forecast net profit to mother for 24-26 at 21.21/25.73/3.081 billion yuan, which is 10/9/7 times PE. The company's cash flow is stable. The DCF method is used for valuation, and the target price is 7 yuan, which corresponds to 15 times PE in 24 years. For the first time, coverage was given a “strong” rating.
Risk warning: Macroeconomic fluctuations, market competition has greatly intensified, and terminal demand has fallen short of expectations.