Core views

TCL Electronics announced its 2024 semi-annual results. The H1 revenue performance achieved a high increase. The revenue side growth was mainly due to the sharp rise in domestic and foreign prices of televisions and increased contributions from innovative businesses such as photovoltaics; the profit side still achieved rapid growth in the face of rising costs and increased competition, mainly due to the company's own cost reduction and improvement in quality and efficiency, good cost ratio control, and steady operating performance. We are optimistic about the company's future growth prospects. On the one hand, its overseas market share continues to increase, and smart screen business revenue is expected to continue to grow in the future; on the other hand, its product structure is continuously optimized, which is expected to push operating profit margins back to pre-pandemic levels.

occurrences

On August 24, 2024, TCL Electronics announced its 2024 semi-annual results.

In 2024H1, the company achieved operating income of HK$45.494 billion (+30.3%), net profit to mother of HK$0.65 billion (+146.5%), and a net interest rate of 1.4% (+0.7pct).

Brief review

1. Revenue analysis: The main 2024H1 TV industry is steady, and the emerging business is growing rapidly 1. By product: TV volume and price increase, innovative business contribution increased 1) Shows that the business: 2024H1 achieved revenue of HK$30.135 billion (+21.3%), accounting for 66.2%, with a gross margin of 16.9% (-1.9pct).

A. Smart screen: Sales volume of 12.52 million units (+9.2%), average price of HK$2,071 (+12.7%), achieved revenue of HK$25.914 billion (+23.2%), accounting for 57.0% and gross margin of 16.9% (-2.3pct); of these, Q2 sold 6.68 million units (+13.0%). ① Domestic: Sales volume of 2.8 million units (+5.4%), average price of HK$2,980 (+14.9%), achieved revenue of HK$8.353 billion (+21.1%), and gross margin of 19.8% (-2.5pct); of these, Q2 sold 1.45 million units (-7.5%). H1 domestic Mini LED TVs sold 0.24 million units (+120.1%) and Quantum Dot TVs sold 0.34 million units (+20.3%). ② Overseas: Sales volume of 9.71 million units (+10.4%), average price of HK$1808 (+12.5%), achieved revenue of HK$17.561 billion (+24.2%), and gross margin of 15.6% (-2.2pct); of these, Q2 sold 5.22 million units (+20.4%). H1 overseas Mini LED TVs sold 0.27 million units (+124.7%), and Quantum Dot TVs sold 1.55 million units (+79.9%).

B. Small to medium size: Achieved revenue of HK$3.761 billion (+10.7%), accounting for 8.3%. ASP increased, and gross margin was 16.7% (+0.4pct). ① Mobile: Achieved revenue of HK$2.23 billion (+0.9%) and gross margin of 16.0% (+3.3pct). ② Tablet: Achieved revenue of HK$1.53 billion (+29.1%), gross margin of 17.7% (-5.2pct).

C. Smart Business Display: Achieved revenue of HK$0.46 billion (+11.3%), accounting for 1.0%, and gross margin of 13.8% (-2.1pct).

2) Innovative business: 2024H1 achieved revenue of HK$13.953 billion (+60.6%), accounting for 30.7%, and gross margin of 14.4% (+0.3pct).

A. All-category marketing: Achieved revenue of HK$7.753 billion (+27.7%), accounting for 17.0%, and gross margin of 16.3% (+1.1pct).

B. PV: Achieved revenue of HK$5.269 billion (+212.7%), accounting for 11.6%, and gross margin of 10.3% (+2.6pct).

C. Smart Connectivity and Smart Home: Achieved revenue of HK$0.931 billion (+0.1%), accounting for 2.0%, and gross margin of 21.7% (+3.0pct).

3) Internet business: 2024H1 achieved revenue of HK$1.212 billion (+8.9%), accounting for 2.7%, and gross margin of 54.0% (-0.1pct). ① Domestic: Achieved revenue of HK$0.87 billion (-1.9%). ② Overseas: Achieved revenue of HK$0.342 billion (+51.3%).

4) Other business: 2024H1 achieved revenue of HK$0.194 billion (-26.8%), accounting for 0.4%, and gross margin of 1.9% (+0.4pct).

II. By region: Both domestic and foreign sales grew, and Europe and emerging markets contributed an increase of 1) China: 2024H1 achieved revenue of HK$19.064 billion (+38.1%), accounting for 41.9%, of which Smart Screen and others had revenue of HK$18.194 billion (+40.8%) and Internet revenue of HK$0.87 billion (-1.9%).

2) North America: 2024H1 achieved revenue of HK$7.459 billion (+4.3%), accounting for 16.4%, of which Smart Screen and others earned HK$7.283 billion (+2.8%) and Internet revenue of HK$0.176 billion (+175.9%).

3) Europe: 2024H1 achieved revenue of HK$5.54 billion (+47.1%), accounting for 12.2%, of which Smart Screen and others earned HK$5.505 billion (+46.2%) and Internet revenue of HK$0.035 billion.

4) Emerging markets: 2024H1 achieved revenue of HK$13.43 billion (+31.8%), accounting for 29.5%, of which Smart Screen and others earned HK$13.3 billion (+32.6%) and Internet revenue of HK$0.13 billion (-19.7%).

2. Profit analysis: Profit levels have been under pressure for a short time, and the long-term improvement trend can still be expected I. On the gross profit side: screen price rise+structural changes. The phased decline in gross margin was affected by factors such as rising panel prices, downgrading market consumption, increased industry competition, and changes in the company's business, brand, and overseas regional structure. The company's gross margin declined. The 2024H1 gross margin was 17.0% (-1.6 pct).

The price of 2024H1 panels continued to rise, with a year-on-year increase of about 25%, including a 15% increase in Q2. At the same time, demand in mature markets such as China, the US, and Japan is weak, the cost-performance brand share is rising rapidly, and the product strategies and price systems of leading brands are under pressure, so the product structure and profit level have gradually declined. As Q3 panel prices begin to decline and policy incentives drive demand growth, superposition the company's product and channel structure optimization, the scale effect of new business gradually becomes apparent, and the share of innovation and Internet business increases, gross margin is expected to increase further. The gross margin level is expected to improve sequentially in the second half of the year.

II. Cost side: Continued cost reduction and efficiency, cost ratio decreased

The 2024H1 sales/management/R&D cost rates were -0.9/-1.2/-0.7pct, respectively. The main reason is that the company continues to promote cost reduction, quality and efficiency improvement, and increase cost control efforts. As cost reduction and efficiency increases continue to advance, the cost rate is expected to maintain a healthy level.

III. Net profit side: Net interest rate has increased markedly, and there is still room for improvement in the long term 2024H1 net interest rate of 1.4% (+0.7pct). Under the circumstances where gross margin declined due to cost side and structural changes, the company maintained a steady improvement in business performance by reducing costs and improving quality and efficiency.

Combining changes on the gross profit side and expense side, it is expected that there is still room for improvement in long-term net interest rates.

Investment advice: TCL Electronics continues to promote the “middle and high-end plus big screen” and dual brand strategy, continuously increase domestic and foreign market share and expand the smart screen business scale, and promote profit level restoration by optimizing product and channel structure, localization, cost reduction and efficiency. We predict that in 2024-2026, the company will achieve net profit of HK$1.373/1.675/2.034 billion, corresponding EPS of HK$0.54/0.66/0.81, and the current share price corresponding PE is 8.37/6.86/5.65 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 around 0.195 billion units (YOY -2.7%), a record low in nearly ten years. Looking ahead, macro-level unfavorable factors will continue for 1-2 years. TrendForce Jibang Consulting expects to be in the 0.2-0.22 billion range, making it difficult for the TV market environment to fundamentally change.

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 early October 2022, the average price of 75/65/55/50/43/32 inch TV panels increased by a total of 72/73/52/40/17/10 US dollars in June 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.