Investment advice

The market concentration of China's black power industry is evolving towards the white power pattern. Upstream and downstream black power companies are overcoming supply chain barriers between Japan and South Korea and gradually reshaping the global brand competition pattern. Hisense insists on global expansion. The retail share of color TV in the domestic market is stable in the TOP1, and the share of color TV in the overseas market is in the TOP 3.

rationales

Reshaping the global color TV industry pattern: 1) Since 2010, panel companies in mainland China have gradually replaced the scale advantage of the global panel industry established by Korea through continuous large-scale investment. According to data from Lotu Technology and Ovirevo, in 2023, mainland China's TV panel production capacity accounted for 69% of the world's total production capacity, CR3 in the panel industry reached 60%, and the upstream pattern was reshaped. 2) Supported by the advantages of the upstream industrial chain, Chinese companies such as Hisense no longer have a clear technological gap with Japan and South Korea, and have achieved a continuous increase in global share based on cost performance advantages.

1-3Q24 Hisense Color TV's share of global shipments was 13.8%, an increase of 7.6ppt compared with 2016.

Foreign brands in the Chinese market are shrinking at an accelerated pace: 1) AVC monitoring, foreign brands (Samsung, Sharp, Sony, LG) had a 33% share of offline retail sales in 2015. Sharp was acquired by Foxconn in 2015, and Toshiba Color TV was acquired by Hisense in 2018. Currently, Samsung alone still has some influence. 2) Samsung/LG/Sony/Sharp's offline retail sales share was 13%/4%/6%/10% in 2015, falling to 8%/0.2%/6%/1% in 2024. 3) Although Xiaomi is fiercely competitive in terms of cost performance, Hisense successfully coped with the Vidda brand and cultivated the main brand Hisense into a brand with a certain premium. Over the past ten years, Hisense color TV's domestic market share has continued to increase.

Continued breakthroughs in overseas markets: 1) In 2016, Hisense began to accelerate overseas market development, using sports marketing to enhance brand awareness and channel influence. The company's overseas business has covered more than 40 countries and regions in Europe, the United States, the Asia-Pacific region and the Middle East Africa region. The share of overseas revenue increased from 34% in 2016 to 46% in 2023, and the overseas main revenue CAGR was 14%. 2) The company operates under both Toshiba and Hisense brands. In the North American market, Hisense brands are in the second tier; in the Japanese market, Toshiba and Hisense have a combined share of 34%, ranking first; in the European market, Hisense's sales share is 10%, ranking in the top ranking.

Improved governance mechanism and diversified business system: 1) Hisense Group is a leading large-scale electronic information industry group in China. In 2020, the Group completed mixed reform and introduced Haifeng International, and Hisense Vision became a company with no actual controller. 2) In 2021 and 2024, the company issued separate equity incentive plans to further improve incentives. The company's operations improved markedly in 2018-2023, and the net profit CAGR to mother reached 40%. Results for the first three quarters fell short of expectations in 2024 due to adjustments in domestic sales of Vidda and transmission of overseas costs. Currently, negative factors are gradually being eliminated, and we expect the company's performance to improve in 2025.

Profit forecasting and valuation

The profit forecast for 24/25 remains unchanged. The current stock price corresponds to 24/25 13.4x/11.5x P/E. Maintaining an outperforming industry rating and considering the sector's valuation recovery and valuation switch to 2025, we raised our target price by 48% to 26.6 yuan, corresponding to 17.0x/14.6x P/E in 24/25, with 27% upward space.

risks

Continuity risk of China's subsidy policy; risk of US tariff policy; risk of panel price fluctuation.