It covered TCL Electronics for the first time and gave it a buy rating, with a target price of HK$7.68. TCL is a global television leader, and has formed a global layout and a successful overseas travel model. The company is backed by TCL's large industrial group. Under the strategic direction of “brand leading value, global efficiency management, technology driven, and vitality first”, the company is entering a harvest period of improving business quality. Combining the company's vertical integration capabilities in the display industry, expanding overseas channels, and improving the overall strength of brand marketing, we are optimistic that the company will continue to occupy the global share of high-end TV, thereby increasing the profitability of the overseas TV business. Combined with continuous optimization of internal operations, the company's long-term profitability improvement is interesting, and it is expected that it will continue to achieve the net profit growth target of equity incentives.

Deep cultivation overseas, weak development, industrial collaboration, leading R&D

The company focuses on global development. Global shipments of TCL brand TVs have a CAGR of +7.4% in 2019-2023 (industry CAGR -2.8% during the same period), and in 2023 they have risen to second place in global shipments (Omdia). Global TV market growth is limited, but Japanese and Korean brands still have strong brand influence in the middle and high-end markets. Currently, display technology iteration is a new opportunity for industrial transformation. TCL's large industrial group has the advantages of upstream and downstream integration, scale, and R&D iteration, and the company deployed Mini LED backlight technology earlier (2024 global miniLED TV shipment or +65% YoY, TrendForce), which is expected to seize the wave of technological change. Chinese brands such as TCL in the North American market are already three parts of the world with Japanese, Korean, European and American brands. There is plenty of space in Europe and emerging markets. Under the wave of new technology, we look forward to TCL continuing to win global share in the future.

The strength of the industrial chain expands diversified categories, and improvements in profitability can be expected

The company's deep channel capabilities are compounded by a continuously strengthened overseas localization layout. Diversified categories have shown rapid growth strength (innovation, Internet business revenue 20-23 CAGR +80%/+45%), and help share the TV industry's expenses. Meanwhile, the TV industry is gradually increasing its product strength globally (maintaining high investment in R&D and superimposing the advantages of iterative display technology), which may accelerate breakthroughs in the middle and high-end markets, thereby improving the company's overseas gross margin level. At the same time, the company's internal cost investment (sales and management expense ratio continues to decline) and operating quality (reducing losses in small and medium-sized businesses) are expected to continue to improve refined management and profitability.

How we differ from the market view

The market is paying more attention to short-term profit improvements, and we believe that TCL's overall strategic changes and focus direction are more worthy of long-term attention. It is expected that the company will continue to focus on improving product strength, maintain a positive trend in terms of brands and channels, and increase its share. High-quality large-scale growth in global revenue in the medium to long term may enhance the company's profitability.

Investment advice: Eagle hits the sky, and improvements in global operations can be expected. For the first time, we expect the company's net profit to be HK$1.23/1.61/1.93 billion in 2024-2026, respectively, +65%/+31%/+20%, corresponding EPS of HK$0.49/0.64/0.77. Wind comparable companies consistently expected PE to be 10x in 25 years. Considering the outstanding business performance of overseas brands, the management improvement logic is expected to continue. The company was given a target PE of 12 times in 25 years, corresponding to the target price of HK$7.68, a “buy” rating.

Risk warning: Overseas sales fall short of expectations, panel prices continue to rise, foreign currency exchange risks.