This report is read as follows:
The business model has been transformed from hardware as the core profit to hardware as the shield to strengthen the company's leading position in the color TV industry, and to enhance profitability by means of Internet operation. Maintain the target price of HK $11.7 and increase its holdings.
Summary:
Maintain the target price and increase the holdings. TCL Electronics has formed a positive cycle of sustainable growth with panel-color TV terminal-Internet operation as the core. We believe that the company is going through an era of great change in profit model, TCL electronic Internet operation business will continue to grow, and is currently at the starting point of profitability improvement. Maintain the company's deduction of HK $0.52 EPS for 2021-2022 and HK $0.83 for 2023 non-EPS. Adopt segment valuation method, refer to comparable companies, give hardware profit 10xPE, Internet operating profit 53.7xPE, corresponding to the target price of HK $11.7, increase holdings.
The company's 2020 revenue and deduction of non-net profit exceeded expectations. The company excluded the contract manufacturing business in 2020, and 20Q4 merged with TCL Communications Group. After adjustment, the company's income in 2020 was HK $50.95 billion (+ 40.2%), deducting non-return net profit of HK $1.05 billion (+ 25.1%). Gross margin 19.0% (- 1.5pct), deducting 2.5% non-return net profit (+ 0.2pct).
The leading color TV in the world, the share of domestic and export sales has increased in an all-round way. In 2020, the company's global television revenue was 16.7% year-on-year, of which overseas increased by 27.4% to HK $26.75 billion, while the mainland was basically flat at HK $12.86 billion. Product structure continues to upgrade superimposed scale effect appears, overseas brand TV operating profit margin compared with the same period last year + 0.8pct. The company has a significant advantage in the North American market, with sales growth of + 25.0% in 2020. Relying on the advantages of operating costs and efficiency brought by the improved layout of the whole industry chain and the benchmarking effect of the US market, the company successfully replicated the leading advantage to Europe / emerging markets. Sales grew by + 66.0% and 19.4% respectively.
Business model shift: from an one-shot sale of TV hardware to a continuous share of Internet operations.
Overseas: the company has established continuous sharing cooperation with Internet leaders such as Alphabet Inc-CL C and Roku, with overseas Internet business revenue of HK $1.23 billion in 2020, + 97.0% compared with the same period last year. With the accumulation of overseas TV sales and the continuous improvement of Alphabet Inc-CL C's ARPU value, the operation share will accelerate growth. Domestic: Thunderbird's operating income is + 118.8% to HK $910 million, while ARPU is HK $53.20 (+ 50.7%). The number of active users × payment conversion rate × unit price × business quantity four-factor resonance, Thunderbird's net profit growth rate is expected to reach 50% in the next five years. We believe that the company is gradually moving towards a good business of "increasing the scale of user income and decreasing the scale of enterprise costs". It is expected that the compound growth rate of net profit of the overall Internet business from 2021 to 2025 is also expected to exceed 40%.
Core risks: increased competition in the TV industry, panel price upward risk.