Core views
Currently, the comprehensive strength of China's black electronics leaders is increasing and continuously seizing the market share of overseas brands. We are optimistic about TCL Electronics' 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, continuous optimization of its product structure is expected to push operating profit margins back to pre-epidemic levels, contributing revenue and profit flexibility to smart screen business development. Furthermore, we explained why TCL Electronics' net interest rate has fluctuated greatly in recent years, and how to view Hong Kong stock discounting and valuation issues.
summary
Why are you optimistic about TCL's future growth prospects? On the revenue side, TCL's overseas market share continues to rise, doubling in five years, and Europe and emerging markets are expected to contribute more in the future.
From the profit side, the high-end market recovers, TCL's large size+miniLED penetration rate increases, high-end share > overall share, and the profit margin of subsequent operations is expected to gradually rise. From the perspective of corporate governance, the goals of the new round of equity incentive performance assessments are leading to an increase in profit margins.
Why have profit margins fluctuated so much in history? In recent years, there are many non-financial factors such as profit and loss due to the sale of shares in joint ventures by the company, and the cost ratio is high due to global operations, so profit margins are unstable. Profit margins are expected to maintain a steady upward trend as one-time profits and losses are cleared, and early investment ushered in remarkable results, compounded by cost reduction and efficiency.
How to make a reasonable valuation? The weakening of panel cycle attributes is conducive to improving the profit margin of downstream brands. At the same time, the company has the advantage of vertical integration. TCL Huaxing supports maintaining a steady procurement rhythm, effectively reducing costs, improving production efficiency, and improving the inventory cycle. TCL Electronics' Hong Kong stock discount rate should be around 20%, and there is still plenty of room for growth in the current market value.
Investment advice: The company continues to increase domestic and foreign market share and expand the smart screen business scale, and promote profit level restoration by optimizing product and channel structures, localization and cost reduction and efficiency. We predict that in 2024-2026, the company will achieve net profit of HK$1,376/16.82/HK$2,046 million, corresponding EPS of HK$0.55/0.67/0.81, and the current share price corresponding PE is 11.99/9.80/8.06 times, which is covered for the first time with a “buy” rating.
Risk warning: declining market demand, rebound in panel prices, and fluctuations in the RMB exchange rate.