Li Ping | Written by Gravel Business Review | produce
1
Rebirth and disillusionment
"The global panel pattern has been adjusted, and the cyclical fluctuations of the panel industry will be significantly weakened in the future."
Benefiting from the strong growth of downstream demand such as TVs and tablets, global LCD panel prices have bottomed out since the second half of 2020. In 2020, TCL Technology's non-net profit increased by more than 100 times. In March 2021, the market value of TCL Technology hit a record high of 170.2 billion yuan.
However, the substantial growth in TCL Technology's performance does not seem to have dispelled the concerns of secondary market investors about cyclical changes in panel demand. In August 2021, when TCL Technology announced its half-year report, the company's market value had fallen below 130 billion yuan.
In order to dispel the outside world's doubts about the sustainability of the company's performance, Li Dongsheng, founder of TCL Technology, believes at the TCL Technology semi-annual report performance conference that the cyclical fluctuations of the panel industry will be significantly weakened in the future, "The impact of fluctuations on TCL Huaxing is relatively small compared to peers, and we hope that this impact can be reduced as much as possible through our internal active response in the future."
As the founder of TCL, Li Dongsheng himself has written a series of reflection articles on the "Rebirth of the Eagle". In that year, after the acquisition of Thomson and Alcatel with huge funds, TCL fell into the quagmire of huge losses and suffered setbacks in its internationalization strategy. After profound review and reflection, TCL Group re-emerged from the trough, and Li Dongsheng's entrepreneurial image has been greatly repaired.
At the end of 2018, TCL Group spun off all the businesses of TCL Electronics, TCL Communications, and TCL Home Appliances, leaving only the LCD panel business and changing its name to TCL Technology. In July 2020, TCL Technology spent 10.974 billion yuan to acquire 100% of the equity of Zhonghuan Group.
Since then, TCL Technology has transformed from a traditional home appliance company into a "technology company" driven by semiconductor display and semiconductor photovoltaics. In 2021, TCL Technology's net profit exceeded the 10 billion mark for the first time in history, and the myth of "the rebirth of the eagle" was staged again.
But it turns out that the cyclical risks of the panel industry still greatly exceed the expectations of Li Dongsheng and most observers. In the past 2022, under the background of weak terminal consumer demand and intensified low-price competition in the industry, the panel industry continued to decline, especially the price of large-size LCD TV panels has fallen below the cash cost price, and the industry has fallen into large-scale losses.
In this context, TCL Technology's Huaxing Optoelectronics changed from a big profit of 10.65 billion yuan to a huge loss of 8.35 billion yuan, and the roller coaster-like performance fluctuations fully interpreted the magic and fate of cyclicality. In the face of the unprecedented panel winter, the reborn TCL technology has once again fallen into a period of confusion.
2
Record losses
On the evening of March 30, TCL Technology announced its 2022 annual report. According to the financial report, in 2022, TCL Technology achieved operating income of 166.55 billion yuan, a year-on-year increase of 1.8%, a net profit attributable to the parent of 260 million yuan, a year-on-year decrease of 97.40%, and a non-net profit of -2.698 billion yuan, a year-on-year decrease of 128.57%, which is also the first operating loss in TCL Technology in ten years.
TCL Technology said in its annual report that semiconductor display will experience the most severe global industrial winter in 2022, affected by geopolitical conflicts, inflation and other multiple impacts, the demand for display terminals in major markets has fallen sharply, the price of large-size panel products has dropped significantly, and the panel industry has fallen into a loss.
From the perspective of revenue composition, TCL Technology's main business is divided into semiconductor display business, new energy photovoltaic, distribution business and other four major business segments. Among them, semiconductor display (LCD panel) and new energy photovoltaic (TCL Central) are the company's two core business segments, accounting for nearly 80% of the total revenue, and are also the company's main source of profit.
The panel business has become an important reason for TCL Technology's loss. Since the second half of 2021, the panel industry has entered a downward cycle, and the whole year of 2022 is still hovering at the bottom. According to WitsView survey data, in 2022, the price of 55-inch LCD TV panels will fall from $117 to $83, a year-round decline of nearly 30%; In June 2021, the price of 55-inch LCD TV panels was as high as $227, and the largest drop has exceeded 60%.
Affected by the decline in the price of major display products, in 2022, TCL Technology's semiconductor display business achieved operating income of 65.72 billion yuan, down 25.5% year-on-year, and the gross profit margin of sales was only 0.87%, down 23.74 percentage points from the same period last year. Among them, Huaxing Optoelectronics, the core subsidiary of the panel business, achieved an operating income of 56.256 billion yuan and a net loss of 8.35 billion yuan.
According to data from the annual report of another panel giant, BOE, in 2022, BOE achieved a total revenue of 178.414 billion yuan, down 19.28% year-on-year, and net profit attributable to the parent was 7.551 billion yuan, down 70.91% year-on-year. In terms of gross profit margin, the gross profit margin of BOE's display device business was 7.97%, down nearly 20 percentage points from the same period last year.
In addition to the sharp decline in gross margin, inventory price loss is also an important reason for the large loss of panel companies. According to the annual report, for the whole year of 2022, TCL Technology raised a total of 3.497 billion yuan in asset impairment reserves, of which the inventory price decline loss exceeded 3 billion yuan.
In addition, the Japanese panel manufacturer JOLED also brought more than 400 million yuan to TCL Technology.
On March 27, according to a number of Japanese media reports, JOLED announced that it had applied to the Tokyo District Court to initiate bankruptcy reorganization proceedings for "civil regeneration". In 2020, TCL Huaxing invested 30 billion yen (about 2 billion yuan) in JOLED and acquired more than 10% of the latter's equity.
According to public information, JOLED was established in 2015, which is the integration of the OLED display development department of Sony Corporation and Panasonic Corporation, mainly engaged in the research, development, production and sales of OLED displays and their parts, materials, manufacturing equipment and related products.
In the OLED production method, printing and evaporation are the two mainstream technical routes. It is reported that Japan's JOLED has pioneered a printed OLED production process, which can coat light-emitting materials like a printer. Li Dongsheng has publicly said that only South Korea's Samsung, Japan's JOLED and TCL Huaxing have in-depth research on printing display technology.
According to the annual report, as of the end of 2022, TCL Technology made an impairment provision of 319 million yuan for JOLED, and the investment loss recognized by the equity method in the current period was 421 million yuan.
Some insiders believe that the declaration of JOLED bankruptcy seems to indicate that the printing technology route will lose in the competition, which is far more than the actual loss of TCL Technology, which hopes to achieve "curve overtaking" through the printing process.
3
PV rescue
Compared with the large loss of the panel business, TCL Technology's new energy photovoltaic business performed well. For the whole year of 2022, TCL Central achieved operating income of 67.01 billion yuan, a year-on-year increase of 63.0%, and a net profit of 7.07 billion yuan, a year-on-year increase of 59.5%.
TCL Zhonghuan was formerly known as Zhonghuan Co., Ltd., one of the "double heroes" of photovoltaic monocrystalline silicon wafers. In 2020, the mixed ownership reform of Zhonghuan Group, the controlling shareholder of Zhonghuan Co., Ltd., was implemented, and TCL Technology (Tianjin), a subsidiary of TCL Technology, successfully won 100% of the equity of Zhonghuan Group and became the largest shareholder of TCL Central.
Since then, TCL Technology has increased its holdings in TCL Central many times. As of the end of 2022, TCL Technology (Tianjin) holds a total of 885 million shares of TCL Central, with a shareholding ratio of 27.37%, and is the controlling shareholder of the company; TCL Technology holds about 78.03 million shares, accounting for 2.41%; Li Dongsheng himself holds 2.175 million shares and serves as the chairman of the company.
By the end of 2022, TCL's total monocrystalline production capacity has increased to 140GW, and it is expected to further increase to 180GW by the end of 2023. At that time, TCL's total monocrystalline production capacity is expected to surpass LONGi Green Energy to become the world's first.
With the advent of the era of photovoltaic parity on the Internet, it has become an industry consensus to improve the utilization rate of silicon materials and reduce the cost per watt with the help of large-scale and thinning wafers. Up to now, TCL Central has leading advantages in large-size, thin-sheet, N-type silicon wafers, etc., and N-type G12 silicon wafers have the first global market share.
In 2019, Zhonghuan took the lead in the industry to launch a disruptive 210mm silicon wafer (G12), which can significantly increase the power of monolithic modules and reduce BOS costs, laying a competitive advantage in the field of large-size silicon wafers. According to the annual report data, in 2022, the sales volume of photovoltaic silicon wafers in Zhonghuan was 10.647 billion pieces, a year-on-year increase of 29.64%, of which the market share of silicon wafers export market ranked first in the world.
It is worth mentioning that TCL Technology's initial acquisition of Zhonghuan shares (767 million shares) held by Zhonghuan Group was traded at a transaction price of 10.97 billion yuan. As of the close of trading on April 7, the market value of TCL Central was about 158.6 billion yuan, and the corresponding market value of the shares acquired by TCL Technology was about 37.6 billion yuan.
However, from the perspective of the secondary market, TCL Technology does not seem to be recognized by investors because of its successful investment in TCL Central. As of the close of trading on April 7, the market value of TCL Technology was 79 billion yuan, which was nearly 100 billion yuan lower than the historical high.
The larger-than-expected decline in panel prices should be a major reason why investors continue to sell TCL Technology stocks. However, from another perspective, TCL Technology's current shareholding ratio in TCL Central is about 29.8%, corresponding to a market value of about 47.3 billion yuan. Then, the total market value of TCL Technology after excluding TCL Central is only 31.7 billion yuan (79 billion yuan - 47.3 billion yuan).
In other words, if the shareholding of TCL Central is excluded, the current valuation of TCL Technology panel business is only about 30 billion yuan, is this valuation level undervalued?
4
An inflection point?
In fact, since the fourth quarter of last year, panel prices have fallen below the cash cost price of some companies, and panel manufacturers have also started the first large-scale and full-generation production reduction in a decade to respond. As industry inventories continue to fall, panel prices have shown signs of bottoming out, and the question of whether TCL Technology and BOE shares are undervalued has become a focus of secondary market investors.
According to CINNO data, in September last year, the global panel factory operating rate (the ratio of the actual production quantity of the production line to the maximum production quantity) fell to a low of less than 60%. However, as Chinese and foreign panel manufacturers began to reduce production on a large scale, panel prices rebounded slightly since October 2022.
There are also signs of warming on the demand side. As the original inventory was digested, major LCD TV brands gradually resumed the number of panel purchases. According to public reports, Samsung VD has raised its TV panel procurement plan for the fourth quarter of 2022, from the original plan of 8.5 million units to 9.5 million to 10 million units.
On the other hand, as the panel production capacity of Japan and South Korea continues to withdraw, the global panel production capacity continues to be concentrated in China. The latest data shows that in 2022, the global share of TV panel shipments of five mainland enterprises such as BOE and TCL Huaxing will reach a new high of 68.5%, of which BOE and TCL Huaxing will account for more than 40% of the market.
Generally speaking, with the clearance of production capacity and the further improvement of market concentration, the supply and demand adjustment role of leading enterprises in the industry will be significantly enhanced. Therefore, industry insiders generally believe that the cyclical nature of the panel industry is expected to weaken, and BOE and TCL Technology are expected to benefit in the long term.
In the context of the expected recovery of panel prices, TCL Technology and BOE stock prices have recently ushered in a wave of rebound. Data show that since 2023, BOE's stock price has risen by more than 30%, and TCL Technology has risen by more than 20%.
In fact, the recovery of panel prices has also been fulfilled to a certain extent in the gross profit margin performance of listed companies. According to the annual report data, in the fourth quarter of 2022, BOE's gross profit margin on sales was 5.9%, an increase of 3.28 percentage points from the third quarter (2.62%). However, from the data of TCL Technology, its comprehensive gross profit margin in the fourth quarter of last year was 7.65%, which was still lower than the gross profit margin in the third quarter (8.49%).
From an absolute point of view, the gross profit margin of both BOE and TCL Technology panel business is only single digits, which shows that the recovery of the panel industry is still relatively weak.
In addition, the continuous decline in the price of this round of panels has further enhanced the understanding of the heavy assets and strong cycle of its industry, and the business model of LCD panels has begun to be questioned more and more.
In fact, display panels are a typical highly capital- and technology-intensive industry, and a high-generation production line is often tens of billions of yuan of investment. It is reported that the investment amount of TCL Huaxing Guangzhou T9 project is as high as 35 billion yuan. Among them, it is necessary to generate a large number of fixed asset discounts, but also to bear high financing costs.
Due to the continuous high investment, the financial cost of TCL Technology has remained high in recent years. According to the financial report, from 2020 to 2022, TCL Technology's financial expenses will be 2.357 billion yuan, 3.728 billion yuan and 3.423 billion yuan, respectively, and the heavy interest expense is also an important reason for the pressure on its profit side.
Overall, from the perspective of segment valuation, the current valuation of TCL technology panel business in the secondary market is only 31.7 billion yuan, which should be undervalued to a certain extent. On the other hand, the industry's heavy assets, high investment, strong cycle and other characteristics also determine that the LCD panel itself is not a good business model. Even after entering the stage of pricing of Chinese enterprises, the situation of the industry "relying on the sky to eat" has not fundamentally changed.
Five years ago, due to the difficult profitability and low valuation of the home appliance business, Li Dongsheng spun it off from a listed company and focused on the panel business of China Star Optoelectronics. From today's point of view, Huaxing Optoelectronics, whose performance fluctuates greatly, is obviously not the good business that Li Dongsheng hoped for.