TCL Electronics (1070.HK) – a rising star in the TV business
TCL Electronics (1070.HK) – a rising star in the TV business
Vertical integration and surging emerging market sales have allowed the Hong Kong-listed manufacturer to leapfrog established Korean and Japanese rivals to number 2 position globally
TCL Electronics Limited (1070.HK) (“TCL”), with a market cap of HKD 7.57 billion (USD 968 million), is not your ordinary Chinese TV manufacturer. TCL focuses on mid-to-high end audio/video products like miniLED, QLED, Android, and smart TVs, ranking second in the global TV market behind Samsung. The Company also produces air conditioners, refrigerators, smartphones, tablets, and smart home devices. A recent catch-up with the IR team at TCL’s Shenzhen Industrial Park Headquarters intrigued us and we decided to dig a bit deeper. Currently, we have a trading position open in TCL with average in-price of HKD 2.71. Our personal target range for the stock is HKD 3.71–4.26.
TCL has leapfrogged Japanese and Korean competitors in the TV market, largely by vertically integrating where others haven’t. It is honing in on the more premium large-screen segment – previously the exclusive domain of Korean and Japanese brands. TCL's technological strengths, cost-effective panel production, and leading position in rapidly growing emerging markets should allow for strong ongoing growth despite a challenging macro climate in its home market.
TCL will announce FY23e earnings on 28 March 2024. The stock has limited sell-side coverage, but sell-side expectations are for the Company to return to a 10% topline growth to around HKD 79 billion (USD 10 billion) with a net profit of around HKD 669 million (USD 86 million), in range with TCL’s net profit guidance of HKD 600-700 million (USD 77-90 million).
TCL is 55% owned by TCL Industries Holdings (“TCL Ind”) and 14% owned by strategic and management, with the remaining 31% as free float. TCL Ind is ultimately controlled by the Li family, headed by entrepreneur Li Dongsheng. As a separately listed subsidiary, TCL is run by its own professional management team, including CEO Zhang Shaoyong, who rose through the ranks after joining the company at an entry level in 2000 rising from an entry level to leadership position. Zhang Shaoyong has guided TCL through different economic cycles, seeing periods of struggle and growth.
What sets TCL apart from established names in the TV screen business?
Chinese brands like TCL, Haier Smart Home (6690.HK; 600690.SS) and Midea Group (000333.SZ) are increasingly replacing established Japanese and Korean players in the global arena, particularly in the mass-market segment. Chinese companies are closing in fast on the last bastion of Korean technical supremacy, OLED displays (only 3% of the global market). TCL’s vertical integration, coupled with strong international expansion, bode well for the Company’s prospects.
TCL ranked second among global TV brands with a 12.5% market share (5.3% just 10 years ago), ahead of Hisense Home Appliances’ (0921.HK; 000921.SZ) 11.4% and LG Electronics’ (066570.KS) (“LG”) 11.2%. TCL sits behind heavyweight Samsung Electronics (005930.KS) (“Samsung”), which topped the market for an 18th consecutive year at 30.1%.
A key competitive advantage in realizing greater profitability comes from vertical integration. Its diversified production base (half of its factories are overseas in the US, Mexico and Poland) provides a useful hedge against tariffs targeting “Made in China” goods. It should be noted that industry consolidation among upstream panel producers over the past several years has led to an exodus of foreign peers from upstream manufacturing. By way of example, on an apples-to-apples basis, TCL can now produce displays for 15-20% cheaper than its global peers, which has helped the Company gain market share at the expense of industry leaders such as Samsung and LG.
TCL’s expanding footprint in rapidly growing emerging markets
TCL is actively expanding its international sales presence amid continued weakness in the domestic market, where a longer-term downturn seems likely owing to sluggish consumer spending fallout and instability in the real estate sector. According to TCL’s Q423 press release in January 2024, shipments to international markets (60% of sales revenue, equally split between developed and emerging markets) grew by 10% yoy in 2023, with emerging markets reaching 17% growth. TCL remains resilient (1.7% growth) in China (40% of TCL’s sales), despite demand-side headwinds.
Compared to the more sluggish EU and NA regions, emerging markets offer lower competition in luxury segments and rapidly growing consumer demand – ideally increasing margins and average sales price over time. TCL is a top 5 player in markets with rapidly growing consumer bases such as India, Saudi Arabia, Vietnam, and the Philippines. TCL aims to expand its branded retail footprint in high-potential (emerging) markets like the Middle East to drive further growth.
Focus on high-value large screens to cement TCL’s leading position in the display business
Currently, around 71% of TCL's revenues are derived from its overall display business, which delivers a 3-4% operating margin. The Company aims to up this to 7-8% in the longer run, in-line with the margins of top competitors like Samsung. They plan to do this by capturing higher-priced premium segments and through developing multi-purpose products.
The global TV market continues to trend towards larger screen sizes and higher-end technologies such as Mini LED and QLED. Shipments of these products grew rapidly in FY23e, and the Company appears poised to tap into rapidly growing demand in this segment, owing to its industry-leading large screen portfolio and vertical integration.
According to the IR team, TCL is responding to this trend by scaling down its small screen business (particularly smartphone screens) to focus on the less competitive and more lucrative large screen market. TCL’s shipments of 65-inch+ TVs increased 35% yoy in FY23e, representing 25% of total shipments. In addition, global shipments of TCL's mid-to-high end TV lines, specifically its Mini LED and QLED TVs jumped 180% and 116% yoy in FY23e respectively.
Innovative business brings about new, diversified and supplementary revenue streams
TCL's seeks to expand beyond TVs with its “Innovative” business, which is focused on household appliances, smart home devices, and wearable devices. TCL groups all of this under “All Category Marketing” and “Smart Connection and Smart Home” in its balance sheets. It’s noteworthy that these segments combined contribute 20% of total revenues with a blended gross margin of around 16% and operating margins of around 1-3% in H123A.
Through partnerships and new products like WiFi-enabled appliances, TCL is embracing the smart home trend, meeting demand for seamless connectivity across devices. By enabling control of home appliances via smartphones, TCL aims to meet the evolving needs of digitally savvy consumers by leveraging a “single-brand strategy” to build strong consumer equity and an identity that resonates across global markets.
Another vertical within TCL’s Innovative is Photovoltaic, launched in Q222A. In light of the global energy transformation, TCL capitalized on synergies with its sister company TCL Zhonghuan Renewable Energy (002129.SZ) to scale solar solutions across China. In FY22A, TCL Photovoltaic had established a presence in 9 provinces. The business achieved HKD 328 million (USD 42 million) in revenues in its maiden year. In just the first half of 2023, TCL Photovoltaic expanded to 14 provinces, achieving HKD1.685 billion (USD 215 million) in revenue. The Company forecasts HKD 4 billion (USD 511 million) in photovoltaics sales for FY23e and targets HKD10 billion (USD 1.28 billion) by FY24e alongside 3-4% operating margin and net profitability.
TCL’s Internet Business - small but rapidly growing segment contributes 30-40% of the company’s profits
TCL's most profitable segment (26% estimated margin) centers around its streaming platform TCL Channel. TCL Channel saw average revenue per user (ARPU) reach HKD 85 (USD 11), up 11% yoy. Its monthly active user (MAU) base exceeded 21 million, an 11% increase yoy. Internationally, TCL has deepened partnerships with streaming leaders like Google (GOOG.O), Roku (ROKU.O), and Netflix (NFLX.O) for a built-in platform on its growing global base of smart TVs.
TCL’s Internet Business currently only contributes 3% of TCL’s total revenues, yet carries 30-40% of the Company’s total operating profits. Given the Company’s overall reliance on low-margin, mass hardware sales, this segment shows particular promise to diversify TCL’s income base. TCL’s Internet Business aims to contribute 10% of group revenues within 3-5 years. If the Company can efficiently scale up this vertical, we think it could boost TCL’s net profit back above HKD 1 billion (USD 128 million), provided its other businesses hold up.
In H123A, TCL's Chinese internet business saw revenue increase 9% yoy to HKD 887 million (USD 113 million) with a 20% operating margin as it continued optimizing platform operations and introducing new AI-driven content, including partnerships with the likes of Tencent (0700.HK). Meanwhile, revenue from international markets jumped substantially by 77% to HKD 226 million (USD 29 million) with a 50% operating margin, supported by one-time revenue gains as TCL channel is rolled out across models. TCL Channel is available in 60 countries, and serves over 21 million MAU globally. Going forward, management will focus on further integrating content from global partners to support continued growth.
Unlocking value amidst weak macro sentiment, investor apathy and limited coverage
Despite a weak macro backdrop, TCL looks set to hit 10% topline growth with around 20% gross margin in FY23e. The Company is guiding net profit to land in range of HKD 600-700 million (USD 77-90 million). TCL has been running a 30-50% dividend payout ratio since 2017. We reckon payout and net profit will likely land on the higher end of the range in the late March 2024 results announcement. Based on price of HKD 3.02 (as at 14 March 2024), TCL offers a decent 4-5% yield, but plenty of 8-9% dividend yield prospects can be found in the current market.
Looking ahead into FY24e, we expect TCL to maintain its growth trajectory along with further margin improvements as the Company scales down its smartphone screen business and ramps up other verticals, including its Photovoltaic and Internet businesses. The stock currently trades at a roughly 15% and 42% discount to (median) domestic and global peers, respectively (11.3x and 6.3x), on a blended 12-month forward P/E and EV/EBIT basis.
We think a positive set of earnings could drive a re-rating and bridge some of the discount. According to TCL’s website, seven Chinese brokers cover the stock, but their reporting appears to be brief, inactive, or dated. Perhaps a good set of results can change that too.
We did a simple reverse DCF to get a rough idea on the growth already factored in at the current share price (HKD 3.02 as at 14 March 2024). It goes without saying that small changes in the inputs can lead to a very different result, but we think the current price implies a conservative scenario of:
5-year revenue CAGR: 9.5%
10-year historical FCF margin: 0.7%
Terminal growth rate: 2.5%
Discount rate: 12%
Currently, we have a trading position open in TCL with average in-price of HKD 2.71. Our personal target range for the stock is HKD 3.71–4.26. A good set of FY23e results with a solid update and prospect on the business trajectory in FY24e should help the market better understand TCL’s value proposition and growth avenues. We think overall business can pick-up due to sector-wide and sentiment recovery, particularly in rapidly growing emerging markets.
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I included to this piece in my post for today: https://emergingmarketskeptic.substack.com/p/emerging-markets-week-march-18-2024
Your piece sort of relates to this one I also mentioned as what happened with Japan can happen to companies:
Japan’s self-inflicted decline offers lesson (The Asset) $ 🗃️
"In the 1980s, Japan boasted a dynamic consumer-electronics sector that served as a cornerstone of its robust export industry. But soon, new digital technologies began to replace the analogue devices on which Japan had a near-monopoly – and both producers and the government failed to adapt"