BOE: Price increase is not a true sign of recovery, demand is the key factor

BOE (000725.SZ) released its Q3 2023 earnings report after the A-share market closed on October 31, 2023 (as of September 2023). The key points are as follows:

1. Overall Performance: Price is the main driving force. This quarter,BOE achieved a revenue of 46.3 billion yuan, a year-on-year increase of 12.6%. The gross profit margin was 14.8%, up 12.2 percentage points compared to the same period last year. The changes in revenue and gross profit margin were mainly influenced by panel prices. Considering the market price trend, Dolphin Research believes that there was no significant increase in shipments this quarter. The company's net profit attributable to shareholders this quarter was 290 million yuan, a year-on-year increase of 122%, and the net profit margin turned positive again.

2. Expenses and Operations: Inventory remains high. The panel industry has entered a downward cycle since the second half of 2021, and the inventory indicator is an important guide for determining the cycle. The company's inventory this quarter has significantly reduced compared to the high level of 30 billion yuan, but it is still not at a low level. Although the current product prices have rebounded, it is mainly due to price increases by manufacturers rather than strong downstream demand. Insufficient demand from customers has led to slow inventory turnover.

Overall, BOE's earnings report this time is not very good. Although both revenue and gross profit margin continue to recover, the two indicators still fall short of market expectations. The panel price increase in this round is already a market consensus. However, behind this price increase, is it driven by strong demand?

From the company's earnings report, Dolphin Research believes that the price increase in this round is mainly due to proactive price adjustments by panel manufacturers, rather than a significant increase in demand. The main points of concern are: 1) the company's revenue growth continues to be lower than the industry's price increase, and there is no significant increase in shipments; 2) prices are rising, but the company's inventory has not shown signs of rapid decline; 3) the recent panel price increase has begun to stagnate.

As the recent improvement in the company's performance is mainly driven by price increases, the stagnation of price increases will directly affect the company's future performance. Without the support of demand, it is difficult to sustain the price increase agreed upon by manufacturers. The stock price has also fallen back below 4 yuan from its high point of 4.5 yuan.

Considering the current stock price, Dolphin Research believes that the expectations of the previous price increase have been fully priced in. Now, BOE, which has fallen in stock price, should pay more attention to the real recovery of demand. Due to the cyclical nature of the industry, the panel industry will always recover. The disappointment in the earnings report may have a short-term impact, but it does not affect the long-term investment confidence.

Here is Dolphin Research's specific analysis of BOE:

1. Overall Performance: Price is the main driving force

1.1 Revenue

In the third quarter of 2023, BOE's total revenue was 46.34 billion yuan, a year-on-year increase of 12.6%. Although the company's revenue in the third quarter began to rebound, it still fell short of market expectations (52.6 billion yuan).

The revenue continued to recover in the third quarter, but Dolphin Research believes that the rebound in revenue this time is still mainly driven by price, and the volume has not significantly improved. Compared with the second quarter, the average price of large panels in the third quarter increased by about 15-20%. However, the revenue in this quarter only increased by 10% MoM, indicating that the shipment volume did not improve significantly. The price increase is mainly due to the price hike caused by the supply-side contraction.

1.2 Gross Margin

In the third quarter of 2023, BOE achieved a gross profit of 6.87 billion yuan, a year-on-year increase of 538.4%. The gross profit margin for this quarter was 14.8%, a year-on-year increase of 12.2 percentage points. The gross profit margin rebounded this quarter, mainly driven by the recovery in prices, and has now risen to double digits.

1.3 Panel Prices

In this quarter, both BOE's revenue and gross profit margin have rebounded, mainly due to the increase in panel prices. So, how did the panel prices perform?

According to Witsview's late October pricing, the prices for 65-inch/55-inch/43-inch/32-inch panels were $169/$126/$65/$37, respectively. The prices of panels of various sizes have increased by more than 50% from the bottom.

With the rise in panel prices, the company's revenue and gross profit margin have both recovered to a certain extent. As prices are influenced by "supply and demand", what is the main cause of this round of price increases?

The company's revenue growth rate this quarter is once again slower than the industry's price recovery rate. BOE's revenue increased by about 10% QoQ this quarter, while the industry's panel prices increased by nearly 20%. The recent halt in the increase of panel prices further confirms what Dolphin Research mentioned last quarter, "This price increase is not due to an increase in demand, but rather due to supply-side contraction and price increases".

Since the current demand for panels is not strong, relying solely on supply-side improvements is not sustainable. Further breakthroughs in panel prices still require an increase in downstream demand to drive them.

2. Cost and Operational Situation: Inventory Remains High

2.1 Operational Indicators

For cyclical industries, it is more important to focus on a company's inventory and operational indicators.

① Inventory Situation: 26.568 billion yuan this quarter, a YoY decrease of 6.8%. The inventory/revenue ratio for this quarter remains at 0.57. Compared to the previous 30 billion, the company's inventory has significantly decreased. However, the current inventory ratio has not yet reached a relatively low level. This indirectly reflects that although prices have rebounded recently, there is still insufficient downstream demand.

② Accounts Receivable Situation: 33.2 billion yuan this quarter, a YoY increase of 19.6%. The accounts receivable/revenue ratio is 0.72, showing a slight increase.

2.2 Expense Ratio

In the third quarter of 2023, BOE's total expenses amounted to 5.972 billion yuan, a YoY decrease of 3.4%. The expense ratio was 12.9%, and the various expenses fluctuated.

1) Sales Expenses: 0.917 billion yuan this quarter, a YoY increase of 15.5%, with a sales expense ratio of 2%. The company's sales expense ratio for this quarter is relatively high compared to the same period, mainly due to increased sales expenses to digest inventory.

2) Administrative Expenses: 1.53 billion yuan this quarter, a YoY decrease of 10.3%, with an administrative expense ratio of 3.3%. The company has exercised certain control over administrative expenses.

3) Research and Development Expenses: 2.88 billion yuan this quarter, a YoY decrease of 5.2%, with a research and development expense ratio of 6.2%. Research and development expenses account for the largest proportion among the four expenses. During the relatively sluggish period in the industry, the company appropriately controlled its research and development expenditures.

4) Financial Expenses: 0.645 billion yuan this quarter, a YoY increase of 0.3%, with a financial expense ratio of 1.4%.

2.3 Net Profit

In the third quarter of 2023, BOE achieved a net profit attributable to shareholders of 290 million yuan, turning losses into gains YoY.

Due to the impact of non-operating factors, net profit attributable to shareholders may deviate from the company's core business operations. If we consider the pure operational aspect, BOE's profit finally turned positive this quarter, mainly due to the increase in panel prices.

In the third quarter of 2023, the company's net profit margin also turned positive, rising to 0.6%. With the increase in panel prices, the company has started making money again. However, the current stagnation in panel price increases puts pressure on the sustainability of the company's profitability.