BOE: The growth and profitability of panels in the next 3 years look promising (23Q4 Investor Conference)

BOE (000725.SZ) released its 2023 fourth quarter financial report after the A-share market closed on the evening of April 1, 2024 Beijing time:

The following is a summary of BOE's 2023 fourth quarter conference. For the interpretation of the financial report, please refer to " BOE: Panel prices rise again, is this time for real? 》

I. Review of BOE's core financial information:

II. $ BOE(000725.SZ) Financial Report Conference Details

2.1. Key points from executive statements:

1. Financial performance: Non-GAAP net profit attributable to shareholders of the listed company increased by 71.74% year-on-year. Both operating income and non-GAAP net profit achieved quarterly growth.

1. Market leadership: In the LCD market, the product shipment volume and shipment area in the overall and five major mainstream areas continue to rank first globally. In the field of IoT products, the shipment volume of innovative products in low power consumption, splicing, advertising machines, and other segmented areas remains globally leading. In flexible OLED, the shipment volume is close to 120 million pieces, setting a new record for annual shipment volume, and the first domestically built 8.6th generation AMOLED production line.
2. Business adjustments: Revenue from smart finance and medical industry achieved year-on-year growth. MLED business integrated with Huacan. Zhongxiangying was recognized as a national specialized and new "small giant" enterprise, and Energy Technology was selected as a demonstration enterprise for intelligent photovoltaics.
3. R&D patents: The cumulative number of independent patent applications exceeds 90,000, with invention patents accounting for over 90% of annual new patents, overseas patents exceeding 33%, and being selected for the sixth consecutive year in the global TOP 20 of the U.S. patent authorization rankings.
4. Technological innovation: Established three major technology sources in semiconductor displays, IoT innovation, and sensor components, accelerating the transformation of IoT.
5. Future outlook: Adhere to deepening the "IoT of the screen" strategy to promote new development in the era of IoT.

2.2. Q&A Analysts' Questions and Answers

Q: Could you please introduce the construction and operation situation, as well as the development plans of several innovation centers? How effective are these centers in promoting the conversion of the company's massive patents?A: Currently, we have three innovation centers in Chengdu, Chongqing, and Qingdao, and the construction is proceeding in an orderly manner. Especially last week, we just held the opening ceremony of the Chengdu Innovation Center. In the future, we will use this as a platform to integrate industrial resources, gather high-end talents, and drive regional innovation.

Q: What are the company's plans for the development of other businesses next, and how much is the proportion of revenue expected to increase? Also, how is the current operation of the hospitals run by the company, and when can they contribute profits to the company?

A: By 2023, the company's display-related business is expected to account for 80% of the revenue, with innovative business growth exceeding 30%. In the health and medical field, BOE has made significant progress since 2016, especially in the development of online IoT hospitals and offline physical hospitals, aiming to achieve positive cash flow in offline hospitals within 3-4 years and profitability within 5-6 years.

Q: How is the current utilization rate of the panel production line in Chongqing B12, and is there a plan to increase production scheduling in 2024?

A: We will make orderly production and scheduling plans based on our own operating conditions and supply-demand relationships. Currently, the utilization rate is within a reasonable range. On the basis of stable operation, we will increase revenue and profit by improving product structure and upgrading technology.

Q: How is the expansion of new product lines for key overseas customers of Chongqing B12 going?

A: B12 has entered a stable operational stage, and major domestic and overseas brand customers are gradually being introduced, with production line utilization increasing steadily.

Q: What is the application status of artificial intelligence technology, in terms of application areas/products, current R&D stage (whether there are mass-produced products)? What are the future plans, and how much investment is expected in artificial intelligence?

A: In recent years, BOE has actively focused on the development of artificial intelligence. The company has established a leadership group and an execution group for AI innovation applications, and allocated 0.5% of annual sales revenue to promote the practical application of artificial intelligence in various business areas. Currently, the implementation effects of related projects have begun to show results.

Q: Can you provide information on this year's dividend payout ratio?

A: The company has implemented cash dividends for 9 consecutive years, totaling over 20 billion RMB. From 2018 to 2023, the annual cash dividend ratio has consistently exceeded 30% of the net profit attributable to the parent company. In 2023, the company plans to distribute cash dividends of approximately 1.13 billion RMB, accounting for 44.34% of the net profit attributable to the parent company for that year. We will continue to distribute dividends in cash, and even with performance growth, we will still consider providing more returns to the capital market.

Q: Your company started supplying high-end Oxide notebook products to Apple customers last year, and this year invested in the G8.6 OLED project. Can you introduce the future IT product business plans and product strategies for Apple customers?

A: We are very confident in our high-end Oxide notebook products, which have been widely recognized by customers. The G8.6 OLED project is an extension of our technological capabilities, and we are committed to providing customers with stronger technical and production supportQ: How do you view the panel cycle weakening and growth enhancement you mentioned two years ago?

A: From the current situation, I believe that the panel cycle is indeed weakening. In the next 3 years, I think the overall growth and profitability of the panel are still good. Firstly, in the next 3 years, the total capacity of LCD will grow limitedly, foreign old production lines and some inefficient high-generation production lines will exit the market; Secondly, the concentration of production lines will further increase; Thirdly, the average size of the largest capacity application in the TV field will continue to grow by about 1 inch per year, although the total shipment volume will remain stable, the total shipment area will still increase.

Q: What is the loss situation of OLED and the profit situation of LCD in 2023?

A: In 2023, influenced by macroeconomic uncertainties, the panel industry supply chain competition is intense. Although our display device business revenue decreased by 2.1%, the gross profit margin increased by 0.9 percentage points, leading in the industry. In terms of LCD, we maintain the global leading position in mainstream applications and rapidly expand into innovative areas, achieving operational profitability for the whole year. In terms of OLED, flexible AMOLED continues to focus on high-end demand, with a continuous increase in market share of major customers and performance improvement quarter by quarter.

Q: Last year's OLED was close to 120 million pieces, can you provide the specific number? How many are expected to be sold this year? Can OLED turn losses into profits this year?

A: Indeed, it was close to 120 million pieces last year, and this year's target is to exceed 160 million pieces.

Q: How do you view this year's panel market? Besides production control strategies, has the demand side emerged from the trough cycle?

A: Market expectations for this year are indeed relatively optimistic. In fact, the overall supply-demand situation has not fully reversed, and each company has adopted its own business strategies, improving quality and quantity, and optimizing structure, achieving certain results, but the demand side has not emerged from the trough, and supply-demand imbalance remains a long-term theme.

Q: What are the overall shipment targets for your company's flexible OLED this year, including specific businesses such as foldable screens and Customer A?

A: The target for flexible OLED this year will continue to grow compared to last year, with an expected increase of over 30%.

Q: What new productive forces does BOE have, and what patents put BOE in a favorable position in industry competition?

A: In recent years, BOE has mainly applied for patents in the fields of OLED, artificial intelligence, and IoT innovation, which have played a significant role in supporting the company's development and exploring new markets. Of course, BOE also has many valuable patents, and we will use these patents to protect BOE's interests when necessary.

Q: Looking at BOE's profit plummeting in the past three years without breaking out of the strong cycle, does your company really have technological barriers, and when will the benefits of the 90,000 patents be realized?

A: As a high-end semiconductor display manufacturer, we do have technological barriers, but we cannot deny that there have been many unhealthy industry competitions. Our 90,000+ patents have been continuously optimized in structure over the years, increasing original patents. For some low-value patents, we actively invalidate them, which also brings benefitsQ: What is the average annual capital expenditure and depreciation situation of the company from 2024 to 2026?

A: In the next three years, the depreciation of the LCD part will gradually expire in stages, including the Ordos 5.5th generation line, Fuzhou 8.5th generation line, and Hefei 10.5th generation line. As for OLED, the Chongqing 6th generation line is still ramping up. The company will combine production line operations and adhere to guidelines to depreciate and capitalize on time.

In terms of capital expenditure, the company is steadfast in implementing the "Screen IoT" strategy, focusing on its core business in the semiconductor display sector. Based on core capabilities and value chain extension, the company is strategically positioning itself in four high-potential areas: IoT innovation, sensors, MLED, and smart medical equipment, to drive the implementation of the IoT transformation strategy.

Q: Chongqing B12's investment accounts for 83.9% of the budget. What is the current status of the first, second, and third phases of the B12 project, and will the second phase be capitalized in the middle of the year?

A: The first phase of the Chongqing B12 project was capitalized in the fiscal year 2023, and the second phase production line was capitalized in the first quarter of 2024. Currently, the first and second phase production lines are operating well, while the third phase production line is undergoing ramp-up testing. The capitalization of the third phase will be done in a timely manner based on actual production and yield conditions.

Q: The MLED business saw significant growth in the first half of 2023. Could you explain the reasons for the high growth and provide an outlook for the future of MLED? Alternatively, what growth rate can be expected for MLED in 2024?

A: The stable growth of the MLED business in 2023 was due to market expansion and the synergy between our products and technologies with major customers. In the second half of 2023, BOE acquired HuaCan Optoelectronics, making it a major development platform for BOE in the MLED field. The future strategy of BOE in the MLED field revolves around HuaCan Optoelectronics as the core platform, integrating industry chain resources to enhance overall value output.

Q: What is the arrangement for investment intensity and equity recovery?

A: We will consider capital expenditures appropriately. Over the next 3 years, BOE's main capital expenditures will be in Beijing's 6th generation LTPO/LTPS line and Chengdu's 8.6th generation AMOLED line.

Q: Has the TV panel entered a stable profit stage? Are there still uncertainties?

A: Currently, the supply-demand relationship for TV panels has indeed improved to a certain extent, but there are still uncertainties in the demand from terminal brand customers.

Q: What is the size of BOE's current artificial intelligence research and development team? Does the R&D strategy focus on self-development or outsourcing? Is there a plan to invest in large-scale companies?

A: BOE established its Artificial Intelligence Research and Application Center as early as 2018, with a research team of nearly 500 people focusing on the application of artificial intelligence, big data, and algorithms in production lines and products. The strategy mainly combines self-development and cooperation. We have our own industry digital model research and development and currently have no plans to invest in large-scale companiesQ: What is the current investment status of B20, and when will LTPO begin mass production?

A: B20 reached its investment cap ahead of schedule at the end of last year, and all construction is currently proceeding in an orderly manner. Mass production is set to begin in Q2 next year.

Q: Have the B7/B11/B12 production lines started depreciation, and when will it end?

A: Among the company's OLED production lines, both the B7 and B11 lines have completed depreciation and are operating well. The first phase of the B12 line will complete depreciation in 2023, with the second phase scheduled for completion in the first quarter of 2024. Depreciation will continue based on accounting standards, taking into account the yield and utilization of the B12 line. The main semiconductor display production equipment of the company is depreciated over 7 years, and the OLED production lines B7, B11, and B12 will depreciate between 2025-2031.

Q: Could you introduce the medium to long-term plans for the future automotive business? Will the proportion of Tier 1 business gradually increase, and how much weight will it have in the automotive business in the future?

A: The automotive business is definitely a key focus for BOE. According to third-party data, BOE has already achieved the highest market share in automotive displays. We will strengthen cooperation with Tier 1 and OEM manufacturers, involving various product technologies such as passive, TFT LCD, and OLED. We will also provide integrated solutions for specific customers in the automotive field.

Q: Is there a possibility of further strengthening cooperation with Samsung Electronics and LGE at BOE?

A: Our cooperation has always been good and is ongoing. In the future, we will focus on enhancing technical cooperation and product matching.

Q: Have the three digital hospitals in Hefei, Chengdu, and Suzhou achieved a balance between profit and loss?

A: Currently, they have not achieved a balance between profit and loss. However, BOE's smart medical business maintains a high growth rate every year. According to the development trend of the medical industry, hospitals generally achieve a balance between profit and loss after 7-8 years of operation. We are confident that we can perform better than the industry average.

Q: Are there any further investment plans or expansion in the IoT business (domestic and overseas)? What will be the positioning and sales volume of the IoT business within the group in the future?

A: We will continue to increase the sales proportion of the IoT business within the group, aiming for nearly 1/4. We will also enhance the market share of various IoT product categories.

Q: It was noted that your company recently invested in G8.6OLED, and there are various backplane technologies such as Oxide/LTPS/LTPO. Which technology solution does your company plan to adopt? What are the drawbacks of each technology and which product categories do they correspond to?

A: We will mainly adopt a technology combination based on LTPO backplanes and Tandem technology. Depending on market and customer demands, we will adjust flexibly. The products will mainly target high value-added IT productsQ: Will BOE's performance this year be better than last year?

A: From the overall market environment perspective, the European Cup and the Paris Olympics will successively take place in June 2024, boosting demand under the promotion of sports events. In addition, the crisis in the Red Sea has led to an increase in shipping logistics risks, panel prices returning to the rising range, and high price expectations further driving up brand procurement demand. Looking at the whole year, inflation in Europe and the United States continues to decline, consumer confidence index is rising, and with the stimulus of sports events, end demand is expected to pick up. Currently, panel factories producing on demand has become the norm, so it is expected that the supply-demand balance throughout 2024 will further move towards a healthy level, easing industry competition and returning panel prices to rationality.

Q: What are the sales proportions and profit margins of products such as TV/MNT/NB/Tablet/Flexible OLED/Mobile LCD in the semiconductor display business?

A: Overall, in the company's semiconductor display business, large and medium-sized products such as TV & IT account for about 60%, while MBL and other applications account for about 40%.

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