BOE: After finishing "PlayerUnknown's Battlegrounds", watch the demand for "facial color"

On the evening of April 3, 2023, Changqiao A-share of BOE (000725.SZ) released its annual report for 2022 (as of December 2022) after the A-share market closed, the main points are as follows:

1. Overall performance: the performance bottomed out and began to see light. The revenue of BOE A.SZ this quarter was CNY 45.7 billion, down 18.5% year-on-year; the gross profit margin of this quarter was 5.9%, down 13.7 percentage points year-on-year. The decline in revenue and gross profit margin was mainly due to the sharp drop in panel prices; the company's net profit attributable to shareholders this quarter was CNY 2.26 billion, down 61.1% year-on-year, and the net profit margin is still at a loss;

2. Business subdivision: display devices are still indicators of business performance. Display devices are BOE's largest source of revenue, accounting for more than 80%. In the second half of the year, the revenue of display devices decreased by 25.9% year-on-year and the gross profit margin dropped to negative, which is the main reason for the decline in the company's performance. This is due to the sluggish demand for downstream display screens such as TV and mobile phones since 2022;

3. Expenses and operating conditions: inventory turnover is significant, and the net profit margin begins to improve. Since the second half of 2021, the panel industry has entered a downward cycle, and the inventory index has become an important indicator for judging the cycle. There are clear signs of inventory turnover in the company this quarter, indicating that the industry cycle has bottomed out and begun to improve. As the industry bottomed out and rebounded, product prices began to rise, and the net profit margin returned to around 0% this quarter.

Overall, BOE's performance rebounded as expected, which is basically in line with market expectations.

Although the company's fourth-quarter revenue and profit still declined by two digits, the overall performance has improved compared to the third quarter. Gross profit margin and net profit margin have both rebounded on a month-on-month basis, and inventory turnover has significantly accelerated, all of which confirm the "bottoming out of performance + price rise + accelerated inventory digestion" mentioned in Longbridge's previous article on BOE. It shows that BOE and the panel industry are bottoming out. With the rebound in panel prices, the industry is expected to achieve supply-demand balance, and the company will also achieve a turnaround from loss to profit.

As of now, the prices of panels of various sizes have risen from the bottom by two digits. This is mainly because panel companies cannot bear the pressure of long-term losses. After the inventory turnover of the industrial chain, downstream gradually resumes logistics momentum. The recent rise in panel prices is mainly due to the correction after the excessive decline.

From the stock price point of view, BOE has risen from the bottom of CNY 3.3 / share to CNY 4.5 / share, which is mainly due to the market's expectations for the recovery of the panel industry. Regarding the financial report released this time, it only verifies the cycle reversal logic that the market has purchased in BOE's upward cycle. However, since the market has already priced it and the performance has not significantly exceeded expectations, this performance seems good, but the stock price is unlikely to rise significantly. Overall, BOE has completed a certain amount of repair from the bottom, and further excess returns in the future still need to be monitored for downstream demand recovery progress and company's possible performance beyond expectations.

The following is Dolphin's specific analysis of BOE:

I. Overall Performance: Bottoming Out of Performance, Beginning to See the Light

1.1 Revenue Side

BOE achieved a revenue of RMB 178.4 billion in 2022, a year-on-year decrease of 19.28%. The company's revenue decline was mainly due to the decline in the display device business, and the shipping price of displays has shown a downward trend over the past year.

Among them, BOE's total revenue in the fourth quarter of 2022 was RMB 45.67 billion, a year-on-year decrease of 18.5%. Although the company's revenue in the fourth quarter still declined by a double-digit percentage, the decline has eased. At the same time, on a quarter-over-quarter basis, the company's revenue has begun to rebound, which to some extent also indicates that the company's business has begun to show signs of improvement.

1.2 Gross Margin Side

BOE achieved a gross profit of RMB 20.88 billion in 2022, a year-on-year decrease of 67%. The decline in gross profit was far greater than the decline in revenue, mainly due to price declines causing gross margin compression.

Among them, BOE achieved a gross profit of RMB 2.7 billion in the fourth quarter of 2022, a year-on-year decrease of 75.5%. The gross margin for the quarter was 5.9%, a year-on-year decrease of 13.7 percentage points.

Although the gross margin for this quarter is still at a low level, signs of improvement have already been seen. Compared to the low point of 2.6% gross margin in the previous quarter, the gross margin this quarter has begun to rebound, mainly because panel prices have already shown signs of recovery.

1.3 Panel Prices

Since BOE's year-on-year decline in revenue and gross margin is mainly due to the decline in panel prices, what are the current panel prices?

Looking at the Witsview quoted prices at the end of March, the prices of 65-inch/55-inch/43-inch/32-inch panels were USD 120/USD 88/USD 52/USD 30, respectively. The prices of panels of various sizes have already risen by more than 10% from the bottom.

Dolphin mentioned in the previous quarterly report comments "BOE: Three Signals of Bottoming Out and Rebound" that "because TV panel prices have already broken through the cash cost since the second quarter, ... Due to the business pressure, panel factories strongly demanded the policy of "not accepting orders below the selling price and cash cost". "There were signs of bottoming out and rebounding in panel prices in October." It was also from the end of October that the panel prices began to stop falling and rebound.

After frequent declines in panel prices, the panel industry gradually began to experience losses. Under the influence of shrinking output and digesting inventory, the industrial chain gradually digested high inventory pressure. "With the downstream resuming shipping, panel prices begin to stabilize and rebound."

Now that the panel prices have undergone some repair, it is necessary to pay attention to the recovery of downstream demand and shipping motivation for the continued rise in prices.

II. Business segment situation: Display components remain the performance barometer

2.1 Revenue Segments

BOE has once again adjusted its financial statements in 2021. Currently, the company's two main businesses are display component business and IoT innovation business.

1) Display component business: The revenue in the second half of the year was 75.308 billion yuan, a year-on-year decrease of 25.9%. The display component business is the company's traditional main business, mainly including TV, mobile phone, notebook and other display screen products. The main reason for the revenue decline in the second half of the year was the weak downstream demand and the continued decline in product prices;

2) IoT innovation business: Revenue in the second half of the year was 13.755 billion yuan, a year-on-year decrease of 8.7%. The business is mainly aimed at To B industries, providing overall solutions in various IoT subdivided fields such as smart parks, smart finance, and smart transportation. This business is not greatly influenced by the economic cycle;

3) Other businesses: BOE's other businesses also include sensors and solutions, MLED, and smart medical devices, but these businesses currently account for a small proportion, and have a small impact on the company's performance.

2.2 Gross margin segments

As display component business accounts for more than 80% of the proportion, the trend of the company's gross profit margin is basically dependent on the display component business.

1) Display component business: The gross profit margin in the second half of the year was -0.2%, a year-on-year decrease of 24.8pct, and the main reason for the decline in business gross profit margin was the decline in panel market prices;

2) IoT innovation business: The gross profit margin in the second half of the year was 9.8%, a year-on-year decrease of 1.9pct, and the decline in business gross profit margin was caused by the rise in the cost side.

III. Expense and business situation: Inventory turnover is obvious, and net profit margin begins to improve 3.1 Operating Indicators: Significant Digestion of Inventory

In a downward industry cycle, it is more important to focus on a company's inventory and operating indicators.

①Inventory situation: 22.788 billion yuan this quarter, down 18% YoY. The inventory/revenue ratio this quarter fell to 0.5. With the adjustment of capacity utilization, the company mainly focused on digesting inventory in the second half of the year and achieved good results. The company's inventory has gone down by nearly 10 billion yuan, from the high point of 33 billion yuan in the middle of the year. As the company and the industry digest inventory, panel prices have also shown signs of bottoming out at the end of the year.

②Accounts receivable situation: 28.815 billion yuan this quarter, down 19.3% YoY. The accounts receivable/revenue ratio is 0.63, which is at a relatively reasonable level.

3.2 Expense Ratio: Showed Rigidity

In Q4 2022, the combined expenses of four categories for BOE reached 7.02 billion yuan, up 20% YoY. The expense ratio for these four categories is 15.4%. The expense ratio has risen slightly mainly due to the relative rigidity of some expenses and the decline in revenue this quarter.

1) Sales expenses: 1.577 billion yuan this quarter, down 24% YoY, and a sales expense ratio of 3.5%. The company's sales expenses have some correlation with revenue changes. The decline in revenue this quarter also reduced the company's sales expense.

2) Administrative expenses: 1.594 billion yuan this quarter, up 409% YoY, and an administrative expense ratio of 3.5%. The company's administrative expenses are relatively rigid and are not affected much by revenue changes. This quarter, labor costs and stock-based payments increased.

3) Research and development expenses: 2.701 billion yuan this quarter, up 7.4% YoY, and a research and development expense ratio of 5.9%. The company's research and development expenses are the largest proportion of the four expenses. In the industry downturn phase, the company appropriately controlled its research and development expenses.

4) Financial expenses: 1.148 billion yuan this quarter, up 21% YoY, and a financial expense ratio of 2.5%. The change in the company's financial expenses is mainly due to the decrease in net interest expenses.

3.3 Net Profit: Net Profit Margin Shows Improvement

BOE achieved a net profit of 7.551 billion yuan attributable to the parent in 2022, a YoY decrease of 70.77%. The positive value of net profit attributable to the parent is mainly brought by minority equity. If only considering the net profit, BOE had a loss of 1.7 billion yuan in 2022.

Looking at the fourth quarter alone, BOE achieved a net profit of 2.26 billion yuan attributable to the parent, a YoY decrease of 61.1%. The decline in panel prices has affected the company's revenue and gross profit margin. The relatively small elasticity of expenses is the main reason for the significant decline in BOE's net profit attributable to the parent this quarter. The net profit margin of the company in the fourth quarter of 2022 began to rebound, rising to -0.9%, after experiencing double-digit negative net profit margins in the third quarter. The company reversed its decline starting from the fourth quarter.