BOE: Panel price increase without volume increase, is it a "true" recovery?

JD.com (000725.SZ) released its 2023 interim earnings report (as of June 2023) after the A-share market closed on the evening of August 28, 2023 (Beijing time). The key points are as follows:

1. Overall Performance: Recovery not driven by demand. This quarter, JD.com achieved a revenue of 42.2 billion yuan, a year-on-year growth of 2.6%. The gross profit margin for this quarter was 11%, a year-on-year decrease of 4.4 percentage points. The changes in revenue and gross profit margin were mainly influenced by panel prices. The net profit attributable to the parent company for this quarter was 490 million yuan, a year-on-year decrease of 77.9%.

2. Business Segments: Display devices are the core of performance. Display devices are JD.com's largest source of revenue, accounting for over 80%. The display device business in the first half of the year declined by 13.97% compared to the same period last year, and the gross profit margin decreased by 9.58 percentage points, which was the biggest drag on the company's performance.

3. Expenses and Operations: Inventory remains high, insufficient shipping momentum. Since the second half of 2021, the panel industry has entered a downward cycle, and inventory indicators have become an important guide for determining the cycle. Although current product prices have rebounded, it is mainly due to manufacturers proactively raising prices rather than strong downstream demand. Therefore, the overall shipping momentum of customers is still insufficient.

Overall, JD.com's interim earnings report is not ideal. Although revenue and profit have started to recover this quarter, both figures are still below market expectations. As the increase in panel prices is already a market consensus, more attention is focused on the company's shipments and overall performance elasticity in this earnings report.

Therefore, despite the price increase this quarter, the company's performance did not show a significant improvement.

Considering the company's stock price performance, the previous upward trend was mainly driven by expectations of the industry bottoming out. However, the stock price has not been able to stabilize, mainly because the market believes that current downstream demand is weak, and the sustainability of this rebound is questionable. The release of JD.com's earnings report directly reflects the price recovery of this panel.

Now that the stock price has fallen below 4 yuan again, it indicates that the market has already accepted the current sluggish demand situation. Dolphin Research believes that this earnings report is not ideal, and it has already been reflected in the stock price. The company operates in a cyclical industry, and although there are still opportunities in the medium to long term as the industry improves, there is limited upward momentum in the short term due to weak demand.

The following is Dolphin Research's specific analysis of JD.com:

1. Overall Performance: Recovery not driven by demand1.1 Revenue

In the first half of 2023, BOE achieved a revenue of 80.177 billion yuan, a YoY decrease of 12.48%. The decline in revenue was mainly due to the downturn in the panel and display product market.

In the second quarter of 2023, BOE's total revenue reached 42.2 billion yuan, a YoY growth of 2.6%. Although the company's revenue began to stabilize and rebound in the second quarter, Dolphin Research believes that the increase in revenue mainly resulted from price-driven factors, while the volume aspect did not show significant improvement. Compared to the first quarter, the average price of large panels in the second quarter increased by about 20%-30%. However, the QoQ revenue growth in this quarter was only 11%, indicating that the shipment volume did not improve significantly.

1.2 Gross Margin

In the first half of 2023, BOE achieved a gross margin of 7.243 billion yuan, a YoY decrease of 57.7%. The decline in gross margin was much greater than the decrease in revenue, mainly due to price declines putting pressure on the gross margin.

In the second quarter of 2023, BOE achieved a gross margin of 4.64 billion yuan, a YoY decrease of 26.5%. The gross margin for this quarter was 11%, a YoY decrease of 4.4 percentage points. The gross margin has rebounded this quarter, mainly driven by the recovery in prices, and has roughly returned to the level of the same period last year.

1.3 Panel Prices

Since the YoY decline in BOE's revenue and gross margin was mainly caused by the decline in panel prices, what is the current situation of panel prices?

According to Witsview's late August pricing, the prices for 65-inch/55-inch/43-inch/32-inch panels are $168/$125/$66/$38, respectively. The prices of panels of various sizes have increased by more than 40% from the bottom.

With the rise in panel prices, the company's revenue and gross margin have both experienced a certain degree of recovery. As prices are influenced by "supply and demand," what has caused this round of price increases?

The BOE earnings report provides an answer. Despite a 20% increase in the quarterly average price of panels of various sizes, the company's revenue only increased by 11% QoQ .

Given that demand has not shown a clear recovery, the sustainability of this round of price increases remains uncertain. Of course, after panel prices broke through the cash cost, there was a strong demand boost on the enterprise side. Now, with prices experiencing some recovery, further price increases will require downstream demand to drive them.1.4 Business Segmentation

In this earnings report, JD.com has made some minor adjustments to its financial statements, mainly by categorizing certain IoT-related display device businesses under the IoT Innovation segment.

According to the revised financial statements:

1) Display Device Business: H1 revenue of 67.876 billion yuan, a YoY decrease of 13.97%. The display device business is the company's traditional core business, mainly including TVs, smartphones, and laptops. The decline in revenue in H1 is mainly due to weak demand, resulting in lower product prices and shipments compared to the same period last year.

Breakdown of Display Device Gross Margin: H1 gross margin of 6.01%, a YoY decrease of 9.58 percentage points. The main factor contributing to the decline in gross margin is the decrease in prices.

2) IoT Innovation Business: H1 revenue of 17.417 billion yuan, a YoY increase of 1.08%. This business focuses on B2B solutions in IoT sub-sectors such as smart parks, smart finance, and smart transportation. It is less affected by market cycles.

Breakdown of IoT Innovation Gross Margin: H1 gross margin of 8.61%, a YoY decrease of 1.17 percentage points. The gross margin of the IoT Innovation business remains relatively stable, generally around 10%.

3) Other Businesses: JD.com's other businesses include sensors and solutions, MLED, and smart medical equipment. However, these businesses currently account for a small proportion and have little impact on the company's performance.

II. Expenses and Operating Conditions: High Inventory Levels and Insufficient Shipping Momentum

2.1 Operating Indicators

During a downturn in the industry cycle, it is more important to focus on a company's inventory and operating indicators.

① Inventory Situation: 25.631 billion yuan this quarter, a YoY decrease of 22.4%. This indicates that although prices have rebounded recently, there is still insufficient shipping momentum downstream.

② Accounts Receivable: 27.622 billion yuan this quarter, a YoY increase of 6.3%. The ratio of accounts receivable to revenue is 0.65, which is at a relatively reasonable level.

2.2 Expense Ratio

In Q2 2023, JD.com's total expenses amounted to 4.898 billion yuan, a YoY increase of 3.6%. The expense ratio was 11.6%, which remained relatively stable with varying increases and decreases in different expense categories.

1) Selling Expenses: 995 million yuan this quarter, a YoY increase of 73%, with a selling expense ratio of 2.4%. The selling expense ratio in this quarter is relatively high compared to the same period last year, mainly due to increased expenditure on consumer expenses to digest inventory.

2) Operating Expenses: This quarter's operating expenses were 1.308 billion yuan, a decrease of 8.5% YoY, with an operating expense ratio of 3.1%. The company's operating expenses remained relatively stable and were not significantly affected by revenue.

3) Research and Development Expenses: This quarter's research and development expenses were 2.607 billion yuan, an increase of 2% YoY, with a research and development expense ratio of 6.2%. The company's research and development expenses accounted for the largest proportion among the four expenses. During a relatively sluggish period in the industry, the company appropriately controlled its research and development expenditures.

4) Financial Expenses: This quarter's financial expenses were -0.12 billion yuan, a decrease of 107.2% YoY, with a financial expense ratio of 0%.

2.3 Net Profit

In the first half of 2023, BOE achieved a net profit attributable to shareholders of 735 million yuan, a YoY decrease of 88.9%. The positive net profit attributable to shareholders is mainly due to the contribution of minority shareholders' equity. If only considering net profit, BOE incurred a loss of 1.667 billion yuan in the first half of the year.

Looking at the second quarter alone, BOE's net profit attributable to shareholders was 488 million yuan, a YoY decrease of 77.9%. The main reason for the significant decline in net profit attributable to shareholders in this quarter was the YoY decrease in panel prices.

In the second quarter of 2023, the company's net profit margin began to rebound, reaching -1%. This indicates that the average price in the second quarter has basically returned to the breakeven point.

Dolphin Research's historical articles on BOE:

Earnings Season

April 28, 2023, Earnings Report Review: "BOE: Expectations of Recovery Have Been Met, Can the Peak Season Stage a Comeback?"

April 6, 2023, Earnings Report Review: "BOE: Surviving the Desperate Situation, Now It's All About Demand"

October 31, 2022, Earnings Report Review: "BOE: Three Signals of Bottoming Out and Recovery"

August 31, 2022, Earnings Report Review: "BOE: Buying Not Just Performance, But Cycle Reversal"

In-Depth Analysis

July 26, 2022, Company Deep Dive: "A Comprehensive Analysis of BOE: Why Short-Term Risks Don't Affect Long-Term Value"2022 年 7 月 5 日行业深度 "From Double Champions to Double Bears: Has the Cycle Plunder of BOE and TCL Come to an End?"

July 21, 2021 Top Research: "No Bottom to Buy on as Panel Cycle Peaks"

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