Li Dongsheng bets another hundred billion on the "crossroads" of LCD

The intense competition in the LCD field is coming to an end.

South Korean manufacturer LG's 80% stake in LG Display (China) Co., Ltd. (referred to as "LGD Guangzhou Factory") and 100% stake in LG Display (Guangzhou) Co., Ltd. were valued at 10.8 billion yuan and sold to TCL Technology (000100.SZ) subsidiary TCL Huaxing Optoelectronics Technology Co., Ltd. (referred to as "Huaxing Optoelectronics").

In the current white-hot competition in the panel industry, it may be a big bet made by Li Dongsheng and the TCL group to seize a larger share of the LCD market.

As early as 2020, TCL Technology acquired Samsung's LCD factory in China for around $1 billion.

Looking back at the challenges faced by the TCL group in mergers and acquisitions, such as the previous acquisition of China Star Optoelectronics Technology Group, which led to the establishment of TCL China Star Optoelectronics Technology Co., Ltd. (002129.SZ), entering the photovoltaic industry.

However, due to the impact of industry overcapacity, TCL China Star Optoelectronics is currently in a loss-making state.

Mergers and acquisitions have brought significant goodwill to TCL Technology.

As of the end of June 2024, TCL Technology's goodwill has reached 10.517 billion yuan, and now they are once again launching an acquisition almost equivalent to this amount.

As the waiting period reverses, will they make the right bet this time?

Seizing Territory Again

In this transaction, what TCL Technology values most may be LGD Guangzhou Factory.

LGD Guangzhou Factory owns an 8.5th generation LCD production line, mainly producing large-size LCD panels for TVs and commercial displays, with a designed monthly capacity of 180,000 large panels.

The 8.5th generation line mainly cuts large-size products such as 55-inch, 65-inch (cutting set), 85-inch (cutting set), 98-inch, etc.

As of the end of June 2024, TCL Technology already has a total of 3 8.5th generation LCD production lines: t1, t2, and t10.

After the transaction is completed, TCL Technology will have 4 8.5th generation LCD production lines, further increasing its market share.

According to DISCIEN's "Global TV Panel PSI Monthly Data Report," in 2023, TCL Technology's subsidiary Huaxing Optoelectronics' LCD TV panel shipments were 47.3 million, second only to BOE (000725.SZ) with 56 million; during the same period, LGD Guangzhou Factory's shipments were 7 million, ranking eighth.

This is expected to further narrow the gap between TCL Technology and BOE.

"After the acquisition is completed, LGDCA Factory (LGD Guangzhou Factory) will form a 'twin star' factory with TCL Huaxing Guangzhou t9 production line, which will help optimize resource allocation, reduce operating costs, improve operational efficiency, and enhance production line competitiveness," TCL Technology stated.

BOE also participated in the equity battle for LGD Guangzhou Factory.

As early as last year, there were rumors of LGD Guangzhou Factory being up for sale, with industry speculation that BOE and TCL Technology were both likely to participate in the bidding.

In March of this year, BOE responded to the media saying that this possibility cannot be ruled out, while TCL Technology declined to comment.

Just five months later, TCL Technology announced that it had become the preferred buyer of LGD Guangzhou Factory, ultimately taking the lead This merger will further increase the market share of mainland manufacturers.

According to DISCIEN's 2023 data, the top mainland manufacturers BOE, CSOT, HKC, and CHOT subsidiary CHOT Optoelectronics have LCD panel market shares of 24%, 20%, 17%, and 6% respectively, totaling 67%.

With LGD Guangzhou merging into CSOT, the market share of the top mainland manufacturers is expected to exceed 70%.

In recent years, Korean and Japanese manufacturers have been continuously phased out of the LCD market.

As early as 2020, Samsung sold its Suzhou LCD factory, and with LG selling LGD Guangzhou, Korean manufacturers have basically exited the competition in the LCD market.

Japanese manufacturers are the same.

On August 21st this year, Sharp, the only domestic manufacturer in Japan producing TV panels, announced that its factory in Sakai City has stopped producing large-size LCD panels.

With this trend, the previous situation of the four regions of Japan, South Korea, mainland China, and Taiwan standing side by side has been broken, and the "players" in the LCD market may be left with only mainland China and Taiwan.

Twice "grabbing" Korean production capacity

TCL Technology's move this time is still a counter-cyclical bet.

Since 2017, the global terminal market demand has been sluggish. Although there was a small peak in 2021, it began to decline continuously in the second quarter of 2022. DISCIEN data shows that the global TV panel shipments of LCDs in 2023 were 234.6 million, a year-on-year decrease of 10%.

Reflected in LGD Guangzhou, the revenue in 2023 was 6.334 billion, with a net profit of 602 million, a year-on-year decrease of 36.84% and 14.73% respectively.

Affected by the continued slowdown in demand this year, the global LCD TV panel shipments in the first half of the year were 118.9 million, a year-on-year decrease of 2%.

However, TCL Technology still chose to make a move, perhaps betting on the expectation of the improvement of the LCD competitive landscape and the probability of a supply-demand reversal.

This is not the first time in recent years that TCL Technology has acquired a peer company.

In 2020, TCL Technology acquired the former Samsung Suzhou LCD capacity (now renamed Suzhou CSOT) for $1.08 billion, with a transaction price of 7.622 billion RMB, etc.

Suzhou CSOT has an 8.5th generation LCD production line.

In 2019, when the LCD was in a price war and a cyclical downturn, Suzhou CSOT's net loss reached 28 million RMB.

But TCL Technology, which made the move at the time, believed that the industry cycle adjustment had gradually bottomed out, and the supply-demand relationship was expected to improve.

"Due to the concentrated release of production capacity, the current semiconductor display industry cycle fluctuation has continued since the end of 2017, the entire industry's operating efficiency has been hovering at the bottom, demand has been steadily increasing, and the integration of the supply side has been brewing for a long time. This acquisition will help improve the supply-demand relationship of the entire industry and increase industry concentration." TCL Technology pointed out.

The following year after the acquisition, this transaction had a positive impact on TCL Technology.

Starting from the third quarter of 2020, TCL Technology's performance grew significantly, with revenue and net profit for the period reaching 19.414 billion RMB and 993 million RMB, respectively, representing a year-on-year growth of 29.05% and 32.28% After the consolidation of the Suzhou factory, TCL Technology's performance in 2021 surged to a high point along with the manufacturing industry. The revenue from large-size business reached 56.55 billion yuan during the period, a year-on-year increase of 95.1%.

In the industry's view, the subsequent integration of TCL Suzhou factory and LGD Guangzhou factory under TCL Technology is expected to increase its discourse power in the LCD industry.

"Once the leading manufacturers capture more market share, they can adjust production based on sales and reasonably control inventory levels. At the same time, the increase in market share also means having more independent pricing power, which is expected to alleviate the issue of low-price competition within the industry," pointed out a consumer electronics industry expert in Beijing.

Due to the large-scale capital investment required for LCD panel production lines, the process from initial promotion to smooth mass production and delivery is complex and time-consuming, posing a high barrier to entry for new players.

"LCD panels are relatively inexpensive, with mature technology and basically no profit margin, making it difficult for new entrants to come in," the expert further noted.

The "River" of Cycles

TCL's merger and acquisition journey has not always been smooth sailing.

TCL China Star (002129.SZ) is a highlight in TCL Technology's acquisition history, marking its entry into the photovoltaic industry.

In 2020, TCL Technology spent 10.974 billion yuan to acquire 100% equity of China Star Group, thereby gaining control of TCL China Star.

TCL Technology had high expectations for this deal, believing that it would help both parties leverage their advantages in terms of funds, technology, etc., to seize the opportunity for energy supply upgrades through synergistic integration, industrial landing, and other means.

At that time, the deal took place against the backdrop of a stable growth phase in the photovoltaic industry.

In 2019, China Star's revenue and net profit were 16.887 billion yuan and 1.261 billion yuan, respectively, representing year-on-year growth of 22.76% and 59.85%.

With the acceleration of silicon wafer production capacity and increasing demand, China Star reached its peak in 2022, with revenue of 67.01 billion yuan, a year-on-year increase of 63.02%.

However, due to industry overcapacity, China Star's performance plummeted significantly the following year, with a net profit attributable to the parent of only 3.416 billion yuan, nearly halved from the previous year.

Misjudgments in production capacity decisions further deepened the performance dilemma.

For example, in 2023, despite industry overcapacity, the then CEO of China Star, Shen Haoping, insisted on full production and sales, further expanding losses.

In the first half of 2024, China Star went from profit to loss, with a net loss attributable to the parent reaching 3.064 billion yuan.

In August of this year, Shen Haoping has voluntarily resigned, and TCL's leader Li Dongsheng has temporarily taken over as the CEO of China Star.

During the industry downturn, how Li Dongsheng, who has taken over personally, will adjust the business strategy remains to be seen.

Waiting for the Reversal Moment

Whether this heavy investment in LCD will meet expectations is still unknown.

There are various challenges in this deal.

First, although the move is countercyclical, the deal is not "cheap".

The acquisition cost of 59.5% equity of LGD Guangzhou factory is 7.37 billion yuan. Based on a registered capital of 1.334 billion US dollars (equivalent to 9.353 billion yuan), the acquisition price is 1.32 yuan/registered capital, with a valuation of 12.346 billion yuan With LGD Guangzhou Plant's net profit of 6.02 billion yuan in 2023, the corresponding price-to-earnings ratio (PE) for the transaction is 20.51 times.

As a comparable peer, Rainbow Corporation's trailing price-to-earnings ratio (PE-TTM) is 13.2 times.

The hundred billion acquisition may pose certain financial pressure for TCL Technology.

As of the end of June 2024, TCL Technology had cash and cash equivalents of 17.924 billion yuan, with an asset-liability ratio of 63.84%, 11.32 percentage points higher than BOE.

In July of this year, TCL Technology issued bonds to raise 2 billion yuan, with 14.30 billion yuan mainly used for debt repayment.

Xin Feng (ID: TradeWind01) inquired about the acquisition-related issues to TCL Technology, but did not receive a response as of the time of drafting.

Secondly, when will the downstream supply and demand reach a balance, it is a test of TCL Technology's resilience.

In August of this year, TCL Technology acknowledged that in the short term, there was a slight fluctuation in panel prices due to the transition between peak and off-peak seasons. However, it is expected that industry supply-side adjustments can drive panel prices to maintain a positive trend.

The uncertainty remains whether TCL Technology's supply-side adjustments involve production cuts - there were previous reports that CSOT would take one to two weeks off before and after the National Day holiday this year, but this has not been confirmed.

Third-party data firm Lutu Technology predicts that with the stimulus of the "trade-in for new" subsidy policy, the terminal market is expected to warm up, and there is a possibility of a price reversal for large-size products in October.

Thirdly, as multinational giants are gradually exiting the LCD industry to invest in OLED, the long-term technological substitution risk for LCDs is receiving increased attention.

"The main problem facing the application of OLED technology in large-size display panels comes from the instability of its organic light-emitting layer material, which needs further improvement to reduce costs. OLED is currently more suitable for small screens, so in the short term, LCD cannot replace OLED," said a consumer electronics industry professional in Shanghai.

The professional also pointed out that after consumer downgrading, compared to other new technologies, LCD TVs have relatively lower prices and still have a broad market space.

Is the moment of cycle reversal that TCL Technology is optimistic about already here? The market is eagerly awaiting