TCL Corporation:Rising panel prices boost earnings
Revenue up slightly; earnings largely in line with our estimate
Q1-Q316 revenue was Rmb77.7bn, up 4.83% YoY, net profit attributable toshareholders was Rmb1.54bn, down 25.5% YoY, and EPS were Rmb0.13, largely inline with our estimate. Net cash flow from operating activities was Rmb5.3bn, up amoderate 2.6% YoY.
Supply chain advantages boosted performance of TV business
Q316 revenue rose 6.9% YoY, faster than in H116 (+3.5%), mainly driven by fastergrowth in the LCD TV, LCD panel and home appliances businesses. TCL's TV businesssuccessfully turned around and reported Q1-Q316 net profit of Rmb130m due toproduct mix improvements, driven by larger product sizes and a higher weighting ofhigh-end products. We expect the business to deliver a good performance in Q416, asChina Star Optoelectronics Technology (CSOT) can ensure panel supply. Smart TVoperations had a total of 15.75m subscribers activated and 6.74m daily activesubscribers, generating revenue of Rmb31m, slightly below expectations. Thecompany's communications business declined significantly due to the mobile phonemarket downturn and was de-listed. We think it is unlikely to turn around. The whitegoods business delivered Q1-Q316 revenue of Rmb9.9bn, up 25.3% YoY, but netprofit was low (Rmb61m).
Panel prices continued rising, with net profit likely to increase
CSOT's Q1-Q316 revenue was Rmb15.3bn, up 20.1% YoY, and net profit wasRmb1.33bn, with its YoY decline narrowing to 25.7%. Helped by a rebound in panelprices since Q216, CSOT's Q316 net profit rose 40.1% YoY. Given recently rising panelprices, we expect net profit to improve further in Q416. In August, the companycollaborated with the Shenzhen Municipal Government to invest in building an 11thgeneration LCD panel production line, with a planned investment amount ofRmb46.5bn. When completed, the project will widen the company's offering of largesizepanel products, possibly improving its competitiveness. However, its earningsoutlook is still uncertain, since such a sizeable investment will lead to vast depreciation.
Nevertheless, a possible spin-off of CSOT would help ease TCL's funding pressure.
Valuation: Maintain Rmb3.87 PT, Neutral rating
We maintain our 2016-18 EPS estimates of Rmb0.21/0.23/0.26. Our DCF-based pricetarget of Rmb3.87 assumes 7.8% WACC. We have a Neutral rating.