HONG KONG / ACCESSWIRE / April 16, 2020 / There are many well-performed stocks being undervalued in the Hong Kong stock market. Take TCL Electronics (1070.HK) as an example. The company’s main business is TV sector. Over the past several years, its financial performance has been on an upward trajectory, and its management has been generous in paying out dividends. Its growth rate and stability impressed many investors.
However, the company is standing at a P/E ratio of just 3x and a P/B ratio of just 0.64x, whereas its dividend yield is as high as 6%.
TCL Electronics feels like a company poised for a “Davis Double Play”.
1. Existing logic
Over the past two decades, China has been experiencing a real estate boom, which has brought enormous opportunities for the home appliance industry.
Despite industry-wide rapid growth, the color TV, which constitutes the most crucial part of the home appliances, is lagging far behind white appliances and kitchen appliances when it comes to ROI.
TCL Electronics has seen its sales volume swell from 16.74 million sets in 2014 to 32 million sets in 2019. During those years, its revenue has climbed from HKD 33.5 billion to HKD 47 billion.
However, this stellar performance has not lifted up its share price, which has barely budged in the past five years. Its P/E ratio has even dropped from 20 to 3.
Among all home appliances, the color TV has the highest technical threshold, where the panel technology is the most fundamental. The panel module accounts for 50% of the color TV’s cost.
Semiconductors and LCDs, which make up the panel module, are both asset-heavy industries where big investments must be made for years before any benefits can be reaped.
To understand that, just look at Samsung, which kept investing for decades and survived quite a few loss-making years. Finally, it weathered multiple cycles of the industry, overtook its Japanese competitors to become the world’s top panel maker, and grabbed the pricing power.
Chinese firms are in the investment phase, with some distance to go before they can rival their peers from South Korea and Japan. As recently as in 2018, brands from those countries, like Samsung and Sony, still claimed the highest unit prices in the color TV market.
For tens of years, China’s TV color sector has faced a double whammy. On one hand, it has had to continue down the path of investments in technologies. On the other hand, it has struggled to withstand malicious competition, with its best firms like TCL Electronics and Skyworth severely undervalued.
Actually, the white appliance sector, which is now the darling of the investment community, was once in the same position.
Between 1998 and 2004, overcapacity forced the air conditioner sector into a price war, which, at its worst, drove down the gross profit margin of Gree to only 18% and its net profit margin to a meager 2%. Soon, most brands started clearing their inventory. Gree and Midea became leaders, drawing on their technologies and sales channels. They quickly established brand advantages and started enjoying a high gross profit margin. At the moment, Gree’s gross profit margin is over 30%.
In recent years, the logic of the color TV market has been quietly changing.
One of the most noticeable things is the rise of China’s panel technology. According to statistics from CICC, BOE surpassed LG Display on shipments of LCD TV panels in 2019 to reach No. 1 around the world. CSOT, a close partner of TCL Electronics, also made its way to the top 5 that year.
Turbocharged by the right panel technology, Chinese firms can now keep pace with their Japanese and Korean counterparts in launching new products. TCL Electronics can even beat Samsung to new products powered by QLED and Mini Led.
The development of intelligent technologies is also noteworthy. At CES 2020, held in Las Vegas, TCL, Samsung, and Sony all came up with new TVs. Cutting-edge technologies such as 5G and AI overshadowed big-screen and high-definition as the most-stressed selling points.
TCL X9 8K QLED TV, a featured 8K product from TCL Electronics that sells for CNY 19,999, is equipped with a pop-up AI camera. Users can get rid of the remote control and interact with the product using voice instructions or gestures. It has built-in AI and 5G modules that set up connections to other home appliances so that users can manage them all together.
As the penetration of 5G increases, the TV is not just a carrier of content broadcast by TV stations anymore. It is more about creating a big screen ecosystem that links all home appliances.
As the most prominent home appliance, TV has the largest screen, which makes it a natural hub for a home IoT.
On this screen, users can download apps for entertainment or education, watch videos they like, or play online games. It also allows them to control the entire smart home remotely.
That is why TV has emerged as the traffic inlet for the home and why firms like Xiaomi or Huawei have scrambled to draw up their strategies for the big-screen ecosystem.
As a fixture in the business of TVs, TCL Electronics has long since made moves to establish a foothold in the smart TV arena. Apart from working with CSOT to secure a supply of high-quality panels, it has acquired Falcon Network Technology, which has become its trump card for developing software systems, VUI voice interaction solutions, and content.
Its stronger product competitiveness has naturally translated into market share gains.
In the Chinese market, the company has kept its sales volume about the mark of 7 million sets for years on end. A high sales volume has brought about a large number of active users as well as a sizable income from hardware. By the end of 2019, the company had 20.79 million daily active users, up 36.1% year on year.
To put that in perspective, Meituan and Tmall only have fewer than 15 million monthly active users.
Since it has got a grip on the traffic inlet in the living room, TCL Electronics has a lot of wiggle room for growing its Internet business. Falcon Network Technology has signed agreements with nearly 100 partners, including Tencent, Youku, iQiyi, and Xueersi, to propel the development of its TV platform. Besides, TCL Electronics has launched TCL Channel in Vietnam, India, Japan, Brazil, and Russia to offer overseas users a diversity of local content.
The company’s Internet business has turned into an unignorable profit generator, which raked in HKD 756 million of revenue in 2019, 108.7% higher than the previous year. The operating revenue of Falcon Network Technology from its main business shot up 50.7% to hit HKD 546 million. Its net profits after tax were HKD 175 million, up 137.8% year on year, and its net profit margin reached a staggering 32%.
Considering high sensitivity to data privacy in overseas markets, TCL Electronics has formed partnerships with Roku, Google, and Netflix, where it provides hardware technologies, and those firms provide contents. This mode has become quite popular among overseas users. In 2019, TCL Electronics, for the first time, posted HKD 210 million of sustainable revenue from overseas Internet business. That signaled its success in entering overseas Internet markets.
In the same year, the sales volume of TCL brand TV in overseas markets substantially increased by 26.1% year-on-year to 13.46 million sets. In July, it defeated Samsung and ranked No.1 in the US market by sales volume.
Improvements to technologies have created an opportunity for the company to transform itself and opened new room for making profits. Branding efforts have led to a hike in its market share. Its development path in the color TV sector is quite similar to that of a white appliance firm in early 2000.
The development of technologies for TVs has shown some trends, and the global TV sector has entered a stage of restructuring.
Since 2010, major companies like TCL Electronics, Xiaomi, and Hisense have surged to the top 5 on the league table of sales volume.
As China is close to finishing its urbanization, many investors assume that the home appliance industry has become a traditional one that is not so appealing. That is why TCL Electronics and some other firms in the industry are severely undervalued.
However, now is the best time for investing in these Chinese firms before the spectacular rise of them.
In July 2019, TCL Electronics surpassed Samsung and LG, and became No.1 in the US market in terms of sales volume. When their domestic markets were saturated, Sony and Samsung embarked on a journey of global expansion.
Now, Chinese firms like TCL Electronics are retracing that route.
4. Investment logic
After the 1930 stock market crash, Graham went broke in bargain-hunting. In his classic book Security Analysis, he introduced a notion known as the margin of safety, which holds that the intrinsic value of securities should be lower than their prices to give investments a cushion against errors in calculation.
TCL Electronics has a thick cushion for that purpose.
Operation-wise, the company has strong capabilities to keep going. Since 2015, it has made profits each year and its profitability has grown ever stronger. It has a stable operating cash flow, with a low level of long-term debts and a high working capital turnover ratio. Its management once sought financing, but that was mostly for strategic moves, like the acquisition of Falcon Network Technology.
They have been extremely generous and paid out dividends multiple times in the past 10 years. The dividend yield in 2019 was 6%, calculated based on the company’s current share price.
Growth-wise, the company’s operating revenue increased from HKD 33.5 billion in 2014 to HKD 47 billion in 2019. Over those years, its net profits skyrocketed from HKD 246 million to HKD 2.325 billion, up nearly 10 times.
Going forward, the company will further explore overseas markets, advance its Internet business, and boost the penetration of high-end products. All this will keep it on the track of growth.
The market cap of TCL Electronics is only above HKD 7 billion, and its P/E ratio is at a record low of 3.
Two factors are at work. On one hand, home appliance is closely associated with real estate, which is in the contraction phase of its cycle and suppresses the valuations of home appliance firms.
One the other hand, the Hong Kong stock market, where TCL Electronics is listed, has suffered from the trade dispute, protests, and the COVID-19 outbreak, causing most stocks there to be undervalued.
The current valuation of TCL Electronics is the result of a perfect storm. When real estate moves to the expansion phase of its cycle or the Hong Kong stock market gets back to its feet, the company, full of growth potential, will likely perform a “Davis Double Play “.
Even if its valuation is not corrected, which is the worst-case scenario, the company will still be highly investment-worthy due to its dividend yield of nearly 6% each year and its promising future in overseas markets.
Hong Kong Zhixin Financial News Agency Limited
Ms.Rachel Lei Tel: (86-755) 8254 5361
Ms.Lilian Lam Tel: (86-755) 8255 0643
Ms.Jules Zhu Tel: (86-755) 8277 0579
Ms.FancyWang Tel: (86-755) 2589 3557
Mr.Jason Wang Tel: (86-755) 2394 1306
Mr.Alex Xiao Tel: (86-755) 8323 6296
SOURCE: TCL Electronics Holdings Ltd via EQS Newswire
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