CICC: TCL Electronics Outperforms the Industry, Overseas Business is Eye-catching and Global TV Shipments Ranks No.2

TCL Electronics (1070.HK) announced 2019 interim results. It recorded a turnover of HK$ 22.72 billion, up by 8.0% YoY. Profits attributable to owners of the parent was HK$ 1.36 billion, up by 138.1% YoY, beating CICC's expectation. After deducting the one-off non-operating gain (HK$ 790 million) due to the remeasurement of the fair value of 44.44% pre-existing equity interest in Falcon Network Technology held by the company as of the acquisition date in 1H 2019 and the one-off gain (HK$ 155 million) from sales of properties in 1H18, the profits attributable to owners of the parent in 1H19 was HK$ 572 million, up by 37.5% YoY, which meets CICC's expectation.

In 1H19, the overseas business of TCL Electronics performed outstandingly, sales volume of TCL brand TVs in overseas markets had significantly increased by 49.8% YoY to 7.07 million sets, which led to a notable increase of 32.5% YoY to HK$ 10.77 billion on turnover. The operating results of TCL brand TV in overseas markets surged by 132.2% YoY to HK$ 441 million. Although the competition of the domestic TV market was intense, the TCL brand TVs sales volume increased to 3.24 million sets up by 6.9% YoY in the PRC market, and the Company recorded a turnover of HK$ 6.22 billion.

During the period, despite total shipment of global brand TV industry slightly decreasing by 0.4% to 110 million units, the global TV sales volume of TCL Electronics achieved 15.53 million sets, up by 17.9% YoY, significantly outperformed the market. The global shipment of TCL Electronics ranked No. 2, after Samsung, and its TV brand business in North America, France, Pakistan and the Philippines ranked top 3 in these markets.

The Internet business achieved breakthrough. As the Company's position in global TV market has been improved, it deepens the cooperation with Google and Roku and gained recurring revenue sharing on Internet business. In 1H19, the revenue of the overseas Internet business was HK$ 96 million. What's more, after increasing stake in Falcon Network Technology (Internet TV platform for TCL brand TV in the PRC), TCL Electronics started to consolidate the PRC internet business in April 2019. In the first half of 2019, Falcon's revenue jumped by 125.2% YoY to HK$ 350 million. Its net profit was HK$ 78 million. The average daily number of global active users increased to 17.07 million.

TCL Electronics has the advantages in the vertical integration of industrial chain, global production capacity layout and cost-performance ratio in overseas markets, which will lead to the continuous development in the future. By relying on its overseas markets, TCL Electronics still will be able to achieve good development in the future. In addition, smart TV Internet business is also an important profit growth point.

With the profits of 2019 and the fair value remeasurement, CICC raised 2019 net profit forecast by 77% and the 2019 and 2020 earnings per share forecast are HK$ 0.78 and HK$ 0.50 respectively. It reiterates "Outperform the industry" rating and a target price of HK$ 5 on TCL Electronics, corresponding to P/E ratio 6.4x and 9.9x for 2019 and 2020 respectively, representing an upside potential of 47.5% from the current share price. The current stock price corresponds to a P/E ratio of 4.3x and 6.7x in 2019 and 2020.