20141203-光大证券-Time_for_Bargain_Hunting_15页_202kb

TCL Multimedia (1070 HK) Summary

Core Content

TCL Multimedia (TCLM) is one of the top 5 LCD TV suppliers globally, and it is the largest player in the PRC market with a market share of 17.1% in 1H14. The company has been experiencing significant earnings volatility over the past five years, primarily due to ineffective inventory and cost control. However, with improved cost and inventory management, TCLM is expected to return to profit in 2014E and resume earnings growth in 2015E and 2016E. The report initiates coverage with a BUY rating, setting a target price of HK$4.0, which is based on a 1.2x P/BV ratio, one standard deviation above its historical average. This valuation is considered not aggressive compared to its peers.

Key Financials

Market Overview

• Global TV Shipments: Expected to grow steadily at 4–6% in 2014–2016 due to strong replacement demand and price erosion.
• PRC TV Shipments: Declined by more than 5% in 2014E but will resume steady growth of 2–4% YoY in the following years.
• 4K TV Penetration: Increased significantly in the PRC from 0.4% in 2Q13 to 15.2% in 2Q14, and is expected to reach 17–22% in 2014E.

Company Overview

• Market Position: Fourth largest global TV manufacturer after Samsung, LG, and Sony.
• Sales Network: Strong global presence with two regional business centers and four business units covering over 130 countries.
• PRC Network: 33 sales companies and 219 affiliated service centers, with 3,000 sales points covering tier 3 to tier 6 cities.
• Brands: TCL, ROWA, and Thomson, with TCL primarily targeting PRC, Europe, North America, and emerging markets.

Earnings and Profitability

• Earnings Volatility: TCLM's net margin fluctuated between -3.6% and 2.5% over the past five years, largely due to inventory and cost control issues.
• Improvement in 2014E: Expected net margin of 0.8% in 2014E and 1.2% in 2015E, with a return to profit in 2014E.
• Profitability in 3Q14: Recorded a profit of HK$58.7m, compared to a loss in 3Q13, driven by improved margins and cost control.
• Operating Margin: Improved by 3.3ppt YoY to 2.2% in 3Q14, indicating progress in cost management.

Key Risks

• Technological Changes: Rapid changes in TV technology and consumer preferences pose a risk to sales.
• Competition: Intense competition from Samsung, LG, Sony, Hisense, and Panasonic.
• Economic Slowdown: Potential decline in replacement demand due to economic downturns in PRC and global markets.
• Raw Material Prices: Fluctuations in component costs could negatively impact profitability.
• Currency Risk: Overseas sales account for 41% of total sales, making it vulnerable to currency fluctuations.

Strategic Initiatives

• "Double +" Strategy: Focuses on "intelligence + internet" and "products + services" to diversify into smart devices and additional services.
• O2O Platform: Aimed at enhancing cost advantages and integrating traditional and new media marketing strategies.
• Cost Control: Continued efforts to manage operating expenses and improve margins.

Financial Position

• Net Debt-to-Equity Ratio: 14.8% as of 3Q14, indicating a healthy financial position.
• Cash Flow: Free cash flow is expected to improve from HK$308m in 2014E to HK$518m in 2016E, reflecting better cash generation and cost management.

Investment Outlook

• Target Price: HK$4.0, based on 1.2x P/BV ratio, which is one standard deviation above its average.
• Earnings Growth: Expected to grow at a CAGR of 56.2% for operating profit from 2013 to 2016.
• Valuation: Target price is not aggressive compared to peers, with an average P/B of 3.2x and median of 2.4x for 2014E.

Conclusion

TCLM is positioned to return to profit in 2014E and benefit from steady growth in global TV shipments and improved margins. The company's strong market presence and strategic initiatives offer growth potential, though it must manage the risks associated with competition, technology shifts, and currency fluctuations. With a strong balance sheet and improving financial metrics, TCLM is a promising investment opportunity.