Electronic enthusiasts might want to set their alarms for 8 o'clock in the morning, as news has surfaced that TCL Group, which has been off the radar for some time, is crafting a fresh investment and business integration strategy. The semiconductor display panel is expected to be the cornerstone of this plan.
On the evening of July 12, TCL Group announced its intention to acquire 10.04% of the equity in Huaxing Optoelectronics, held by Changjiang Hanyi, Xingyu Limited, and several individuals named Lin. The deal amounts to 4.034 billion yuan, all of which will be settled through the issuance of shares.
Once the transaction is completed, TCL Group will hold a controlling stake of 85.71% in Huaxing Optoelectronics. Known as the profit engine of TCL Group, Huaxing Optoelectronics holds the second-largest market share among TV LCD panel manufacturers in mainland China. According to IHS Market data, Huaxing Optoelectronics accounted for 13% of the global TV panel market in 2016.
The establishment of Huaxing Optoelectronics marks a significant step in TCL's vertical integration strategy within the upstream industrial chain. As the display panel industry gains momentum, TCL is deepening its supply chain integration efforts.
The Low-Key "Profit Cow"
Unlike BOE’s initial acquisition of Korean firms and technologies, Huaxing Optoelectronics started with talent recruitment for independent research and development. In this capital- and technology-intensive sector, Huaxing Optoelectronics has weathered tough times. Today, the company is recognized for its strong profitability and technological prowess.
According to financial reports, Huaxing Optoelectronics is a high-value asset for TCL Group, contributing half of the company’s profits in 2016. As a major profit driver, Huaxing Optoelectronics remains relatively低调 (low-profile), a trait typical of B2B businesses. Insiders at Huaxing Optoelectronics mentioned that TCL Multimedia supplies 40% of Samsung’s panel needs, while Samsung accounts for 20% of Huaxing’s total output. The rest of the customer base consists of top-tier Chinese TV manufacturers like Hisense and Skyworth.
Despite the attractive profits, the cyclical nature of the panel industry means manufacturers endure periods of sluggish performance. Continuous investment in next-generation production lines during these lean times is crucial for future competitiveness. With costs reaching tens of billions of dollars, steady funding is essential. Besides government support, Huaxing Optoelectronics aims to secure more financing platforms and development opportunities through listing.
However, the proposed listing with Deep Textile did not yield results. Following the failed listing attempt, TCL focused on Huaxing Optoelectronics' restructuring this year. In May, TCL Group transferred approximately 37% of Huaxian Optoelectronics’ shares to Huaxing Optoelectronics. This move aimed to integrate upstream and downstream panel suppliers more tightly. Huaxing Optoelectronics primarily manufactures panel glass, while Huaxian Optoelectronics specializes in modules. Closer collaboration is anticipated as production lines develop.
Now, TCL Group’s acquisition of Huaxing Optoelectronics shares underscores the importance of semiconductor displays. The announcement highlighted two primary objectives. First, strengthening management control over Huaxing Optoelectronics will enhance the overall operational efficiency of listed companies and boost shareholder returns. Second, the company plans to offer shares to key management personnel and core employees of Huaxing Optoelectronics to improve the firm's incentive systems and attract talent.
Nevertheless, compared to Samsung, Huaxing Optoelectronics still has a ways to go in the semiconductor display field. An insider admitted to the press: "Huaxing Optoelectronics' technology isn't the most advanced. Currently, while maintaining efficiency leadership, we're chasing product and technological leadership. Although we’re still catching up to world-class players like Samsung and Sharp, we believe we’re becoming more efficient."
Is There an Overcapacity Risk?
TCL Group has invested heavily in the upstream supply chain. Today, Huaxing Optoelectronics operates three production lines. Additionally, TCL has channeled substantial resources into the semiconductor sector through Huaxing Optoelectronics.
It must be noted that external rivals are formidable. In the acquisition announcement, TCL Group also cited the risk of overcapacity. From 2017 to 2019, Innolux’s 8.6th generation line, Huike Electronics’ 8.6th generation line, BOE Fuzhou’s 8.5th generation line, BOE Hefei’s 10.5th generation line, Huaxing Optoelectronics Shenzhen 11th generation line, China Electronics Xianyang’s 8.5th generation line, China Electronics Chengdu’s 8.6th generation line, and Sharp Guangzhou’s 10.5th generation line have come online, pushing China’s LCD panel production capacity beyond South Korea to lead globally. However, a significant portion of Huaxing Optoelectronics' output still needs to be absorbed externally, posing a potential risk of price cuts.
According to Sigmaintell statistics, in the first half of 2017, China’s display panel manufacturers maintained robust growth in production area, accounting for 24.5% of the global display industry, a rise of 22.7%. Even amidst RMB depreciation, the profitability of mainland China’s panel manufacturers continued to improve. It’s projected that the consolidated operating profit margin of China’s main panel makers will reach 12% in the first half of 2017, up 9% from the previous year and the highest level in the past five years. Meanwhile, the Korean display industry intensified investments in the large-size mid-to-high-end market and the AMOLED market, spurring rapid growth in the OLED materials and equipment sectors. Competition between Chinese and Korean companies has become a focal point.
In the face of fierce competition, TCL Group seeks to leverage Huaxing Optoelectronics' accumulated factory technology to gain an edge. Liquid crystal panel production demands precise environmental conditions, including air cleanliness. Upgrades across every link require real-world production experience. In mature LCD panel technology, enhancements on the production line are increasingly vital.
Today, Huaxing Optoelectronics’ factories employ automated and intelligent production methods. Zhang Feng, Director of Huaxing Optoelectronics, told the 21st Century Business Herald: "Through certain intelligent controls, the manufacturing cycle from production to output can be reduced by 38%; the number of defective products can be cut by about 42%. Additionally, through warehouse automation and deployment, the time from our output to delivering to customers can be shortened by 32%; the product defect rate can also be reduced by 28%."
On another front, TCL Group is exploring flexible displays by combining quantum dot and OLED technologies, while also researching printing production technology for flexible panels. Zhang Feng stated: "Flexible display technology faces three main challenges: product design, equipment processing technology, and materials. The latter two are more critical. The processing technology is largely concentrated in Korean enterprises, while materials mainly depend on Japanese firms. However, these technologies are gradually being released."
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