Electronic enthusiasts, did you hear? TCL Group, which has been inactive for quite some time, is reportedly crafting a fresh investment and business integration strategy. Unsurprisingly, the semiconductor display panel is taking center stage within this plan.
On the evening of July 12, TCL Group revealed its intention to buy 10.04% of the Huaxing Optoelectronics shares held by Changjiang Hanyi, Xingyu Limited, and others. The deal's price tag stood at 4.034 billion yuan, which will be fully paid via stock issuance.
Following this transaction, TCL Group will directly own 85.71% of Huaxing Optoelectronics. Huaxing Optoelectronics has long been the profit engine of TCL Group, currently ranking second in the mainland China TV LCD panel manufacturer market share race. According to IHS Market research, Huaxing Optoelectronics accounted for 13% of the global TV panel market in 2016.
The establishment of Huaxing Optoelectronics marks a crucial step in TCL's vertical integration of its upstream industrial chain. With the display panel industry gaining momentum, TCL is also pushing deeper into the integration of its industrial chain.
A 'Profit Cow' Under the Radar
Unlike BOE, which began by acquiring Korean firms and their technologies, Huaxing Optoelectronics initially focused on recruiting talent forè‡ªä¸»ç ”å‘. In this capital- and tech-intensive sector, Huaxing Optoelectronics has weathered some tough times. Today, the company is recognized for its profitability and technological prowess.
From the financial reports, Huaxing Optoelectronics stands as a high-quality asset for TCL Group, contributing half of the company’s profits in 2016. As a profitable cornerstone of TCL Group, Huaxing Optoelectronics remains relatively低调, which is largely due to the nature of its business-to-business (B2B) operations. Insiders at Huaxing Optoelectronics shared with reporters that currently, 40% of Samsung’s panel supplies come from TCL Multimedia, while Samsung makes up 20% of Huaxing Optoelectronics’ total sales. The rest of their clients include top five Chinese TV manufacturers like Hisense and Skyworth.
Despite the substantial profits, the cyclical nature of the panel industry means manufacturers experience fluctuating performance. Continuously investing in next-generation production lines during sluggish periods is key to succeeding in the next competitive round, and these investments often require billions of dollars. Besides government support, Huaxing Optoelectronics aims to attract more financing platforms and expand development opportunities through listing.
However, the previous attempts at restructuring Huaxing Optoelectronics with Deep Textile did not pan out. After the listing stalled, TCL has been refocusing its efforts on Huaxing Optoelectronics' reorganization this year. For instance, in May, TCL Group transferred about 37% of its Huaxing Optoelectronics shares to Huaxing Optoelectronics itself. The rationale behind this move is to strengthen the integration of upstream and downstream companies within the panel industry. While Huaxing Optoelectronics primarily produces panel glass, Huaxian Optoelectronics focuses on modules. Their collaboration will grow closer as production lines are built.
Now, TCL Group's acquisition of Huaxing Optoelectronics shares signifies its commitment to semiconductor displays. The announcement states two primary goals for this transaction. First, enhancing the management and control of Huaxing Optoelectronics will boost the overall operational efficiency of the listed company and increase shareholder returns. Second, the company plans to enable key management personnel and core employees of Huaxing Optoelectronics to hold shares in the listed company. This move aims to improve the company's incentive systems and attract talent.
Nevertheless, in the realm of semiconductor displays, Huaxing Optoelectronics still lags behind Samsung. The insider admitted to the reporter: “Huaxing Optoelectronics’ technology isn’t the most advanced. At this stage, while maintaining efficiency leadership, we’re pursuing product leadership and leading-edge technology. Compared to world-class competitors like Samsung and Sharp, Huaxing Optoelectronics is catching up quickly, and we’re now more efficient.â€
Is Overcapacity a Concern?
TCL Group has made significant investments in the upstream industry chain. Currently, Huaxing Optoelectronics operates three production lines. Moreover, TCL has centralized its semiconductor resources in Huaxing Optoelectronics.
However, it must be noted that external rivals are formidable. In the acquisition announcement, TCL Group also highlighted 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 will all come online, making domestic LCD panel production surpass South Korea to become the world leader. However, a significant portion of Huaxing Optoelectronics’ production capacity will need to be absorbed externally, potentially leading to price cuts.
According to Sigmaintell statistics, in the first half of 2017, China’s display panel manufacturers maintained high growth in production area, accounting for 24.5% of the global display industry, a 22.7% increase. Even amid RMB depreciation, the profitability of mainland Chinese panel makers continued to rise. It is expected that in the first half of 2017, the consolidated operating profit margin of China’s main panel makers will reach 12%, up 9% from last year and the highest in the past five years. Meanwhile, the Korean display industry strengthened its investments in the large-size mid-to-high-end market and the AMOLED market, showing rapid growth in the OLED materials and equipment industry. The competition between Chinese and Korean companies has become a focal point.
In the face of competition, TCL Group is trying to leverage Huaxing Optoelectronics’ continuous accumulation of factory technology to gain an edge. Given the demanding external conditions for producing liquid crystal panels, such as air cleanliness, upgrading every link requires the accumulation of practical production experience. In the case of mature LCD panel technology, improvements on the production line become even more crucial.
Today, Huaxing Optoelectronics’ factory is automated and employs intelligent production. Zhang Feng, Director of Huaxing Optoelectronics, told the 21st Century Business Herald: “With some intelligent control, first, the manufacturing cycle from production to output can be shortened by 38%; second, the number of defective products can be reduced by about 42%; third, through warehouse automation and deployment, the time from our output to customer delivery can be shortened by 32%; fourth, the product defect rate can be reduced by 28%.â€
On the Other hand, TCL Group is exploring a different path in flexible displays, combining quantum dot technology and OLED technology, and establishing a printing production technology for researching and developing flexible panels. Zhang Feng said: “Flexible display technology faces three main challenges: product design, equipment processing technology, and materials. The latter two are more critical. The technology of the previous processing methods is generally concentrated in Korean enterprises, and materials mainly rely on Japanese companies. However, the technology in these areas is gradually being released.â€
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