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BOE Technology Version 1 | Bloomberg: 000725 CH Equity | Reuters: 000725.SZ Refer to Important Disclosures at the End of This Report

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BOE Technology Version 1 | Bloomberg: 000725 CH Equity | Reuters: 000725.SZ Refer to Important Disclosures at the End of This Report China / Hong Kong Equity Radar BOE Technology Version 1 | Bloomberg: 000725 CH Equity | Reuters: 000725.SZ Refer to important disclosures at the end of this report DBS Group Research . Equity 27 Sep 2019 BUY (Initiating coverage) Riding on price stabilisation of LCD Last Traded Price ( 26 Sep 2019):RMB3.71(CSI300 Index : panels and upgrade to high-ASP OLED 3,841) • The world’s largest panel suppliers, riding on price Price Target 12-mth:RMB4.70 (26.7% upside) stabilisation of LCD panels and upgrade to high-ASP OLED Analyst • Increasing exposure to high-ASP OLED panels Susanna Chui, CFA+852 36684194, [email protected] • Price stabilisation or even recovery of LCD panels Tsz-Wang TAM, CFA+852 36684195, [email protected] • Initiating coverage with BUY and TP of Rmb4.70 Price Relative The world’s largest panel suppliers, riding on price stabilisation of LCD panels and upgrade to high-ASP OLED. We initiate coverage on BOE with a BUY rating with TP of Rmb4.70. BOE is the world’s largest panel suppliers in terms of shipments. Riding on price stabilisation of LCD panels and upgrade to high-ASP OLED panels, we expect BOE’s net profit to deliver a CAGR of 30% in FY18-21F. It is trading at 24x FY20F PE, versus 5-year average of 28x and peers’ 18-46x FY20F PE. Increasing exposure to high-ASP OLED panels. It is expected OLED Forecasts and Valuation panel adoption in smartphones will rise from 31% in 2018 to 52% FY Dec (RMBm) 2017A 2018A 2019F 2020F in 2021F with OLED’s advantages over LCD, including reduced Turnover 93,800 97,109 118,866 138,721 EBITDA 23,555 21,094 24,759 29,985 thickness and flexible design (i.e. curved, foldable for flexible OLED Pre-tax Profit 9,741 4,122 4,589 6,557 panels). Flexible OLED panels for smartphones has higher ASP of Net Profit 7,568 3,435 3,845 5,501 USD87 in 2018, versus LCD panels’ USD17. BOE, which will be the Net Pft (Pre Ex) (core profit) 7,568 3,435 3,845 5,501 Net Profit Gth (Pre-ex) (%) 302.0 (54.6) 11.9 43.1 world’s second largest OLED panel suppliers after Samsung, with EPS (RMB) 0.22 0.10 0.11 0.16 supply share to grow from 7% in 2019 to 11% in 2020F, will be EPS Gth (%) 304.8 (54.5) 11.9 43.1 Diluted EPS (RMB) 0.22 0.10 0.11 0.16 beneficiaries of upgrade from LCD to high-ASP OLED. DPS (RMB) 0.05 0.03 0.03 0.04 Price stabilisation of LCD panels. LCD panels are still BOE’s major BV Per Share (RMB) 2.42 2.47 2.41 2.39 revenue contributor with 70%+ of FY18 revenue. ASP of LCD PE (X) 17.1 37.6 33.6 23.5 P/Cash Flow (X) 4.9 5.0 4.3 4.6 panels has declined 20%+ y-o-y in 2018, because demand shift P/Free CF (X) nm nm nm nm from LCD to OLED and LCD capacity expansion led to LCD EV/EBITDA (X) 8.2 10.8 10.3 9.4 Net Div Yield (%) 1.3 0.8 0.8 1.1 oversupply. Despite ongoing capacity expansion in 2019-2020F, we P/Book Value (X) 1.5 1.5 1.5 1.6 expect capacity loading control of panel suppliers will stabilise LCD Net Debt/Equity (X) 0.4 0.5 0.8 1.0 panel price, as price of large size panels is close to cash cost. ROAE(%) 8.9 4.0 4.6 6.6 Valuation: Earnings Rev (%): New New Our TP of Rmb4.70 is based on 30x FY20F PE, which is 2SD above Consensus EPS (RMB) 0.11 0.15 Other Broker Recs: B: 13 S: 3 H: 5 5-year average. The valuation is justified by its FY18-21F net profit CAGR of 30%, riding on price stabilisation of LCD panels and Source of all data on this page: Company, DBS Bank (Hong Kong) Limited upgrade to high-ASP OLED. (“DBS HK”), Thomson Reuters Key Risks to Our View: Price pressure of LCD panels amidst ongoing capacity expansion. At A Glance Issued Capital (m shrs) 33,862 Mkt Cap (RMB$m/US$m) 125,629 / 17,616 Major Shareholders (%) Beijing State-Owned Capital Operation & Mgmt Center 12.0 Chongqing Yuzi Photoelectric Industrial Inv. 7.8 Hefei Jianxiang Investment Co., Ltd. 7.4 Free Float (%) 72.8 3m Avg. Daily Val. (US$m) 399.23 GICS Industry: Information Technology / Tech. Hardware & Equipment ed- CK/ sa- CS /DL Equity Radar BOE Technology Growth Prospects and Valuation Sales breakdown – segments (2018) Capacity expansion LCD panels. BOE is the world’s largest panel Other suppliers in terms of shipments (#1 in TV, monitors, notebooks 3% and tablets, #2 in smartphones after Samsung [005930 KS]). It has c.20% of the world’s LCD panel capacity in 2019F, with 9 Offset -10% production line in Beijing (2), Chengdu (1), Hefei (3), Ordos (1), Port device Chongqing (1), Fuzhou (1). 1 production line in Wuhan (1) will Smart medical business business come in 2020F, which will lead to LCD volume growth. Smart IoT 72% 1% business LCD panel price. ASP of LCD panels has declined 20%+ y-o-y, 14% because shift of demand from LCD panels to OLED panels as well as LCD capacity expansion of China’s panel suppliers led to oversupply of LCD panels. We expect continued oversupply of Sales breakdown – regions (2018) LCD panels in 2019-2020F, but price stabilisation of LCD panels. 3 LCD production lines of Truly (732 HK), Hon Hai/Sharp (2317 TT) and HKC, has entered mass production in 2019F, and 3 LCD Other Asian production lines of BOE and HKC will come in 2020F. Despite countries and ongoing capacity expansion of Chinese panel suppliers in 2019- regions 46% 2020F, we expect switch from LCD production lines into OLED by other panel suppliers such as Samsung and LG Display (034220 China Mainland KS), will stabilise LCD panel price, as price of large size panels is Europe 44% 4% close to cash cost. Samsung has switched 1 LCD production line into OLED production line in 2019. America 6% Higher-ASP OLED panel adoption in smartphones. We expect the increasing demand for OLED panels in mid to high end Sales breakdown – business divisions (2018) smartphones, with OLED panels’ advantages over LCD panels, Other including reduced thickness, enhanced picture quality, improved Business power efficiency, compatibility with underglass fingerprint, and 3% design flexibility (i.e. curved, foldable for flexible OLED panels). Trendforce expects OLED panel adoption in smartphones to raise from 31% in 2018 to 52% in 2021F. Flexible OLED panels for smartphones has higher ASP of USD87 in 2018, versus LCD Main Business panels’ USD17. BOE, which will be the world’s second largest 97% OLED panel suppliers after Samsung, with supply share to grow from 7% in 2019 to 11% in 2020F, will be beneficiaries of upgrade from LCD to high-ASP OLED. Gross Profit breakdown – segments (2018) Capacity expansion in OLED panels. Korean players such as Samsung, LG Display dominates higher-ASP OLED panel market Other with 52% and 10% of the world’s OLED panel capacity 14% respectively, while BOE has only c.7% of the world’s OLED panel Offset capacity in 2019F, with 2 production line in Chengdu (1) and -11% Mianyang (1). However, BOE will catch up with 11% of the Smart medical business world’s OLED panel capacity in 2020F, beyond LG Display, with 1 3% Port device more OLED production lines in Chongqing (1) to be Smart IoT business 65% commercialised in 2020F. BOE’s OLED panel capacity as % of its business total panel capacity will increase from 11% in 2019F to 14% in 7% 2020F. Source: Company, DBS HK Client expansion. Besides supplying OLED panels to Huawei (i.e. P30 Pro and Mate 30 Pro), we expect BOE to kick off OLED panel shipments to new models for other China’s smartphones vendors such as Xiaomi (1810 HK) and OPPO in late 2019F and early 2020F. And as per a recent Nikkei report, Apple (AAPL US) has been in the final stage of talks with BOE to adopt BOE’s OLED panel for its iPhone displays. A future deal with Apple will be a significant milestone for BOE, becoming Apple’s first OLED panel supplier outside of Korea. Page 2 Equity Radar BOE Technology Balance Sheet: Net debt position. BOE’s net debt to equity ratio increased Leverage & Asset Turnover (x) from 6% in 2015 to 54% in 2018 since it began developing OLED business in 2014. As of December 2018, BOE had a net debt position of Rmb65bn (Rmb116bn debt and Rmb51bn cash). Its operating cash inflows was Rmb26bn, which is lower than net capex of Rmb54bn. However, backed by largest shareholder, Capital Management Center, the biggest SOE in China, BOE has been receiving benefits for capacity expansion and technology development, including low-cost banking loan. Share Price Drivers: Increasing exposure to high-ASP OLED panels. It is expected Capital Expenditure OLED panel adoption in smartphones to raise from 31% in 2018 to 52% in 2021F with OLED’s advantages over LCD, including reduced thickness and flexible design (i.e. curved, foldable for flexible OLED panels). Flexible OLED panels for smartphones has higher ASP of USD87 in 2018, versus LCD panels’ USD17. BOE, which will be the world’s second largest OLED panel suppliers after Samsung, with supply share to grow from 7% in 2019 to 11% in 2020F, will be beneficiaries of upgrade from LCD to high-ASP OLED.
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