Preannounced earnings up an estimated 410-416% YoY

    BOE Technology (BOE) preannounced 2021 results: Estimated revenue totaled Rmb215-220bn, attributable net profit grew 410-416% YoY to Rmb25.7-26bn, and recurring core profit rose 791-802% YoY to Rmb23.79-24.09bn. In 4Q21, revenue could reach Rmb51.7-56.7bn, with recurring net profit possibly totaling Rmb5.2-5.5bn, beating our expectations. We note the firm’s profitability improved in 2H21 as adjustments in product structure stabilized price fluctuations. We expect the price of large panels to rebound in 2Q22, and organic light-emitting diode (OLED) shipment to grow rapidly, boosting earnings.

    Trends to watch

    BOE adjusted product structure to offset cyclical fluctuations; profitability further improves. We expect liquid crystal display (LCD) panel supply to remain stable in the long term, given limited new production lines. As the market share of leading manufacturers is increasing, we think the firm can bargain with suppliers to pass through the price pressure to the upstream. As the leading panel supplier of multiple downstream sectors, BOE can leverage its clients' diversity and rich production lines to optimize panel size and adjust product structure, improving the profitability of its traditional LCD business. Data from Omdia shows that declines in panel prices narrowed MoM in November 2021, and the price of 32” and 43” panels were already close to the bottom in the previous cycle in December 2021. With the volume ramp-up of in-car displays and wearable products, we expect the trend toward larger sizes to evolve further. Panel price may slightly rebound in 2Q22, driven by the stocking up on inventory in 3Q. The price of integrated circuits also started to fall, driving the recovery of the firm’s profitability.

    OLED business may start to generate earnings in 2022; growth of foldable display may beat. According to Sigmaintell, BOE’s flexible OLED smartphone panel shipment totaled around 60mn pieces in 2021, up nearly 60% YoY. BOE’s flexible display shipment should rank No.1 in China and No.2 globally, according to our estimates. With improvements in capacity utilization rate and product pass rate, we expect the OLED business to achieve breakeven in 2022 and make a profit. OLED business’ shipment may exceed 100mn pieces in 2022. We expect BOE to cooperate closely with well-known brands and benefit from the rapid growth of the foldable smartphone industry. BOE is the smartphone screen supplier of Honor and other brands’ flagship foldable smartphones. It also supplies OLED foldable notebook screens to Asus and other notebook brands.

    Valuation and recommendation

    As BOE grew stronger in product structure optimization in 2H21 despite the sector downtrend, we lift our 2021 and 2022 revenue forecasts 9% and 1% to Rmb217.5bn and Rmb231.7bn. The profitability of BOE’s OLED and other businesses also improved; thus, we raise our 2021 and 2022 net profit forecasts by 11.4% and 10% to Rmb25.7bn and Rmb26.6bn. We introduce our 2023 forecasts for revenue of Rmb254.1bn and net profit of Rmb27.4bn. The stock is trading at 1.4x 2022e and 1.3x 2023e P/B. Given lower sector valuation, we maintain an OUTPERFORM and a TP of Rmb7.36 (2.1x 2022e and 2x 2023e P/B), offering 48.7% upside.

    Risks

    Industry business climate disappoints; uncertainties in global COVID-19 headwinds; exiting of South Korean manufacturers disappoints.

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