At 8:00 AM, tech enthusiasts were buzzing about TCL Group, which has been inactive for quite some time, rumored to be planning significant investments and business integrations. One of the focal points of interest in the industry is undoubtedly its semiconductor display division.
On the evening of July 12, TCL Group announced its intention to acquire 10.04% of the shares held by Huaxing Optoelectronics from Changjiang Hanyi, Xingyu Limited, Lin Zhou Xinglan, Lin Zhou Xingyong, Lin Zhou Xingyuan, and Lin Zhou Xinglian. The transaction amount was 4.034 billion yuan, to be paid through share issuance.
Following the conclusion of this deal, TCL Group will directly own 85.71% of Huaxing Optoelectronics. In recent years, Huaxing Optoelectronics has been a major contributor to TCL Group's profits and ranks as the second-largest TV LCD panel manufacturer in mainland China. According to data from research firm IHS, in 2016, Huaxing Optoelectronics accounted for 13% of the global TV panel market.
The establishment of Huaxing Optoelectronics was a crucial step in TCL’s vertical integration strategy for the upstream industrial chain. As the display panel industry gains momentum, TCL is also intensifying its efforts in industrial chain integration.
"Low-profile 'Cash Cows'"
Unlike BOE's initial acquisition of a Korean company to further its technological research, Huaxing Optoelectronics embarked on independent R&D from the start. In this capital- and technology-intensive sector, Huaxing Optoelectronics has faced numerous challenges but today stands as a symbol of efficiency and technology.
From the financial reports, Huaxing Optoelectronics is a top-tier asset for TCL Group, contributing nearly half of the company's profits in 2016. As a highly profitable segment, Huaxing Optoelectronics remains relatively quiet, a characteristic dictated by the nature of B2B business. An insider at Huaxing Optoelectronics revealed to reporters that TCL Multimedia supplies 40% of Samsung’s panel requirements, and contributes 20% of Samsung's needs. Other clients include domestic giants like Hisense and Skyworth.
Despite impressive profits, the cyclical nature of the panel industry means manufacturers face varying performance levels year after year. Continuous investment in next-generation production lines during lean periods is key to succeeding in the next competitive round, but these require substantial financial backing. Besides governmental support, Huaxing Optoelectronics aims to enhance its financing capabilities and development prospects through listing.
However, the backdoor listing attempts with Shenzhen Textiles have not been successful twice. Following the failed attempt, TCL has been actively working on Huaxing Optoelectronics’ reorganization plan this year. In May, TCL Group transferred approximately 37% of its shares in "Huaxian Optoelectronics" to Huaxing Optoelectronics. This move aims to integrate upstream and downstream panel companies more tightly. Huaxing Optoelectronics primarily produces panel glass, while Huaxian Optoelectronics focuses on modules. Their collaboration will deepen as production lines are constructed.
TCL Group's acquisition of Huaxing Optoelectronics is also seen as a strategic move in the semiconductor display sector. The announcement highlighted two main objectives. First, to strengthen the management and control of Huaxing Optoelectronics, thereby enhancing the overall operational efficiency of listed companies and improving shareholder returns. Secondly, to allow key management personnel and core employees of Huaxing Optoelectronics to hold shares in the listed company, which will aid in improving the company's incentive systems and talent attraction.
Nevertheless, compared to industry leaders like Samsung, there remains a gap between Huaxing Optoelectronics and its peers in the semiconductor display field. The aforementioned insider acknowledged to reporters, “Huaxing Optoelectronics' technology isn't the most advanced. Currently, we are maintaining our efficiency leadership while pursuing product leadership and aiming for technological leadership. Although we are catching up quickly to world-class players like Samsung and Sharp, our current efficiency is higher.â€
“Overcapacity Concerns?â€
TCL Group has made considerable investments in the upstream industry chain. Huaxing Optoelectronics now operates three mass-production lines. Additionally, TCL has focused its semiconductor resources on Huaxing Optoelectronics.
However, it must be noted that external competitors are equally formidable. In the acquisition announcement, TCL Group also outlined the risk of overcapacity. From 2017 to 2019, Innolux Optoelectronics Gen. 8.6, Huike Electronics Gen. 8.6, BOE Fuzhou Gen. 8.5, BOE Hefei Gen. 10.5, Huaxing Optoelectronics Shenzhen Gen. 11, China Electronics Xianyang Gen. 8.5, China Electronics Chengdu Gen. 8.6, and Sharp Guangzhou Gen. 10.5 lines will come online. Domestic LCD panel production capacity will surpass South Korea to become the world’s leading producer. A significant portion of Huaxing Optoelectronics’ production capacity will need to be absorbed externally, raising the possibility of price reductions.
According to statistics from Sigmaintell, in the first half of 2017, Chinese display panel manufacturers maintained high growth in production area, accounting for 24.5% of the global display industry, up 22.7% year-on-year. Even with the depreciation of the RMB, the profitability of mainland Chinese panel manufacturers continued to rise. It is anticipated that in the first half of 2017, the comprehensive operating profit margin of mainland China's main panel manufacturers will reach 12%, up 9% year-on-year, marking the highest level in the past five years. Meanwhile, South Korea's display industry is increasing its investment in the large-sized mid-to-high-end market and the AMOLED market, driving rapid growth in the OLED materials and equipment industries. Competition between Chinese and Korean companies has thus become a focal point.
In response to this competition, TCL Group is attempting to leverage its own strengths by continuously accumulating factory technology through Huaxing Optoelectronics. The production of liquid crystal panels requires exceptionally high external environments, such as air cleanliness, and each link’s upgrade demands slow accumulation of technology in the actual production process. As LCD panel technology matures, improvements on the production line become increasingly critical.
Today, Huaxing Optoelectronics’ factories are fully automated and intelligent. Zhang Feng, Director of Huaxing Optoelectronics, told the 21st Century Business Herald: “By employing some intelligent controls, first, the manufacturing cycle from production to output can be shortened by 38%; secondly, defective products can be reduced by about 42%; thirdly, through warehouse automation and deployment, the time from our output to customer delivery can be cut by 32%; fourthly, the product defect rate can be lowered by 28%.â€
On the other hand, TCL Group is seeking another path in flexible displays. For quantum dot technology and OLED technology, it has adopted a dual-track approach. It also established a research room to develop flexible panel printing production technology. Zhang Feng stated: “Flexible display technology faces three main challenges: product design, equipment processing technology, and materials. The latter two are more critical. The technology for the previous processing technology is largely concentrated in Korean companies, and the materials mainly depend on Japanese companies, but these technologies are gradually being released.â€
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