BOE: Expectations of a rebound have been fulfilled, can the peak season stage a major comeback?

On the evening of April 28, 2023, Beijing time, BOE Technology Group Co., Ltd. (000725.SZ) released its Q1 financial report for 2023 (ending in March 2023) after the close of the A-share market, with the following highlights:

Revenue: Prices have not rebounded significantly, and demand remains weak. BOE's total revenue for Q1 2023 was CNY 38 billion, a year-on-year decrease of 24.8%, lower than Bloomberg's consensus estimate (CNY 41.7 billion). The continued decline in the company's revenue is mainly due to the sluggish demand caused by the insignificant rebound in panel prices. Although panel prices began to bottom out at the end of last year, the price increase in Q1 was not significant.
Gross margin: The increase in prices directly boosted the gross profit margin. BOE's total revenue for Q1 2023 was CNY 2.6 billion, down 75.9% year-on-year. The gross profit margin for the quarter was 6.8%, which increased slightly from the previous period, mainly due to the rebound in prices. As panel prices have quickly rebounded since March, the company's gross profit margin is expected to increase rapidly.
Operating and expense situation: Inventory turnover is obvious, and cost control has started. Although BOE had over CNY 20 billion in inventory this quarter, the significant reduction in the impairment of company assets indicates the company's confidence in the recovery of demand and inventory turnover. Overall expenses have decreased, and the company has started to control costs, but some costs show rigid characteristics.

Overall, BOE's financial report for this quarter basically meets expectations. The revenue for the quarter still fell by more than 20% year-on-year, mainly due to sluggish demand in Q1. The improvement in gross profit margin is a positive sign and is in line with the situation of prices bottoming out. The sluggish demand in Q1 was expected, and the improvement in gross profit margin can be reflected in panel prices, which is consistent with market expectations.

Looking forward to the next quarter, Dolphin believes that BOE's gross profit margin and profit will both have significant improvements. This is mainly due to: firstly, downstream will enter panel inventory stocking from the second quarter, and new inventory stocking orders may accelerate industry recovery; secondly, panel prices have already shown signs of rapid increase since March, and the increase in panel prices will promote the improvement of gross profit margin.

As for BOE's rise from the low point of CNY 3.22/share to CNY 4.5/share, with an increase of more than 30%, this already partially includes the expectation of panel prices bottoming out. However, the drop from CNY 4.5/share to CNY 4/share is like what Dolphin mentioned in the previous financial report comments on BOE's "survival game" and seeing "how demand reacts": "BOE has already completed some repair work at the bottom, and further excess returns still depend on the progress of downstream demand recovery and the company's possible outperformance." Dolphin still believes that the market has already digested the expectations of BOE's bottoming out, and the focus now is on the recovery in demand. As of the second quarter, downstream demand is expected to recover as the panel enters the peak shipping season, which will also drive panel prices to continue to rise. BOE, currently down to around 4 yuan/share, has a certain safety buffer, but whether it can continue to break through the short-term high point of 4.5 yuan depends on the market's judgment of the degree of demand recovery. Dolphin will continue to track it.

Here is Longqiao Dolphin's specific analysis of BOE:

I. Core indicators: Panel prices stabilize, gross profit margin begins to rise

1.1 Revenue end: BOE's total revenue in the first quarter of 2023 was 38 billion yuan, a year-on-year decrease of 24.8%, lower than the market expectation of 41.7 billion. The company's revenue end continues to show a double-digit decline, mainly due to the continued weakness in downstream demand for displays, and the price rebound in the first quarter was not significant.

1.2 Gross profit end: BOE achieved a gross profit of 2.6 billion yuan in the first quarter of 2023, a year-on-year decrease of 75.9%. The sharp decline in gross profit was caused by both the decline in revenue and the decline in gross profit margin.

The gross margin for this quarter was 6.8%, a slight increase QoQ, benefiting from the bottoming out of panel prices. Since A-share companies often separately list asset impairments, if they are considered in gross profit margin, the adjusted gross profit margin (considering the impact of asset impairments) for this quarter was 5.2%, with a significant increase QoQ (+3.8pct). The effect of price increases on gross profit margin improvement is still significant.

1.3 Panel prices: The change in gross profit margin is mainly affected by the rise and fall of panel prices. Looking at the Q1 financial report, in fact, the panel price from the fourth quarter of last year to the first quarter of this year, although there were signs of a rebound, the price increase was not significant. This also resulted in no significant increase in revenue and gross profit margin in BOE's financial report this time.

However, from the latest panel quotes at the end of April, the prices for 65-inch/55-inch/43-inch/32-inch were $133/$95/$55/$31, respectively. Panel prices began to rise rapidly from March. This is mainly due to downstream starting to increase their shipping efforts after experiencing the need to increase inventory due to breaking cash cost demand in the first quarter.

Dolphin believes that as the downstream enters the peak season for stocking up, panel prices are expected to continue to rise. BOE's gross profit margin and profit situation will experience significant improvement in subsequent quarters. Finally, after more than a year of downturn in the panel industry, it has finally emerged from its trough period.

2. Cost and Operating Performance: Effective Inventory Treatment and Significant Reduction in Operating Losses

2.1 Operational Indicators: Inventory: An Important Indicator for the Company to Get Out of Difficulties

Inventory Situation: This quarter 24 billion yuan, a MoM growth of 5.3%. The MoM increase in inventory of BOE is mainly affected by seasonality. The first quarter is often not the peak season for the company's shipments, and the increase in MoM is not significant. However, from the perspective of inventory/revenue ratio, the ratio in this quarter fell back to 0.63, a significant decline from the previous high.

Dolphin believes that BOE's inventory turnover has been effective. The company only made a 600 million yuan asset impairment treatment this quarter, which is significantly less than the 2 billion yuan in the previous quarter. Starting from the second quarter, downstream inventory gradually began to stock up. BOE's inventory increase in the first quarter was mainly used to stock up downstream customers, without excessive asset impairment treatment.

Accounts Receivable: 25.1 billion yuan this quarter, a MoM decrease of 12.9%. The ratio of accounts receivable to revenue is 0.66, which is at a relatively reasonable level.

2.2 Cost Rate: Controlling Costs in Progress

In the first quarter of 2023, BOE's four expenses totaled 5.467 billion yuan, a YoY decrease of 10.4%. The four expense ratio was 14.4%, and the expense ratio also decreased MoM, mainly because the company has taken certain measures to control costs.

1) Sales expenses: 0.932 billion yuan this quarter, a YoY decrease of 27.6%, and a sales expense ratio of 2.5%. The company's sales expenses are somewhat related to changes in revenue. The decline in revenue this quarter also affected the company's sales expense expenditures.

2) Management expenses: 1.426 billion yuan this quarter, a YoY decrease of 6.2%, and a management expense ratio of 3.8%. Compared to sales expenses, management expenses are slightly rigid. Although the company has controlled management expenses appropriately, the decrease is not significant.

3) R&D expenses: 2.65 billion yuan this quarter, a YoY decrease of 5.2%, and an R&D expense ratio of 7%. R&D expenses of the company still account for the largest share among the four expenses. Although the company has appropriately controlled R&D expenses, it still maintains a relatively high R&D investment, indicating that the company still attaches importance to R&D.

4) Financial expenses: 0.449 billion yuan this quarter, a YoY decrease of 7.8%, and a financial expense ratio of 1.2%. The overall change in financial expenses of the company is not significant.

2.3 Net Profit Attributable to the Parent: Significant Improvement in Operating Losses

BOE's net profit attributable to the parent in Q1 2023 was CNY 250 million, a decrease of 94.4% YoY, but exceeded market expectations (-CNY 2 billion) . Although the net profit attributable to the parent has turned positive, it is still at the beginning of profitability.

The Dolphin believes that "net profit attributable to the parent" here does not fully reflect the company's operating situation. After some processing, it can better reflect the company's true operating situation.

Processed profit = Gross profit - Taxes - Four expenses + Asset impairment losses + Credit impairment losses + Asset disposal gains

From the perspective of "processed profit," BOE's current performance has rebounded. The "processed profit" of the company in the previous quarter was -CNY 6.732 billion, a significant loss. In this quarter, the "processed profit" of the company was -CNY 3.744 billion, and the loss has significantly decreased, which also conforms to the industry situation of rising panel prices.

Dolphin's Historical Articles on BOE:

Financial Reports

April 6, 2023, Financial Report Review: "[BOE: Completing the Jedi Survival and Waiting for Demand 'Mood'] (https://longportapp.com/en/topics/4833536)"

October 31, 2022, Financial Report Review: "[BOE: Three Signals of Bottoming Out and Rebounding] (https://longbridgeapp.com/en/topics/3593968?invite-code=EZND0I&channel=t3586604)"

August 31, 2022, Financial Report Review: "[BOE: Buying is Not Performance, but Cycle Reversal] (https://longbridgeapp.com/topics/3392508)"

In-depth Analysis

July 26, 2022, Company Depth: "[360-degree Decomposition of BOE: Why Short-term Traps Do Not Affect Long-term Value?] (https://longbridgeapp.com/topics/3198941)"

July 5, 2022, Industry Depth: "[From Double 'Xiong' to Double 'Xiong': BOE and TCL's Cycle Plunder Coming to an End?] (https://longbridgeapp.com/topics/3043558)"

July 21, 2021, Peak Judgment: "[The Panel Cycle Peaks and There Is No Bottom to Pick Up] (https://longbridgeapp.com/topics/948161?invite-code=032064)" This article's risk disclosure and statement: Dolphin Research's Disclaimer and General Disclosure