SHENZHEN MTC(002429)3Q23 EARNINGS REVIEW：STRONG ODM GROWTH AND SIGNIFICANT EARNINGS IMPROVEMENT IN LED CHIPS

　　Shenzhen MTC's revenue in 3Q23 grew steadily, with significant sequential improvement mainly due to increased shipments in the television original design manufacturing (TV ODM) business and significant improvement in the light emitting diode (LED) chip business. As a leader in the TV ODM industry, the Company has built a full presence along the entire LED value chain. The shipment volume of the ODM business is likely to increase to more than 10mn units in 2023, bringing strong earnings elasticity. At the same time, its vertical integration advantages in the LED industry are increasingly prominent, running ahead of peers in terms of capacity, technology, and profitability. The introduction of mini/micro LEDs could inject additional growth momentum to the Company. We are optimistic about Shenzhen MTC's short-term earnings elasticity and highly visible growth in the medium and long term. We reiterate the "BUY" rating.
　　Robust YoY growth and substantial QoQ improvement. q In 1-3Q23, Shenzhen MTC achieved revenue of Rmb12.687bn (+15.84% YoY) with a gross profit margin (GPM) of 18.21% (+2.31ppts YoY). The attributable net profit (ANP)/ex-one-off ANP was Rmb1.272bn/1.118bn (+44.40%/+46.27% YoY) and the nonrecurring profit was mainly government subsidies of Rmb166mn. The net profit margin (NPM) was 10.42% (+2.20ppts YoY). q In 3Q23 alone, the Company achieved revenue of Rmb4.952bn (+28.85% YoY, +22.53% QoQ) with a GPM of 18.70% (+2.49ppts YoY, +1.20ppts QoQ). The ANP/ex-one-off ANP was Rmb538mn/490mn (+51.74%/+52.14% YoY, +53.04%/+67.37% QoQ). The nonrecurring profit was mainly government subsidies of Rmb54mn. The NPM was 10.86% (+1.64ppts YoY, +2.17ppts QoQ). The selling, administrative, and R&D expense ratios fell by 0.55ppts, 0.70ppts, and 0.22ppts YoY to 1.46%, 0.53%, and 3.76%, respectively, while the financial expense ratio rose 2.63ppts YoY to 1.00% mainly due to the higher exchange gains generated in the same period last year. The Company's 3Q23 results continued to pick up YoY, with a significant improvement sequentially, mainly due to the following developments: 1) In traditional services, TV ODM shipments continued to increase, while networking service delivery to operators returned to normal. 2) In the LED business, the chip segment continued to optimize the product mix after reaching full capacity at the end of 2Q23, and the profit improved significantly. In the meantime, the chip on board (COB) display capacity continued to ramp up. q Looking ahead, we expect the Company's TV ODM business to continue gaining shares as it further explores markets in Europe and South America. In terms of the LED business, the Company's earnings may continue to improve as the industry gradually recovers. Meanwhile, the release of COB production capacity provides medium to long-term growth momentum. We are optimistic about the Company's future growth prospects.
　　LED industry chain: Vertical integration continues to deepen and COB growth is gathering pace.
　　The Company's LED segment achieved revenue of Rmb1.532bn in 3Q23 (+50.95% YoY, +16.20% QoQ) and ANP of Rmb184mn (+240.74% YoY, +65.77% QoQ). The impressive growth can be attributed to several factors.
　　First, the LED industry as a whole has been experiencing a continuous recovery, resulting in a more favorable and healthier competitive environment.
　　Second, the Company has consistently optimized the product mix of its chip business, leading to improved profitability. Last, the accelerated release of COB capacity has contributed to the positive performance. Shenzhen MTC has strategically built a full presence along the entire LED industry chain, encompassing processes such as sapphire flat sheet production, patterned substrate (PSS) manufacturing, LED epitaxial wafer production, LED chip manufacturing, and LED packaging, as well as LED lighting and display applications, highlighting its vertical integration advantages. We expect the Company's market share to continue to rise. As the demand in the LED industry continues to pick up, the earnings potential of the segment will be unlocked. q 1) LED chips: 3Q23 earnings increased significantly QoQ.
　　In 1H23, the NPM of the Company’s chip business declined due to capacity ramp-up. By the end of Jun, its LED gallium nitride (GaN) chip revamping project has reached full production, achieving a monthly output of 1mn pieces (4-inch wafers) and stable product performance. In 3Q23, the Company gradually shifted its production capacity towards mini backlight unit (Mini BLU) and mini red green blue (Mini RGB) displays, which are high-margin and high-value products. At the same time, in the general lighting sector, Shenzhen MTC proactively scaled back its business and raised prices at the end of 2Q23, and the earnings recovery momentum began to show in 3Q23. Additionally, the Company is the first to introduce small chips with specifications of 3mil*7mil and 3mil*6mil to the industry, which achieved rapid cost reduction while maintaining the same light efficiency. These efforts significantly improved the profitability of its LED chip business in 3Q23. Going forward, the Company expects to further increase the production capacity of blue/green LED chips to 1.1mn pieces per month through equipment upgrades before the end of the year and continue to optimize its product structure and develop smaller chips with specifications of 2mil*6mil and 2mil*5mil, which will contribute to the continuous reduction of comprehensive costs for Mini RGB displays. Furthermore, the Company is continuously expanding its customer resources and has become a direct supplier of LED chips to Samsung, accelerating the development of high-end customers in Japan and South Korea. We are optimistic about the steady growth of its LED chip business revenue and the continuous improvement of profit margins in the future. q 2) LED packaging: 3Q23 earnings maintained largely stable.
　　In 2023, the competition in the LED industry has gradually become benign, and the packaging segment took the lead in increasing prices in May-Jun, which, against the backdrop of a low comparable base in 1Q23 due to losses related to inventory sales, resulted in a sharp QoQ improvement in profit margins in 2Q23. In 3Q23, the operational performance remained stabled. The Company's high-margin, high-power lighting products have been mass-produced, and the full-spectrum lighting products have been shipped in batches. Moreover, the Company　　has also introduced a more cost-effective technology solution, which can achieve the same light efficiency at a lower cost and has been adopted by the Mini LED products of customers such as Samsung, Sony, TCL, Xiaomi, and Skyworth. As the industry's business cycle bottoms out, the profit of the packaging business is likely to gradually improve. q 3) LED application: Rapid cost reduction for COB and accelerated capacity ramp-up.
　　Shenzhen MTC has achieved full coverage of spacing range from P0.65 to P1.87 and leveraged its full presence along the value chain to break through core technical challenges and significantly reduce the cost of COB displays. Currently, COB displays offer a price advantage over surface mount device (SMD) displays in the P1.25 and P1.56 spacing markets, enabling the Company to tap a wider range of demand.
　　Shenzhen MTC plans to expand its price advantage to the P1.87 market in the future and is continuously working on cost reduction by utilizing smaller chips, optimizing circuit design, and improving casing. On production capacity, the release of production lines and the smooth delivery of orders are likely to boost earnings. The Company currently has 600 COB production lines, and the output continues to increase, reaching about 7,000 sqm per month, which could secure smooth delivery of downstream orders. At the same time, the Company continues to develop new production capacity and announced in Mar this year that it will add another 1,100 production lines, with the first batch of 100 lines commissioned and anticipated to be fully operational by Dec to boost the monthly capacity to 10,000 sqm. In the future, Shenzhen MTC will also work closely with downstream customers to accelerate the penetration of COB display into the consumer market. We expect that with the accelerated release of production capacity, the Company's LED application revenue and profit will maintain rapid growth.
Multimedia audio-visual products and operation services: Smart display segment showed strong growth while home networking remained stable.
　　In 3Q23, the Company's multimedia audio-visual business achieved revenue of Rmb3.640bn (+8.72% YoY, +10.93% QoQ) and recorded attributable net profit (ANP) of Rmb353mn (+14.98% YoY, +47.08% QoQ). By segment: q 1) Smart display (ODM) business: The global demand for TVs gradually picked up in the first half of 2023, leading to increased panel prices as customers actively placed orders to lock in prices. Additionally, the traditional peak season and restocking demand from North American customers further drove strong order demand. According to Runto Technology, global TV ODM shipments reached 29.45mn units in 3Q23, up 8.9% YoY and 5.2% QoQ. The Company benefited from the industry recovery and expanded its market share in North America through new customers like Onn (a brand owned by Walmart), recording shipment of 3.1mn TV units (+39.0% YoY, +10.3% QoQ). Amid the continuous rise in panel prices, the Company improved operational efficiency to secure transaction prices, increased the proportion of overseas revenue, and leveraged software platform end customers to enhance hardware profitability. We expect that the Company's TV ODM shipments for the full year will exceed 10mn units, providing strong earnings elasticity. q 2) Smart home networking business: Operators’ pace of goods pick-up slowed down in 1H23 but has basically　　recovered since Aug, resulting in a notable sequential improvement in the Company's networking business. With a focus on access network and communication applications, the Company extended its business into the upstream of the access network business via gigabit passive optical network (GPON). In Jul, it announced a proposal to acquire a 55.63% controlling stake in Ruigu Optical Network for Rmb134mn through own funds. This strategic move will expand the Company's industry chain to upstream optical network devices and module products, optimizing cost structure, improving profit margins, and enhancing overall competitiveness through vertical integration.
Potential risks: Weak downstream demand; the progress of the Company's new production line falling behind expectations; oversupply and demand in the industry; the commercialization of new technologies and market expansion falling behind expectations.
Investment recommendation: Shenzhen MTC is a leader in the TV ODM industry and has built a full presence along the whole LED industry chain. Its ODM business are poised to expand shipment to more than 10mn units in 2023, bringing strong earnings elasticity. At the same time, its vertical integration advantages in the LED industry chain are increasingly prominent, leading peers in terms of capacity, technology, and profitability. The introduction of mini/micro LEDs could inject additional growth momentum to the Company. We raise our 2023E/24E/25E EPS forecast to 0.38/0.50/0.6 from Rmb0.37/0.47/0.57. We select Shenzhen Jufei Optoelectronics (300303.SZ), Unilumin (300232.SZ), Leyard Optoelectronic (300296.SZ), and Shenzhen KTC Technology (001308.SZ) in the LED industry as comparable companies, which are trading at an average multiple of 18x 2023E PE. We assign 18x 2023E PE, corresponding to a target price of Rmb6.8, and reiterate the "BUY" rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。