Taking over Guangdong Homa Group, integrating Zhonghuan, what will be the next step for TCL's leader Li Dongsheng?

On the afternoon of May 9, TCL Group held the 2021 performance communication meeting, with TCL's founder and chairman Li Dongsheng and several executives in attendance.

In 2021, it is both the first full year for TCL Technology (000100.SZ) to consolidate Zhonghuan Shares (to be renamed TCL Zhonghuan), and also the year when TCL home appliances made a large-scale acquisition of white goods enterprise Guangdong Homa Electric (002668.SZ).$Tcl Corporation (000100.SZ)$2021 marks the first full year of TCL Corporation (000100.SZ) consolidating Zhonghuan Shares (to be renamed TCL Zhonghuan), as well as the year when TCL Home Appliances made a large-scale lateral acquisition of white goods enterprise Guangdong Homa Electric (002668.SZ).$Guangdong TCL Smart Home Appliances (002668.SZ)$One year.

"The overall environment of TCL Corporation's semiconductor display, photovoltaic new energy, and semiconductor materials core businesses is particularly good, except for the display industry entering a downturn since September last year. TCL's smart terminal business also maintains stable development, which is an important reason for the company's strong growth," explained by Li Dongsheng to the media present, including Time Weekly.

Benefiting from multiple mergers and integration efforts, TCL Group's performance was released in 2021, using new businesses to resist the risk of slowing growth in the TV industry. The overall revenue in 2021 was 252.3 billion yuan, a year-on-year increase of 65%, with a net profit of 17.1 billion yuan, a year-on-year increase of 129%.

Among them, the revenue of TCL Zhonghuan Renewable Energy's photovoltaic business doubled, TCL Huaxing with a focus on display panels achieved a historical high in revenue, driving TCL Technology's revenue and profits to double. TCL Electronics (01070.HK) with black electric assets saw revenue increase by 46.9%, while profits decreased by 35.9% year-on-year.

This year, continuing mergers and integration will remain a key theme for TCL Group. Gradually integrating TCL Zhonghuan to enhance competitiveness and how to synergize after acquiring Guangdong Homa Group are the two major issues TCL Group needs to handle well this year.

"Li Dongsheng aims to make TCL Group one of the Fortune Global 500 companies through mergers and acquisitions." Previously, sources close to TCL revealed to Time Weekly that in 2021, TCL Group successfully entered the list of Fortune Global 500 companies.

"In the future, we hope TCL Technology and TCL Corporation can both become part of the Fortune Global 500." TCL Technology's COO Wang Cheng expressed to Time Weekly reporters.

Image Source: Visual China Group

The first year of the consolidation of Central New Eggy.

Li Dongsheng likes to use eagles as a metaphor for the spirit of enterprise development and change. According to media reports, Li Dongsheng has many eagle-related collections at home and in the office. He believes that eagles fly high, see far, and strike accurately at their prey. In terms of mergers and acquisitions, TCL has always been resolute and precise in its actions.

In 2020, TCL Corporation participated in the mixed reform of Central Central Group, directly making it a wholly-owned subsidiary and becoming the largest shareholder of TCL Zhonghuan, the core asset of Central Central Group. This move brought its new energy photovoltaic and semiconductor material business into the TCL business map.

TCL Corporation consolidated TCL Zhonghuan in its first year, emphasizing restructuring the latter's operating system and driving business expansion.

A TCL (Group) official told Time Weekly that under the previous system, TCL Zhonghuan focused mainly on stabilizing revenue and profits. After the mixed reform, with almost no changes in the company's management, a shift in business philosophy has been made to ignite vitality.

In June 2021, TCL Zhonghuan initiated a share buyback to be used for core executive stock-based incentives and employee stock ownership plans, covering no more than 815 employees. This marks the first time TCL Zhonghuan has launched an employee stock ownership plan.

At the same time, TCL Corporation continues to be closely tied to TCL Zhonghuan. On May 6 this year, TCL Zhonghuan announced that TCL Corporation increased its shareholding through centralized bidding, raising its ownership to 29.8%.

With the support of TCL Corporation, TCL Zhonghuan is gradually loosening up its constraints.

In February 2021, the G12 crystal intelligent factory project of single crystal silicon material with a total investment of approximately 15 billion yuan was settled in Yinchuan, Ningxia. Due to the improved decision-making efficiency, the project went from negotiation to completion in less than two months; In April of this year, TCL Technology participated in the cooperation with TCL Zhonghuan, GCL Tech, and jointly built projects such as granular silicon with an investment of approximately 12 billion yuan; TCL Zhonghuan also plans to provide components products and services to TCL Industrial through TCL Electronics, with an expected increase in transactions of 1.2 billion yuan this year.

At the communication meeting, Wang Cheng stated that TCL Technology's semiconductor photovoltaic crystal production capacity will increase from 88GW in 2021 to 140GW in 2022, and the photovoltaic components will increase from 11GW in 2021 to 13GW in 2022. The production capacity planning for semiconductor materials of 6-inch, 8-inch, and 12-inch will increase from 0.5 million, 0.75 million, 0.17 million pieces per month last year to 0.9 million, 1 million, 0.32 million pieces per month in 2022.

"This year's growth in scale comes from the increase in crystal and chip production capacity. The Yinchuan factory will be put into operation this year. The industry chain will extend downward, and the photovoltaic component business will also increase this year. Semiconductor materials ranked second only to Shanghai Silicon in the domestic industry last year, and this business strives to lead domestically." Li Dongsheng said.

Li Dongsheng, Image Source: Corporate Image

From the plan, TCL Zhonghuan's production capacity growth this year still focuses on the material end. Faced with the continuous rise in upstream silicon prices and a supply shortage situation, TCL Zhonghuan took the first step towards silicon material recently with the support of TCL Technology.

In April of this year, TCL Zhonghuan and TCL Technology separately signed agreements with the People's Government of Inner Mongolia Autonomous Region and the People's Government of Hohhot City, planning to invest approximately 20.6 billion yuan in Inner Mongolia to build projects including high-purity polycrystalline silicon with a capacity of about 0.12 million tons and semiconductor single crystal silicon material.

"Expanding the layout of upstream business is conducive to the synergy of the industry chain to reduce costs and increase the stability of the industry chain." Wang Cheng explained.

Li Dongsheng told Time Weekly reporters that this year he is confident that TCL Zhonghuan will be able to continue to maintain business growth.

Clearing the historical burdens of Guangdong Homa Group.

Acquiring Guangdong Homa Group may be one of the most watched capital moves for TCL (Group) in 2021, and this year is a key year for its business integration.

Since the beginning of 2021, TCL Electronics has been increasing its stake in Guangdong Homa Group through judicial auctions and centralized auction trading, and has invested approximately 1.5 billion yuan to tender for 22.99% of Guangdong Homa Group's shares. After a struggle with the original controlling shareholder Zhao Guodong of Guangdong Homa Group, TCL Electronics finally successfully nominated Xu Longlong and Hu Dianqian to the board of Guangdong Homa Group.

Subsequently, TCL Electronics began to divest its financial technology business that was dragging down performance, allowing Guangdong Homa Group to return to its core business of refrigerators.

A senior home appliance industry insider told Time Weekly reporters that TCL (Group) attaches great importance to home appliances, and in recent years, many top companies in the industry have been poached for air conditioners, successfully developing this category. Based on this foundation, by acquiring the 'Refrigerator Export King' Guangdong Homa Group, TCL (Group) is expected to further fill the gaps in white goods, and Guangdong Homa Group is also expected to become its white goods listed shell asset.

However, after investing a huge amount to take over Guangdong Homa Group, TCL Electronics experienced an unexpected series of twists and turns. This includes the discovery that a subsidiary of Guangdong Homa Group had pledged bank time deposits; Guangdong Homa Group potentially reduced its net profit by 1.978 billion yuan due to non-standard operations in the previous period; Guangdong Homa Group was also 'ST' due to previous guarantor violations.

Whether the historical burdens of Guangdong Homa Group can be quickly cleared is a major issue faced by TCL Electronics after taking over. At the end of 2021, Guangdong Homa Group announced the sale of equity in 4 fully-owned subsidiary companies in the financial technology business for 1 yuan to terminate the financial technology business. On May 6 of this year, Guangdong Homa Group announced that it had reached a settlement agreement with the Zhengzhou Bank Small Business Financial Services Center and others over a contract dispute.

"After the acquisition of Guangdong Homa last year, we put in a lot of effort, and the process was quite arduous, but the results are good. We have basically cleared many of the burdens accumulated in the past, and the China Securities Regulatory Commission has also almost finished clearing the disposal done by the previous management, so there should be good news soon." Hu Dianqian, CFO of TCL Industries and Chairman of Guangdong Homa Group, told Time Weekly reporters.

After the cleanup, the business synergy between Guangdong Homa Group and TCL Group will be a major focus this year.

Image Source: Visual China Group

Hu Dianqian told Times Weekly reporter that this year, Guangdong Homa Group is focusing on the refrigerator main business, aiming to fully integrate it into TCL Group's system, with many aspects of work to be done.

"In terms of sales, Guangdong Homa Group is the largest refrigerator exporter in China, and a significant portion of TCL brand overseas refrigerator sales will leverage Guangdong Homa Group's existing capabilities; in terms of funds, Guangdong Homa Group has been relatively conservative in the past, with bank resources relatively insufficient due to the influence of the previous management, while TCL Group has provided a lot of help in aspects such as bank credit, saving interest expenses on a multi-million level alone; in the supply chain, TCL Group has business in 160 countries and regions, recently may expand refrigerator capacity in North America, allowing Guangdong Homa to serve local customers and operate a local-for-local supply chain." Hu Dianqian said.

Displaying business transcending cycles

In addition to promoting mergers and acquisitions and business integration, TCL Group must face the challenge of the downturn in the semiconductor display business. Li Dongsheng said that it is still unpredictable when the turning point of the downturn in semiconductor display product prices will occur, but from the industrial logic, it is estimated to be close to the bottom.

Television is a traditional advantageous business of TCL Group, with smart terminal assets currently included in TCL Electronics. In 2021, the semiconductor display business accounted for 53.87% of TCL Technology's revenue. According to Witsview data, in the first quarter of this year, the price of 55-inch LCD panels for televisions decreased by 16% compared to last quarter, while laptop and monitor LCD panel prices also decreased by about 7% to 11%.

Li Dongsheng stated that the semiconductor display is strongly cyclical, with the most significant impact from the supply-demand relationship. In production, high technological barriers, large investment scale, and long construction cycle make it necessary to fully utilize the capacity once established, with equipment utilization rate being crucial. To cope with cyclical fluctuations, a major measure is optimizing product structure. While mobile phones and TVs have smaller growth rates, MNT, automotive, and commercial display segments are growing rapidly, leading to a significant increase in non-TV, non-mobile business in the product structure last year, which will continue to increase this year.

In terms of Asia vets terminals, in 2021, TCL Electronics' attributable net income has declined.

"Last year, the overall machine profit was greatly affected by costs (rising), at the beginning of this year, the gross margin expanded rapidly, but in March and April, it faced a volatile situation. Scale is an important aspect to focus on, and our global strategy includes adhering to the mid- to high-end market, expanding overseas, and currently the results are showing improvement," Hu Dianqian stated.

Li Dongsheng pointed out that in the asia vets terminal business, domestic sales volume did not increase last year, but sales data grew. The support for growth comes from product structure optimization, with large screens becoming the main market increment. Overseas, seizing market increments is crucial. In the overseas business last year, TV sales grew by 34%, and this growth trend is likely to be sustained this year.

Facing the semiconductor display cycle, and coping with changes in the global economic situation, Li Dongsheng stated that TCL must adhere to a bottom-line mentality. Major project decisions and operational decisions should prioritize being unbeatable before seeking victory. There should be appropriate contraction in business resource allocation, control of development pace, stability in operational cash flow, seeking opportunities in crisis, and developing in adversity.

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