"Hehui Optoelectronics Loses Billions in 7 Years"

Thanks to the global smartphone market recovery, the continuous release of domestic AMOLED production capacity, and the continuous penetration into the low-end product market, the global demand for AMOLED smartphone panels in 24H1 remains strong:

Shipments are approximately 420 million units, a year-on-year increase of 50.1% (among which, Q2 year-on-year +55.3%, quarter-on-quarter +13.1%).

There is no doubt that the panel industry is indeed recovering.

However, for AMOLED semiconductor display panel manufacturers and Huiguang Optoelectronics (688538.SH), turning a profit is still far from reality.

Seawater and Flame

On the other hand, Huiguang's segmented businesses have all performed well:

In the smartphone field, product shipments and revenue have both increased by more than 60% year-on-year;

In the smart wearable field, shipments increased by more than 20% year-on-year, and revenue increased by more than 40%;

In the tablet/notebook computer field, shipments have even increased by 143% year-on-year.

Huiguang's shipments also reached a new high, with a year-on-year increase of 48% in 24H1.Selling well, the problem is not making money.

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Let's look at Hehui's operating performance:

In the first half of 2024, revenue was 2.395 billion yuan, a year-on-year increase of 74.36%; net loss attributable to the parent company was 1.279 billion yuan, a year-on-year reduction of 1.35%; net loss excluding non-recurring gains and losses was 1.306 billion yuan, a year-on-year reduction of 3.43%.

Looking at the year-on-year increase or decrease may not be so strong, so let's calculate this account in detail.

Before that, in the first half of 2023, Hehui's revenue was 1.373 billion yuan, net loss attributable to the parent company was 1.296 billion yuan, and net loss excluding non-recurring gains and losses was 1.352 billion yuan.

That is to say, in the first half of this year, when revenue increased by 1.021 billion yuan, Hehui's net loss excluding non-recurring gains and losses only reduced by 46.398 million yuan, and the net loss attributable to the parent company only reduced by 17.4528 million yuan.

Is this losing money to make a fuss?

Selling more and losing more

This situation is not the first time to happen to Hehui.

As early as 2023, Hehui's loss amount once exceeded revenue. Among them, the net loss attributable to the parent company was 3.244 billion yuan, and the net loss excluding non-recurring gains and losses was 3.332 billion yuan, while the company's revenue in the same period was only 3.038 billion yuan.In the first three quarters of 2023, the selling prices of AMOLED semiconductor display panels continued to decline, leading to a year-on-year decrease in the company's total operating revenue despite an increase in the number of AMOLED semiconductor display panels shipped. Hehui explained this by saying, "Although the volume of shipments is increasing, it cannot offset the impact of the decline in product prices."

In plain terms, it means "the increase in shipments is not enough to counteract the effects of falling product prices."

Why did the product prices fall?

Hehui provided its explanation: The international situation is complex and changeable, with frequent geopolitical conflicts, slow global economic recovery, decreased consumer willingness to spend, and sustained low demand in the consumer electronics market. This has led to a certain proportionate decrease in the consumption of high-end AMOLED products, with a shift towards downgrading to mid-to-low-end LCD liquid crystal display products. As a result, from January to March 2023, the selling prices of the company's AMOLED semiconductor display panels continued to decline.

However, the decline was too steep, with the reduction in product selling prices exceeding the reduction in unit costs.

Under such circumstances, naturally, the more sold, the greater the loss.

Significant increase in capitalized R&D investment

Looking at the financial reports, it was also discovered that Hehui's slight reduction in losses in the first half of 2024 also owed a lot to the capitalization of R&D investment.

In the first half of this year, Hehui capitalized R&D investment of 169 million yuan, a year-on-year increase of 73.78% (an increase of 71.7766 million yuan).

In contrast, R&D expenses decreased by 28.36% year-on-year to 72.7934 million yuan.A little piece of knowledge: Research and development expenses that are capitalized are not immediately included in the current period's operating costs but are gradually included in the profit and loss over their useful life through amortization. This practice can increase a company's profit level in the short term because the current period's R&D expenses are reduced, thereby lowering the current period's costs.

However, in the long run, capitalized R&D expenses will eventually be included in the costs through amortization, and the impact on profits is merely a delay in time.

Of course, Hehui also provided an explanation.

Competitors' flexible product dimensionality reduction strike

Hehui Optoelectronics' competitors include: BOE Technology Group Co., Ltd., TCL Technology Group Corporation, Shenzhen Tianma Microelectronics Co., Ltd., Visionox Co., Ltd., and South Korean manufacturers.

Among the five A-share listed companies, Hehui has the smallest revenue scale but the most losses.

It is worth mentioning that in recent years, BOE Technology Group Co., Ltd. and TCL Technology Group Corporation have not suffered losses, and both companies are important players in flexible AMOLED panels.

In 2023, BOE Technology Group Co., Ltd.'s flexible AMOLED annual shipments were nearly 120 million pieces. According to Ping An Securities' research report, as of the end of 2023, the global AMOLED production capacity was 500,000 pieces/month, with Samsung and BOE Technology Group Co., Ltd. leading the way, at 150,000 pieces/month and 140,000 pieces/month, respectively.

The mainland of China and South Korea are basically in the same competitive situation in the AMOLED field. In 2023, domestic manufacturers such as BOE Technology Group Co., Ltd., Shenzhen Tianma Microelectronics Co., Ltd., Visionox Co., Ltd., and TCL Technology Group Corporation (China Star Optoelectronics Technology Co., Ltd.) accounted for approximately 38% of the global market share.

That is to say, AMOLED is more in line with the current trend of foldable and slim smartphones.In fact, against the backdrop of slowing smartphone shipments, there has been a structural change in panel demand, with flexible AMOLED panels exerting downward pressure on rigid AMOLED and LCD panels.

In the just-concluded 24H1, TCL CSOT even captured 13.4% of the global market share (flexible AMOLED smartphone panels) with a year-on-year growth rate of 174%, ranking among the top three globally.

Flexible AMOLED panels have become an important engine for the performance growth of BOE Technology and TCL Technology.

Embracing Flexibility

On the other hand, Everdisplay Optronics, which has focused on developing rigid products for differentiated market competition, has never made a profit.

In the relatively small scale years of 2017 and 2018, the company's sales gross loss rate once reached as high as 94.12% and 70.17%; even in the best year of 2021, it still recorded a gross loss rate of 13.01%, and by 2023, this indicator deteriorated to 64.3%.

From 2017 to 2023, Everdisplay Optronics accumulated a net loss attributable to the parent company of 9.681 billion yuan, with a net loss excluding non-recurring gains and losses of 10.227 billion yuan.

If 24H1 is included, the accumulated net loss excluding non-recurring gains and losses has exceeded 11.5 billion yuan.

This also declares the failure of the competition strategy of rigid products.

Everdisplay Optronics, which has suffered losses, finally admitted its mistake in 2024 and chose to embrace flexible products.