BOE's revenue increased but profits did not. How can it reverse the situation?

When will BOE, the king of Chinese panels, be able to reverse the situation of increasing revenue but not profits?

BOE Technology Group Co., Ltd. (000725.SZ), which has always been known in China as a company that survives on subsidies, once again saw its revenue increase but profits not.

On August 27, BOE A disclosed its 2019 semi-annual report. The report shows that in the first half of 2019, BOE achieved operating income of 55.039 billion yuan, a year-on-year increase of 26.60%; net profit attributable to shareholders of listed companies was 1.668 billion yuan, a year-on-year decrease of 43.92%; net profit after deducting non-operating items was 651 million yuan, a year-on-year decrease of 56.65%.

Gross profit margin decreased and expenses increased

According to public information, BOE was founded in April 1993 and is an Internet of Things company that provides smart terminal products and professional services for information interaction and human health. Its products are widely used in mobile phones, tablets, laptops, monitors, TVs, vehicles, digital information displays, health care, financial applications, wearable devices and other fields. At present, the company mainly has three core business segments: terminal devices, smart Internet of Things, and smart medical engineering.

According to BOE's 2019 interim report, in the first half of 2019, BOE's terminal device business achieved revenue of 50.897 billion yuan, a year-on-year increase of 29.94%, and a gross profit margin of 15.56%, a year-on-year decrease of 2.36%; the smart IoT business achieved revenue of 7.522 billion yuan, a year-on-year increase of 2.38%, and a gross profit margin of 9.18%; the smart medical engineering business achieved revenue of 664 million yuan, a year-on-year increase of 26.09%, and a gross profit margin of 51.38%, a year-on-year decrease of 2.07%. In the first half of 2019, BOE's overall gross profit margin was 16.76%. Compared with the company's gross profit margins of 25.07% in 2017 and 20.39% in 2018, BOE's gross profit margin level showed a significant downward trend.

In the first half of 2019, BOE's operating income increased, and the company's costs also increased accordingly as the sales scale expanded. The interim report shows that from January to June 2019, the company's operating costs were 45.812 billion yuan, a year-on-year increase of 30.35%; sales expenses, administrative expenses and financial expenses were 1.365 billion yuan, 2.197 billion yuan and 1.167 billion yuan, respectively, with year-on-year increases and decreases of 5.45%, 2.49% and -2.87%, respectively. In addition, the company continued to increase its investment in research and development, with an investment of 3.893 billion yuan in research and development, a year-on-year increase of 6.81%.

Does the panel still hold the top position?

In the first half of 2019, the semiconductor display industry's high-generation production capacity was rapidly released, market demand was sluggish, the oversupply situation became increasingly severe, panel prices continued to fall, and the profitability of the display business dropped significantly. However, against the backdrop of an overall decline in mobile phone market shipments, BOE's business achieved a counterattack growth in the first half of 2019.

In the terminal device business, BOE has smoothly promoted the construction of new production lines for display and sensor devices. The shipment volume of the 6th generation flexible AMOLED production line in Chengdu increased by more than 300% in the first half of the year compared with last year, and the yield rate reached a new high; the 10.5th generation TFT-LCD production line in Hefei achieved full production, with a yield rate of more than 90%. In the smart Internet of Things business, the transaction volume of works increased by more than 100% year-on-year; more than 1,000 orders for network transformation were obtained, and the cumulative number of network transformations in the first half of the year exceeded 330. In the smart medical and engineering business, 15 peripheral products such as smart watches, body fat scales, and blood pressure monitors were put on the market for sale; the number of registered users of the APP increased by more than 220% month-on-month in the first half of the year.

The semi-annual report shows that in the first half of 2019, BOE's overall display device shipments continued to rank first in the world; shipments in five major mainstream application areas, including smartphone LCD screens, tablet screens, laptop screens, monitor screens, and TV screens, remained first in the world. Shipments of innovative application products increased significantly year-on-year, with ESL (smart retail electronic label business) and wearables ranking first in the world, and flexible OLED smartphones ranking second in the world.

BOE's R&D investment has also enabled the company's technological innovation capabilities to continue to improve, and the number of patent applications has maintained rapid growth. In the first half of 2019, 4,872 new patent applications were filed, of which more than 90% were invention patents and more than 35% were overseas patent applications. More than 2,500 patent applications were filed in important fields such as flexible OLED, sensing, artificial intelligence, and big data. 2,953 new patents were authorized, of which more than 1,200 were authorized in the United States.

BOE, which provides flexible screens for Huawei's Mate20 series and P30 series mobile phones, has recently been reported to cooperate with Apple. If the news is true, BOE's business will open up new markets.

As the leader of the domestic panel industry, BOE's business growth against the trend is certainly gratifying. However, facing the dilemma that even though it received more than 1.1 billion yuan in government subsidies during the period, its net profit still fell by nearly 44%, can BOE's position as the panel king continue to be consolidated?