TCL International Holdings Limited

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1 TCL International Holdings Limited Interim Results 2001 Tomson LI, Chairman 30 August 2001

2 Agenda Financial Review Operation Review Industry Outlook Company Outlook (2H2001) 2

3 Financial Review

4 Financial Review (1) (in HK$ millions) 1H2001 1H2000 Change Turnover 4,529 4,359 +4% Gross Profit Gross Margin Net Profit Net Margin % 161 4% % 233 5% -12% -2% -31% -1% 4

5 Financial Review (2) Unit Sales of 1H2001 Unit ( 000) PRC YoY Export YoY Total YoY % % % TV* 2, % % 3, % Refrigerator 92-40% 0 n.a % Washing Machine Air Conditioner AV % +24% -42% n.a. n.a. n.a % +24% -34% PC 84-3% 0 n.a. 84-3% Mobile Phone % 0 n.a % * Figures included TM-Henan 5

6 Financial Review (3) Gross Profit Margin 1H2001 1H2000 Change TV 16% 18% -2% White Goods 24% 26% -2% AV 12% 20% -8% PC* 9% 12% -3% * PC only has 4 months contribution in 1H2001 6

7 Financial Review (4) Revenue Mix AV 2% PC* 6% Others 5% WG 15% AV 4% Others 3% WG 10% 1H2001 1H2000 TV 77% TV 78% * PC only has 4 months contribution in 1H2001 7

8 Financial Review (5) Revenue breakdown by geographical area Overseas 6% Overseas 6% 1H2001 1H2000 PRC 94% PRC 94% 8

9 Financial Review (6) Financial Highlights 1H2001 1H2000 ROE 5.7% 9.8% Current Ratio 1.7 Debt/Equity Ratio 0.1 Interest Cover (times) A/R Turnover Inventory Turnover 42 days 52 days 31 days 64 days 9

10 Operation Review

11 Operation Review - TV (1) Sustainable Growth under intense competition 6000 Sales of TCL in PRC Units sold ('000) H2001 Expected sales - 2H

12 Operation Review TV (2) Strengthened market position in 1H2001 Ranked 1 st in PRC TV market in terms of units sold (Source: MII) Increased market share to 19% 25 Market Share (%) Source: MII 0 TCL Changhong Konka H

13 Operation Review TV (3) Swift introduction of new concepts and high-end models 20 new models launched in 1H01 (incl. HiD) The best performer in the industry in terms of profitability TCL : Profit (albeit declined by 31%) Hisense : Profit (declined by 15%) Changhong : Loss Konka : Loss Skyworth* : Loss Competition in PRC TV market remains keen Price war initiated by Changhong in April 2001 Principally in 29 * 2001 Final Results (year end: March) Decline in CRT (e.g. 29 declined by 20% in 1H01) and electronic components (declined by 6% in 1H01) prices offset part of the price cuts impact Margin squeezed 2% to approximately 16% 13

14 Operation Review TV (4) ASP merely drop by 5-6% due to sales of large size TV grew at a faster pace >34" TV 4% >34" TV 2% 29" TV 29% 29" TV 23% 25" TV 26% <21" TV 41% 25" TV 28% <21" TV 47% 1H2001 1H

15 Operation Review WGs (1) Performance of White Goods Business unsatisfactory Unit sales of refrigerator & washing machine dropped more than 40% YoY Unit sales for air-conditioner increased a mere 24%, which was below expectation Units ( 000) Refrigerator Washing machine Airconditioner 1H2000 1H

16 Operation Review WGs (2) Market shares for refrigerator and washing machine declined in 1H2001 while that of Air-conditioner increased Market share % Refrigerator Washing Machine Airconditioner H

17 Operation Review WGs (3) Air-conditioner More home appliances manufacturers entered the market to capture high profit margin Market supply increased Increase in price pressure in 1H2001 ASP dropped by 13% Decline in component cost helped to offset price pressure Margin remained stable New products were not well received Prices were set too high Strategies for Improvement Adjusting pricing strategy for new products Improve production cost structure Centralize the component purchase of sub-contractors and ZhongShan factory Further improve R&D capability Increase R&D expenses from 1% to 2.5% of turnover in

18 Operation Review WGs (4) Refrigerator & Washing Machine Transitional period of shifting product strategy Moving to high-end products The delay of product rollout affected sales performance Strategies for Improvement Further improve product mix - shifting to high-end Lifting ASP and gross margin Speed up new products introduction 26 new models to be launched in 2H 18

19 Operation Review PC (1) PC Overall PC shipments were below expectation in 1H Slowdown of home PC market in the PRC According to APMSC, units sold of home PC in Jan-May only grew by 18% which was below IDC s forecast of 35% The Internet boom last year led to a high expectation for the demand this year A delayed consumption due to continuous price cuts INTEL CPU P4 1.5G price cut by 70% in 1H Upgrade ERP system and internal operation restructuring Margin squeezed Production failed to reach economies of scale Increasing expenses for R&D, customer services and ERP system 19

20 Operation Review PC (2) Strategies for Improvement ERP Installation Better control of inventory and cash flow Further reduce management cost and enhance operational efficiency Restructure distribution channel Headcount cut by more than 40% Market strategies Further expand market share of hi-end products P4 Concentrate marketing resources on P4 promotion Expect P4 will account for 60% of TCL s product mix in 2H (17% in 1H) further enhance profitability 20

21 Operation Review Overseas (1) Overseas markets maintained steady growth in 1H TCL leader in TV export (among all Chinese TV manufacturers) 12 Export Market Share (%) Source: MII TCL Konka Skyworth Haier Successfully penetrated into major SE Asian markets TCL is among the top 10 brands in India, Philippines, Vietnam & Indonesia 21

22 Operation Review Overseas (2) Expansion Plans Existing markets India - consider setting up an assembly factory Vietnam prepare re-exporting products to other markets New Markets Middle East signed distributorship contract Europe consider setting factory in the Eastern Europe USA contemplate setting up factory in Mexico or Brazil An expected growth rate of 30-40% p.a. 22

23 Industry Outlook

24 Industry Outlook TV (1) Improving market conditions Steady growth in market demand Expect 5-10% annual growth rate by volume Urban area expected to grow much faster than rural area Increase of disposal income stimulates replacement demand State Council forecasts replacement demand in urban area to have 20m units p.a., representing a replacement rate of over 10% Market consolidation PRC market is mostly dominated by the top 3 players Market share of top 3 players 1997 : 46% 1H2001 : 52% 24

25 Industry Outlook TV (2) Industry inventory continues to decline 1,800 1,600 1Q2001 TV Sales and Production Units ( 000) 1,400 1,200 1, TCL Changhong Konka Skyworth Production Sales Source: MII 25

26 Industry Outlook TV (3) Potential in overseas markets China has competitive advantages in TV production Mass manufacturing capacity and capability Low labour cost High quality standards TCL s strength in overseas markets Experienced overseas sales management team Local JV partners with strong sales connections Financial strength to develop brand awareness 26

27 Industry Outlook PC (1) China PC market still has room to grow Penetration rate of 10% of urban household lags those in developed countries such as Singapore & HK (over 30%) Consumption power is increasing P4 is expected to become the mainstream product in the PRC Expect P4 will take 60-70% of total market share in Q4 27

28 Company Outlook

29 Company Outlook Overview Results of 2H of 2001 are expected to improve TV Industry inventory CRT price stable HiD mass production Further price war unlikely Margin - stable or slightly up WGs Strengthen sales & marketing team Shift to hi-end products Strengthen R&D Units Sales ASP Margins PC ERP improves efficiency Strengthen marketing of P4 Further improve product mix ASP Margins Overseas Markets Further expand market shares in South East Asian markets Further expand product lines and enhance AV & WGs businesses Studying expansions in Middle East, US and Europe 29

30 Company Outlook New Products New Products to be launched in 2H TV PC WGs 50 new models to be launched in 2H HiD (Home Information Display) Projection TV Audio TV Smart TV 2 new product series to be launched in 2H Targeting mid-low-end and hi-end Focus on appearance and audio function More than 20 new models to be launched in 2H Mobile Phone 8 new models to be launched in 2H 30

31 Company Outlook Target (1) Revised sales target in 2001 (units in 000) 2001 Latest target 2000 Units Sold Change % TV 6,500* 5,800** +12% Refrigerator 200 Washing machine 430 Air conditioner 220 AV % -32% +29% -58% PC % Mobile Phone % * TV 2001 target includes 800K of export ** Included 700K units of export 31

32 Company Outlook Target (2) Revenue Mix AV 3% PC 11% Others 3% WG 12% AV 4% Others 3% WG 9% FY2001 FY2000 TV 74% TV 81% *Figures included TM-Henan. Assume PC has full year contribution 32

33 Company Outlook Target (3) Revenue breakdown by geographical area Overseas 7% Overseas 6% FY2001 FY2000 PRC 93% PRC 94% *Figures included TM-Henan 33

34 TCL International Holdings Limited Acquisition of Distribution Network 30 August 2001

35 Agenda Transaction Overview Distribution Network Plans and Strategies 35

36 Transaction Overview

37 Terms of Acquisition Vendor Purchase price Valuation Consideration TCL Holdings (ultimate holding company) Rmb 28 millions for 51% stake 1.5 times book value & 1 time PER (FY2000) Fully paid by cash 37

38 Acquisition Rationale Further enhance product and market information flow Improve operating efficiency better inventory & A/R control Improve overall TCL s competitiveness through direct control of distribution network Further enhance customer service via retail outlets Broaden the Group s earning base May distribute non-tcl brands after China s accession to WTO Improve transparency of our operations Strategically important to increase the Group s sales 38

39 Before Acquisition TCL Holdings Public 51% 54% 46% TCL Distribution Network TCL International Holdings Limited (HKSE: 1070) 15 yrs Distribution Agreement 39

40 After Acquisition TCL Holdings Public 54% 46% TCL International Holdings Limited (HKSE: 1070) TCL King Electrical Appliances (Huizhou) 51% TCL Distribution Network 40

41 Distribution Network

42 Overview Largest company under TCL Holdings, with more than 9,200 employees Most established & extensive professional home appliances distribution network in the PRC Serve as marketing and customer service channels Annual distribution revenue* reached Rmb10 billion in 2000 * Distribution revenue mainly came from consignment sales of TCL International Holdings products 42

43 Milestones 91 Set up 1 st distribution subsidiary in Shanghai 92 Set up distribution companies in Wuhan, Xian, Harbin Increase sales points continuously according to marketing plan 96 TCL s TV became the top 3 best selling TVs in the PRC 97 Set up 7 regional management offices 98 Expand distribution network to rural areas 99 Commence the sales of white goods Computerize distribution network and set up logistics management system 43

44 Nationwide Coverage North West Region Xian, Lanzhou, Taiyuan, Xinjiang Northern Region Beijing, Tianjin, Baotou, Jinan, Qingdou, Jining, Shijiazhuang North East Region Shenyang, Changchun, Harbin South West Region Chengdu, Chongqing, Guiyang, Kunming Eastern Region Nanjing, Shanghai, Hefei, Hangzhou, Yangzhou Southern Region Guangzhou, Shenzhen, Maoming, Nanning, Changsha, Fuzhou Headoffice Huizhou Central Region Zhengzhou, Luohe, Wuhan, Nanchang Note: Distribution network consists of 7 regions, 33 branches and 182 sales offices 44

45 Growth of distribution revenue In Rmb billions Year 45

46 Financial Review (in Rmb millions) 1H Income - Commission* Others Expenses -Advertising Transportation Salary Net Profit 2 57 * Sales commission due from consignment sales 46

47 Competitive Strengths One of the largest distribution networks for home appliance products in China, with broad product and service offerings Long-term, preferred relationships with local distributors and retailers Strong management team with proven track record Advanced computer system (e.g. 進銷存 ) to have better inventory control and cash management Local knowledge and experience 47

48 Plans and Strategies

49 Plans and Strategies Objectives Improve network operation efficiency Expand services to maximize network utilization rate Extend reach to end consumers Plans and Strategies Establish logistics, IT, financial and customer service computer system to enhance data exchange among departments Serve as customer service outlets Implement CRM to improve customer service Provide value added services to distributors such as marketing services, marketing training, product and pricing information, pre-sales consultation Explore opportunities to establish alliance shops (an effective way to extend reach to end consumers) TCL BE THE LEADER IN ALL HOUSEHOLD APPLIANCES 49

50 Open Forum