Guolian Minsheng Securities: TCL Electronics (01070) collaborates with Sony to layout the home entertainment sector, the profit potential of domestic color TV could be unleashed.

Guolian Minsheng Securities released a research report stating that as of 2025 Q4, the global TV shipment market share of China's top 2 brands has surpassed that of South Korea's top 2 brands. Since 2025, Chinese brands have been more profitable than Japanese and South Korean brands, and the global landscape has undergone a qualitative change with the upgrading of China's display industry chain. TCL Electronics (01070) and Sony (SONY.US) plan to establish a joint venture in the family entertainment business, with the company expected to fully tap into its profit potential. With ample synergy throughout the entire industry chain, as the global market share gradually concentrates in the hands of Chinese TV industry leaders, the profit potential of Chinese TV industry leaders is expected to steadily improve. It is recommended to focus on TCL Electronics. The main points of Guolian Minsheng Securities are as follows: TCL Electronics disclosed progress in strategic cooperation with Sony in the field of family entertainment TCL Electronics and Sony plan to establish a new company to take over Sony's family entertainment business. The new company will be owned 51% by TCL Electronics and 49% by Sony, and will operate a one-stop integrated industry chain business globally, including products such as televisions and home audio equipment. The new company can use Sony's trademark for authorized products and marketing materials. At the same time, TCL Electronics will acquire 100% of Sony's Selangor, Malaysia factory (SOEM). The delivery date is expected to be April 1, 2027. Cash payment for acquiring high-quality assets, a win-win situation for both parties TCL Electronics subscribed to 51% of the new company's shares and the Malaysia factory, with a preliminary estimated total transaction price of HK$3.781 billion, to be paid in cash, accounting for 28% of the company's cash and cash equivalents at the end of 2025. Based on the preliminary estimated transaction price and the pre-tax profit of HK$810 million from the family entertainment business from 24Q2 to 25Q1, the PE ratio of this transaction is approximately 4.7 times. Sony's family entertainment business is well-known, but its profits have been under long-term pressure, constrained by tariffs in 2025 and global demand uncertainties and intense competition. The pre-tax profit of this business in 2025 is only marginal, significantly lower than in previous fiscal years. Sony may have a pre-established strategy to spin off the business. In this transaction, TCL Electronics acquires high-quality assets without the need to issue new shares, making it a win-win situation for both parties. Potential for profit to be unleashed, with expected increase in mid-term profit Based on the total revenue of Sony's Displays and Sound from 24Q2 to 25Q1, which amounted to 818.6 billion Japanese yen, the pre-tax profit margin of Sony's family entertainment business is only 2.0%. With the help of Sony's technology, brand value, as well as TCL Electronics' technological and scale advantages, along with its integrated industry chain layout and efficient production advantages, the new company may have the potential to unleash profits. Historically, the profit margin of Sony's family entertainment and sound division has reached as high as 7.8% (in fiscal year 2018). By comparison, Toshiba's TVS company suffered deep losses in 2017 and Hisense Visual Technology's net profit margin improved to 7.0% in 2025 after the acquisition. Overall enhancement of brand image, synergy effects worth noting According to Omdia, in 2017, Toshiba/Hisense brands accounted for a TV shipment market share in Japan of 14.6%/5.5%, respectively, but their combined market share increased to 30%/14.8% in 2025 after Hisense Visual Technology acquired TVS. Sony has a strong advantage in the high-end and large-screen TV market, with TCL/Sony's global TV shipment market share in 2025 being 14.7%/1.8%, and a market share of 14.4%/4.4% for products priced at $500 or more, with complementary effects in North America, Western Europe, and Japan. Risk Warning: The progress and effectiveness of strategic cooperation are uncertain; significant fluctuations in raw material costs or exchange rates; uncertainties in tariffs and external demand; market competition affecting profits.