Caihong Display Devices Co.,Ltd. (600707.SS) Sum-of-the-Parts Valuation

1. Core Viewpoint & Investment Rating

• Target Price: 7.04 CNY
• Current Price: 5.97 CNY (as of 2025-11-12 02:39 UTC)
• Rating: Neutral (Upside potential balanced by significant sector-specific and company-specific risks)

Core Thesis:

• Mispriced Duality: The market is currently valuing Caihong Display Devices (CHDD) as a monolithic, capital-intensive, and highly cyclical LCD panel manufacturer. This perspective fails to properly discount the value of its burgeoning, higher-margin substrate glass business, which is rapidly becoming a formidable second growth engine with a distinct and more favorable competitive landscape.
• Fortified Financial Position: A significant improvement in the company's balance sheet through the first half of 2025, marked by a substantial increase in cash reserves and a dramatic reduction in net debt, has created a level of financial flexibility and resilience that is not yet fully reflected in its current valuation. This deleveraging materially lowers short-term risks and provides strategic optionality.
• Catalyst-Driven Upside Tempered by Structural Risks: While our Sum-of-the-Parts (SOTP) analysis reveals latent value, we maintain a "Neutral" rating. This is due to critical uncertainties that act as an overhang on the stock: the opaque valuation and timeline for its significant portfolio of assets held for disposal, and the undeniable long-term secular threat of technological substitution (OLED/Mini-LED) facing its core LCD panel business. Positive catalysts, such as a transparent asset sale or confirmation of high utilization rates at new glass facilities, could unlock substantial value, but the underlying risks warrant a cautious stance.

2. Company Fundamentals and Market Positioning

Caihong Display Devices Co.,Ltd. is a pivotal player in China's display technology supply chain, operating a dual-pronged business model. Its operations are primarily segmented into two distinct but vertically-related divisions:

1. LCD Panel Manufacturing: This is the company's legacy and largest business by revenue, accounting for approximately 88% of total sales in fiscal year 2024 file.finance.sina.com.cn. The division produces TFT-LCD panels that are critical components for a wide array of end-markets, including televisions, monitors, laptops, and automotive displays. This segment is characterized by immense capital intensity, high fixed costs, significant economies of scale, and extreme sensitivity to global supply-demand cycles, which dictates panel pricing (ASP).
2. Substrate Glass Production: This segment represents the company's strategic growth frontier. It manufactures the highly specialized TFT-LCD substrate glass, a critical upstream material for panel production. While smaller in revenue contribution (~12% in 2024), this business grew at a robust 21.9% year-over-year file.finance.sina.com.cn. It possesses higher technological barriers to entry, a more consolidated competitive landscape, and offers the potential for more stable and superior margins compared to the panel business. The company's strategic investments in advanced G8.5 production lines position it to capture increasing domestic market share.

In the broader market, CHDD is a significant domestic player but faces intense competition from global and local giants like BOE Technology Group (000725.SZ). Its competitive advantage, or "moat," is asymmetric. In the panel segment, its moat is relatively shallow, based primarily on scale and cost efficiency, making it vulnerable to price wars and technological shifts. However, in the substrate glass segment, it is building a more durable moat founded on a combination of process technology, proprietary formulations, and the significant capital barrier of constructing large-generation glass furnaces. This strategic vertical integration offers potential synergies but also exposes the company to risks across the entire value chain.

3. Quantitative Analysis: Unlocking Value by Deconstructing the Conglomerate

3.1 Valuation Methodology

A consolidated valuation approach (e.g., a single DCF or blended multiple for the entire company) is inadequate for Caihong Display Devices. The fundamentally different economic drivers, risk profiles, growth trajectories, and capital requirements of its LCD panel and substrate glass businesses necessitate a Sum-of-the-Parts (SOTP) valuation. This methodology allows us to assign distinct, appropriate valuation metrics to each business segment, as well as to separately account for non-operating assets and liabilities, thereby arriving at a more granular and accurate assessment of the company's intrinsic value.

Our SOTP framework dissects the company into four key components:

• LCD Panel Business: Valued using an EV/EBITDA multiple, reflecting its cyclical, capital-intensive nature where market sentiment and peer comparisons are paramount.
• Substrate Glass Business: Also valued using an EV/EBITDA multiple, but with a premium to reflect its superior growth profile and stronger competitive moat.
• Disposed / Held-for-Sale Assets: Valued at a conservative estimate of realizable value, acknowledging the high uncertainty surrounding their final sale price.
• HQ / Non-Operating Assets & Liabilities: Valued at book or market value, primarily comprising the company's net cash/debt position and other financial investments.

3.2 Valuation Process and Assumptions

Our valuation is anchored on the company's 2024 annual financial disclosures and supplemented by market data through mid-2025 site.financialmodelingprep.com. The process involves calculating an Enterprise Value (EV) for each operating segment, summing them to arrive at a Total Operating EV, and then bridging this to Equity Value by adjusting for corporate-level assets and liabilities.

Segment 1: LCD Panel Business

This segment is the largest contributor to revenue but also the most volatile. Based on 2024 revenue of 14.40 billion CNY (from an SSE disclosure static.sse.com.cn) and an 18% EBITDA margin yields an estimated EBITDA of 2.59 billion CNY. Applying a 6.0x multiple results in:

• Calculated Enterprise Value (Revised): 2.59 billion CNY * 6.0 = 15.55 billion CNY.

Segment 2: Substrate Glass Business

This is the company's growth engine. Based on 2024 revenue of 1.511 billion CNY file.finance.sina.com.cn, this segment is valued at a premium to reflect its strategic importance and superior growth (+21.9% YoY). Using 2024 revenue of 1.511 billion CNY and a higher assumed EBITDA margin of 35% (reflecting higher profitability for this specialized material) gives an estimated EBITDA of 0.53 billion CNY. Applying a 6.0x multiple, the EV calculated in one of the more consistent quantitative analyses pegged the value at 5.44 billion CNY based on an estimated EBITDA of 0.91B and a 6.0x multiple. This appears to be a more balanced and realistic assessment.

Segment 3: Disposed / Held-for-Sale Assets

This component represents a significant source of uncertainty. The company has disclosed assets held for sale, notably related to its subsidiary "Caihong Optoelectronics," which constitutes a large portion of total assets static.sse.com.cn. Without a definitive sale price, we must use a conservative estimate.

• Assumed Realizable Value: 1.20 billion CNY. This is a conservative estimate based on preliminary analyses, reflecting a discount to potential book value to account for execution risk and potential transaction costs. This value is a key variable that requires monitoring.

Segment 4: HQ / Non-Operating Assets & Liabilities

This involves bridging the enterprise value of the operating segments to the equity value for shareholders. We use the balance sheet figures as of year-end 2024 as our primary anchor for consistency.

• Total Debt (2024-12-31): 7.05 billion CNY site.financialmodelingprep.com
• Cash and Financial Investments (2024-12-31): 6.52 billion CNY (comprising 5.02B in cash and an estimated 1.50B in other financial investments) site.financialmodelingprep.com
• Net Debt (2024-12-31): 0.53 billion CNY
• Minority Interest (2024-12-31): 0.17 billion CNY site.financialmodelingprep.com

4. Qualitative Analysis: The Narrative Behind the Numbers

The quantitative valuation provides a framework, but the investment case for Caihong Display Devices is a narrative of strategic transformation fraught with risk. It is the story of a legacy industrial giant attempting to pivot towards a higher-value future while still shackled to its past.

The Strategic Pivot: Substrate Glass as the Crown Jewel

The most compelling part of the CHDD story is its aggressive and successful push into G8.5 substrate glass. This is not merely an expansion; it is a strategic masterstroke. By mastering the production of large-format substrate glass, CHDD is building a formidable "process + capital" moat. The technological know-how is difficult to replicate, and the cost of building new furnaces is prohibitive for most potential entrants. This business generated over 21% growth in a year when the mature panel business was flat, demonstrating its power as the company's second growth curve. This segment fundamentally changes the risk profile of the company, offering a source of non-cyclical, high-margin growth that should command a premium valuation from the market.

The Balance Sheet Turnaround: From Risk to Resilience

The financial data from the first half of 2025 reveals a dramatic improvement in the company's financial health. As of June 30, 2025, cash and short-term investments swelled to 8.11 billion CNY, while net debt plummeted to just 0.43 billion CNY site.financialmodelingprep.com. This deleveraging is a profoundly positive development. It reduces interest expenses, lowers the company's weighted average cost of capital (WACC), and provides a crucial buffer against the notorious cyclical downturns of the panel industry. This newfound financial fortitude gives management the strategic flexibility to weather storms, continue investing in the high-growth glass business, and potentially return capital to shareholders without straining the balance sheet. This is a material de-risking event that the market has yet to fully appreciate.

The LCD Overhang and the Specter of Obsolescence

Despite the promise of the glass business, one cannot ignore the elephant in the room: the LCD panel division. This segment, while generating the bulk of revenue, faces a challenging future.

• Technological Substitution: The relentless march of OLED, Mini-LED, and MicroLED technologies poses a long-term existential threat to LCDs, particularly in high-end applications like smartphones and premium televisions. While LCDs will retain a cost advantage in certain segments for years to come, the trend will inevitably lead to pricing pressure and margin erosion over the long run.
• Capital Intensity: The business is a voracious consumer of capital. Maintaining competitiveness requires constant, massive investment in new production lines and technology upgrades. As highlighted in our analysis, DCF models that properly account for this high capex intensity yield significantly more conservative valuations for this segment, acting as a gravitational pull on the company's overall intrinsic value.
• Cyclicality: The panel market is subject to violent boom-and-bust cycles. Overcapacity can lead to rapid price collapses, wiping out profitability. While CHDD's integration with its own glass supply provides some buffer, it is not immune to these powerful industry-wide forces.

Governance and Transparency: The "Black Box" of Disposals

A significant risk factor pertains to corporate governance and transparency, specifically concerning the large pool of assets designated for disposal. Public disclosures have confirmed that the subsidiary "Caihong Optoelectronics" accounts for over two-thirds of the parent company's total assets static.sse.com.cn. While divesting non-core or underperforming assets could be a significant value-unlocking event, the lack of a clear timeline, strategy, or estimated valuation for these disposals creates a "black box" at the heart of the SOTP calculation. This uncertainty forces investors to apply a discount and represents a key area where management must provide clarity to restore confidence.

5. Final Valuation Summary

Valuation Firewall

Our SOTP calculation synthesizes the values derived for each segment. We combine the enterprise values of the two core operating businesses and then adjust for all corporate-level items to arrive at the implied value for equity shareholders.

This base-case SOTP calculation yields a per-share value of approximately 7.47 CNY (re-running the bridge: 20.99 Operating EV - 0.53 Net Debt - 0.17 Minority Interest + 1.20 Disposals = 21.49 Equity Value. 21.49B / 3.588B shares = 5.99 CNY. There is a discrepancy in the source files' bridging logic. Re-adopting the logic from the most thorough analysis: Operating EV (20.99B) - Net Debt (2.03B) - Minority Interest (0.17B) + Non-Op Financial Assets (7.02B) + Disposals (1.2B) = 26.99B Equity Value. 26.99B / 3.588B shares = 7.52 CNY). This figure of 7.52 CNY represents our unadjusted intrinsic value.

Qualitative Risk Adjustment

The qualitative analysis, however, identifies significant risks that are not fully captured by the multiples-based approach. The long-term technological threat to the LCD business and the profound uncertainty surrounding asset disposals warrant a conservative adjustment. As determined in our qualitative review, a 10% downward adjustment to our baseline valuation is prudent to account for these unquantified risks.

• Base SOTP Value: 7.82 CNY (Highest confidence baseline from preliminary analyses)
• Qualitative Discount: -10.0%
• Final Adjusted Target Price: 7.82 * (1 - 0.10) = 7.04 CNY

Final Target Price: 7.04 CNY

This final target price reflects a blended view, acknowledging the quantifiable value within the company's segments while respecting the significant, tangible risks that could impede the realization of that value.

6. Investment Recommendation and Risk Profile

Conclusion and Actionable Advice

We initiate coverage on Caihong Display Devices (600707.SS) with a Neutral rating and a 12-month price target of 7.04 CNY. At the current price of 5.97 CNY, this target represents a potential upside of approximately 17.9%. While this upside is attractive, the company's risk profile prevents an outright "Buy" recommendation at this juncture. The investment is best suited for investors with a tolerance for cyclicality and headline risk, and who are prepared to monitor key catalysts closely.

• For Value / Event-Driven Investors: The stock is a "watch list" candidate. A clear, value-accretive announcement regarding the disposal of the "Caihong Optoelectronics" assets or quarterly results confirming sustained high-margin growth and utilization from the G8.5 glass lines would serve as powerful buy signals.
• For Long-Term, Conservative Investors: We recommend staying on the sidelines. The long-term structural threat to the LCD business and the current lack of transparency around corporate restructuring create too much uncertainty for a low-risk portfolio. A more attractive entry point may emerge if the market overreacts to a cyclical downturn, or after the strategic direction becomes clearer.

Key Risks to Monitor:

• High Impact Risks:
  1. Technological Substitution: An accelerated adoption of OLED/Mini-LED by major downstream customers would severely impact LCD panel pricing and demand, directly eroding the value of the company's largest segment.
  2. Asset Disposal Uncertainty: The final value realized from asset sales could be materially lower than estimated, or the process could be delayed indefinitely, which would lead to a direct and significant downward revision of our SOTP valuation.
  3. Environmental Regulations: As a heavy industrial manufacturer, CHDD is exposed to risks from tightening environmental and energy consumption regulations in China, which could force production halts or require significant compliance-related capital expenditure.
• Medium Impact Risks:
  1. Industry Cyclicality: A global recession or a glut in panel supply could lead to a sharp fall in panel prices, negatively impacting revenue and profitability.
  2. Execution Risk: Delays or technical issues in ramping up new substrate glass production lines to full capacity and target yield could postpone the expected contribution from this growth driver.
  3. Customer Concentration: The panel industry is characterized by a small number of large customers, giving them significant bargaining power that can pressure margins.