20150703-光大证券-Value_Emerging_18页_212kb

Skyworth Digital Hldg. (751 HK) Summary

Core Content

Skyworth Digital Hldg. (SDH), a leading home appliance manufacturer in the PRC, is highlighted in this report with an Initiate Buy rating due to its attractive valuation and potential for steady earnings growth. The company has a strong presence in the Chinese TV market and is a key player in the high-end 4K UHD TV segment. Its diversified business model includes overseas TV sales, digital set-top box (STB) business, and white goods, which are expected to drive future growth as the domestic TV market stabilizes.

SDH's financial performance for FY15 shows a net profit of HK$3,128m, representing a 149.4% YoY increase, primarily driven by one-off exceptional disposal gains. Excluding these gains, net profit growth is still strong at 40.8% YoY. The company has maintained a strong financial position with net cash of HK$1,154m at the end of FY15.

Main Points

• Market Leadership: SDH is the largest LCD TV manufacturer in the PRC with a 16.8% market share in 2014. It also leads in the high-end 4K UHD TV segment with 32% market share.

• Revenue Breakdown: Approximately 61% of SDH's revenue comes from its China TV business, with the rest from overseas and other home appliance segments. The non-China TV business is expected to be the key driver of future growth.

• Growth Strategy: SDH has expanded its overseas TV and STB sales, and diversified into white goods. This strategy is expected to maintain its growth trajectory, as the domestic TV market is anticipated to stagnate.

• Earnings Growth: Despite a decline in FY16 due to the exclusion of one-off gains, the company is expected to achieve a FY15-18 CAGR of 6.5% in net profit. The gross margin is expected to remain stable due to cost control and improving scale in non-TV segments.

• Valuation: The company's current valuation is considered attractive, with a target price of HK$8.8 (equivalent to 13x FY15E PE). This is based on one standard deviation plus its 10-year average PE, suggesting a re-rating potential.

• Smart TV User Base: SDH has a large smart TV user base, with 9.8 million units installed by the end of FY15 and 7.6 million activated users by May 2015. This provides a platform for additional services and new income streams, though profitability from these is expected to be modest in the short term.

• Cost Control: SDH has implemented effective cost control measures, which have helped stabilize its gross margin and improve profitability. This is reflected in its operating expenses-to-turnover ratio, which has remained relatively stable.

Key Information

Financial Performance (FY15)

• Turnover: HK$40,135m
• Net Profit: HK$3,128m (up 149.4% YoY)
• EPS: HK$1.11 (up 148.0% YoY)
• DPS: HK$0.25 (up 63.3% YoY)

Valuation Metrics

• PE (FY15): 6.0
• PB (FY15): 1.4
• EV/EBITDA (FY15): 6.1
• Target Price: HK$8.8 (13x FY15E PE)

Business Segments

• TV Business: Dominates the Chinese TV market and is a leader in the 4K UHD segment.
• Set-top Box Business: One of the largest players in China's cable and high-definition cable box markets.
• White Goods: Expected to grow steadily in the future but remain a small contributor to revenue in the near term.

Key Risks

• Technological Change: Rapid changes in TV and home appliance technologies and customer preferences.
• Competition: Intense competition from major players like Samsung, LG, Sony, Hisense, and TCL.
• Economic Slowdown: Potential decline in replacement demand due to economic conditions.
• Raw Material Prices: Volatility in component costs could impact profitability.
• Currency Risk: About 14% of revenue comes from overseas operations, making it vulnerable to currency fluctuations.

Summary Table

Conclusion

SDH is positioned to benefit from its market leadership, diversified business model, and effective cost control. The target price of HK$8.8 reflects a re-rating potential and attractive valuation. While the company faces market and operational risks, its strong financial position and steady earnings growth make it a compelling investment.