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Skyworth Digital Holdings (751HK):Maintain PT of HK$10.2,Buy on any weakness coming from rival's poor results

研究机构:摩根大通(亚太) 研究员:Leon Chik 发布时间:2015-10-26

The share price of Skyworth has surged 42% since the beginning of September and outperforming the HSCEI by 32%over this period. Key rival in rural TV sales TCL Multimedia (1070 HK – N) reported (after close of markets on 20 Oct) alarge loss in 3QFY15 and there may be some concern on the upcoming 1HFY16 results (to be announced mid-Nov) forSkyworth, which we see as a potential buying opportunity when the market opens on Thursday. Of particular concern isthe more than 3% Y/Y drop in GPM for TCLM’s domestic sales in 3Q15. We see sufficient evidence that Skyworth hasachieved better growth and more high end (4K-UDTV) sales compared to TCLM and we do not see any major read-across(i.e. weakness in Skyworth’s 1HFY16 performance) due to the TCLM results.

TCLM results surprisingly poor... The 3QFY15 results of TCLM were quite poor with a net loss of HK$441m(1H15 NP of HK$122m and 3QFY14 NP of HK$71m and our 2HFY15 NP estimate of HK$139m). Consensus(Bloomberg) did not expect a 2H15 or a 3Q15 loss (prior to the announcement).

… Mainly because Skyworth taking market share. Skyworth and TCLM are the two major national brands with asignificant focus on rural customers. Skyworth has been gaining market share and TCLM has been losing market sharefor over a year; Skyworth has gained on the high end (4K-UDTV) even faster than the mass market TVs.

Skyworth also has more 4K-UDTV sales. TCLM’s sales of 4K-UDTV comprised just 12% of domestic unit salesYTD FY15 versus over 22% for Skyworth over this period (latest month for Skyworth is 28%). Please see our notedated 12 Oct on Skyworth that shows how profitability rises after a new product exceeds 20% of total sales based onhistorical trends.

Don’t forget Skyworth’s import duty savings. TCLM had a huge cost advantage over many rivals in 2012 to 2014due to its ability to procure panels from domestic producers (mostly China Star owned by parent TCL Corp andSamsung) and not paying import duties of 3-5%. Before mid-2014, Skyworth paid import duties for over 90% of itspanels procured but since the opening of the JV panel plant with LG Display mid-2014, Skyworth has lifted its domesticprocurement to over 50% now with room for additional domestic procurement and import duty savings well into 2016 –an advantage TCLM already fully utilized by the end of 2014.

Overall we are maintaining flattish margin expectations. We maintain our expectations that GPM for Skyworthwould fall slightly in 1HFY16 to 19.3% (from 5% and 20.4% in 2HFY15). The recent TCLM results with 3QFY15GPM down 3% Y/Y may cause some market observers to be concerned of a larger compression in Skyworth’s GPM inthe upcoming 1HFY16 results. We see this as an opportunity and look for a potential positive surprise as the lastupgrade cycle (from CCFL LCD to LED LCD) showed that GPM increases significantly when new product (now 4k-UDTV) sales exceed 20% of total unit sales and does not fall until after it reaches over 60% of total unit sales.

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