20130912-美银美林-Tie-up_with_Alibaba_to_counter_competition_from_internet_firms_11页_363kb

Summary of Skyworth Digital Holdings Ltd Report

Core Content

This report from Bank of America Merrill Lynch focuses on Skyworth Digital Holdings Ltd, analyzing its performance, strategic moves, and investment potential in the context of the evolving Chinese TV market. The key areas covered include operational performance, strategic partnerships, financials, and investment thesis.

Main Points

1. Company Overview

• Founded in 1988 and listed on the HKEx in 2000.
• Ranked second in China LCD TV shipments in 2011 with a 15.8% market share.
• Revenue composition in 1H FY13: 74% from China TV, 12% from digital set-top boxes, and 7% from overseas TV.
• Has a strong presence with 41 branches, 204 sales offices, and over 20,000 retail shops as of September 2012.

2. Tie-up with Alibaba

• Skyworth partnered with Alibaba to launch three TV models that run on Ali OS and Skyworth's Tianci OS.
• The alliance aims to counter competition from internet firms like LeTV and Xiaomi.
• The integration of Alibaba's e-commerce services (e.g., Alipay, Tmall) enhances consumer experience and provides additional value through features such as bill payment and online shopping.
• Skyworth maintains advantages in hardware know-how, logistics, and after-sales services, which complement Alibaba's strengths.

3. August Shipment and ASP

• LCD TV shipments in August: 779k units in China, 155k units overseas.
• Shipment growth was +4% to -12% YoY.
• ASP (Average Selling Price) in China increased by 7% YoY due to an enhanced mix of Cloud/4K TVs.
• Inventory levels remain healthy at 7-8 weeks.
• September shipments are expected to increase ahead of the Golden Week Holiday.

4. Investment Rating and Price Objective

• Reiterated Buy rating with a HK$5.3 price objective.
• The price objective is based on an 8x forward P/E multiple, reflecting the average mid-cycle multiple of its historical trading range since 2011.
• Dividend Yield is expected to rise to 6.10% by 2016E.

5. CFO Departure and Finance Setup

• The retirement of CFO Frederick Leung is expected to have neutral impact as the new management team is experienced.
• Skyworth Group Finance has been approved by the CBRC, which will help in centralizing funding management and reducing finance costs.

6. Financial Performance (Mar 2013)

• Net Income (Adjusted): HK$1,252 mn (2012A), increasing to HK$2,151 mn (2016E).
• EPS (Earnings Per Share): 0.463 (2012A), rising to 0.779 (2016E).
• Free Cash Flow / Share: 0.177 (2012A), expected to reach 0.198 (2015E).
• ROE (Return on Equity): 16.1% (2014E), showing strong profitability.
• Operating Margin: 4.5% (2012A), slightly declining to 3.7% (2016E).
• EBITDA Margin: 5.4% (2012A), decreasing to 4.6% (2016E).

7. Valuation Metrics

• P/E (Price to Earnings): 9.14x (2012A), decreasing to 5.43x (2016E).
• EV / EBITDA: 10.16x (2012A), expected to reach 5.81x (2016E).
• Free Cash Flow Yield: 4.30% (2012A), increasing to 10.51% (2015E).
• Net Debt-to-Equity Ratio: 24.4% (2012A), decreasing to 18.0% (2016E).
• Interest Cover: 7.2x (2012A), increasing to 16.3x (2016E).

8. Investment Thesis

• Skyworth has a strong execution capability, evidenced by its inventory and expense management.
• The company leads in product upgrades, particularly in LED TV and 3D TV penetration.
• However, higher panel costs in 2013 and slow overseas business development could pressure profitability and top-line growth.

9. Stock Data

• Price: HK$4.23.
• Price Objective: HK$5.30.
• Volatility Risk: HIGH.
• Market Value / Shares Outstanding: US$1,437 / 2,634.7.
• Average Daily Volume: 19,526,350.
• ROE (2014E): 16.1%.
• Est. 5-Yr EPS / DPS Growth: 14.6% / 14.2%.
• Free Float: 64.2%.

Key Information

• The report highlights Skyworth's strategic move to counter internet firms by integrating with Alibaba's ecosystem.
• Market share in China TV is expected to remain strong despite intensifying competition.
• Financial health is maintained with healthy inventory levels and positive cash flow.
• The Buy rating is based on strong execution, high-end focus, and potential for growth.
• Valuation metrics suggest a discounted valuation compared to historical averages, with potential for upside if volume growth and cost control outperform expectations.

Conclusion

Skyworth Digital Holdings Ltd is positioned to benefit from its strategic alliance with Alibaba, which enhances its market competitiveness and consumer appeal. The company maintains a strong execution record, with solid profitability and healthy financials. Despite challenges like rising panel costs and slow overseas expansion, the Buy rating and price objective indicate positive outlook and potential for growth in the long term.