SKYWORTH:China TV sales slow while overseas sales pick up

Soft 1H17 results. Skyworth generated 1H17 revenue of HK$20.3b. This was 3.8%YoY higher than revenue earned in 1H16 and1.1% below Bloombergconsensus. China TVsalesaccounted for 46.2% of total revenue while overseas TVsalesaccounted for 22.2%. As of 9M17, Skyworth’s China/overseas TV sales volume had grown17.2%/104.2%YoY to 5.2m/4.4m units, achieving 47.5%/72.9% of the company’sFY17F sales target of 11m/6m. Gross margin remained flat YoY at 20.6%, inline with consensus. 4K TVs made up 42% of TV sales volume out of the 5.2m units sold in China. Blended China TV ASP for 1H17 was down 15.9%YoY to HK$2,123. Operating margin contracted 0.3ppt to 6.5% due to higher marketing and administrative expenses related to businessesacquiredoverseas. Attributable profit was down 3.8%YoY to HK$836m. The company’s dividend payout ratio remained a stable 33.8% after an interim dividend of 9.60 HK cents per share was declared.

HK$100m internet revenue target for FY17F achievable. Skyworth booked HK$50m in internet revenue in 1H17, of which 75% was from content revenue sharing and 22% from advertising. We believe the company’s HK$100m internet revenue target for2017F is easily achievable and we expect Skyworthto double that figure in 2018F. Skyworth’s DAU as of Oct 2016 reached 7m following the upgrade of its internet user data collection system. We expect internet monetization to enter a rapid growth phase in the next two-to-threeyears.We lower our DCF valuation for Skyworth’s internet platform from HK$3.14 to HK$3.00 owing to the increased number of shares.

Maintain Outperform but cut target price to HK$6.42. We cut our China TV ASP assumption for 2017F/2018F by 8.6%/9.4% to reflect our cautious view on the China TV market. However, we raise our overseas TV shipment assumption for the same yearby 80.0%/71.4% to reflect strong overseas expansion. Our SOTP valuation assumes(1)DCF of Skyworth’s internet revenue stream of HK$3.00, and (2)a HK$3.40 per share valuation for the TV hardware segment. We cut our TV hardware target P/E multiple from 6x to 5x to reflect the more challenging China TV environment. Our new target price of HK$6.42, down fromHK$7.30, implies 30% potential upside and translates to 9.3x/8.8x 2017F/2018F P/E.