Skyworth Digital Target Price: HKD5.90 Price: HKD4.66 Set for a Strong Recovery Ahead Market Cap: USD1,818M Bloomberg Ticker: 751 HK

Hong Kong Results Review FY17: below expectations

15 June 2017 Technology | Hardware & Equipment Buy (Maintained) Skyworth Digital Target Price: HKD5.90 Price: HKD4.66 Set For a Strong Recovery Ahead Market Cap: USD1,818m Bloomberg Ticker: 751 HK

We continue to expect Skyworth to see a solid recovery this year. We Share Data expect its profitability to see meaningful improvement, driven by: Avg Daily Turnover (HKD/USD) 53.8m/6.84m 1. Rebound of its GPM (due to panel price moderating and an increase in 52-wk Price low/high (HKD) 4.17 - 6.35 blended ASP of its core China TV sales); 2. Better operating leverage (due to better revenue growth momentum) Free Float (%) 59 and better cost control. Shares outstanding (m) 2,837 Therefore, maintain BUY, with a lower HKD5.90 TP (from HKD6.40, 27% Estimated Return 27% upside) as we cut our earnings forecasts for FY18F-19F by 7-8% to factor in a more conservative blended ASP growth of its core China TV sales. Shareholders (%) Wong Wai Sen, Stephen 36.1 Skyworth Digital’s (Skyworth) profitability to improve meaningfully this year, driven by: Alliance Bernstein LP 5.0 i. Rebound of GPM. According to data from WitsView Technology

Coperation (Witsview), the pricing of major sizes of thin film transistor Share Performance (%) liquid crystal display (TFT LCD) have already shown signs of peaking in recent months. Given that the new capacity is kicking in, IHS Markit (IHS) YTD 1m 3m 6m 12m expects that panel pricing to start dropping in 2H17. Absolute 5.4 7.4 (12.9) 7.1 (5.3) Based on our discussion with management previously, a YoY growth in the Relative (12.1) 4.6 (21.4) (8.0) (32.1) blended ASP of its core China TV sales have risen further to a high single Source: Bloomberg digit in recent months. Given the higher ASP has already shown a

dampening effect to demand, we are slightly more cautious and lower our Skyworth Digital Holdings (751 HK) Price Close Relative to Hang Seng Index (RHS) estimates for blended ASP (only expecting +4% YoY). That said, we still 6.9 140 expect its GPM to rebound by 1.1ppts to 21.1% this year. 5.9 110 ii. Better operating leverage. We expect that Skyworth’s core China TV sales 4.9 80 to resume growth this year, driven by both shipment growth and ASP 3.9 50 increase. This should help lead to a better revenue growth momentum this 60 50 year (+8.6% YoY, vs +0.4% YoY last year) and hence, better operating 40 leverage. Nonetheless, we also expect that the company can achieve 30 better cost control this year. Therefore, we expect its EBIT margin to 20 10

rebound by 1.7ppts to 3.1% and as a result, Skyworth’s recurring earnings Volm

16 17

- -

are forecasted to rebound by 60.8% YoY this year. -

Oct Apr

Jun

Feb

Dec Aug Continuous rapid ramp-up of a high-margin smart TV platform. Last year, Skyworth’s smart TV platform’s revenue grew by 2.1x YoY to HKD166m, above Source: Bloomberg our estimate of HKD150m and management’s original guidance of HKD100m. For this year, we expect this business segment’s revenue to grow by 1x to HKD332m (vs management guidance of HKD300m). Given the high scalability and profitability of this business segment, we expect it to become a more meaningful profit contributor from this year onwards. This is with the contribution to total recurring earnings rising to 6-7% this year and 9-10% next year, up from 2-3% last year. Maintain BUY. Our new TP is based on the same 9x FY18F P/E, close to a its 3-year forward mean; this is also corroborated by our DCF valuation of HKD6.20/share. Key risks include a weaker-than-expected TV demand in China and overseas markets as well as stronger-than-expected competition.

Forecasts and Valuations Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Total turnover (HKDm) 42,695 42,845 46,523 49,647 51,910 Reported net profit (HKDm) 2,170 1,310 1,858 2,212 2,528 Recurring net profit (HKDm) 2,214 1,156 1,858 2,212 2,528 Recurring net profit growth (%) 28.7 (47.8) 60.8 19.0 14.3 Recurring EPS (HKD) 0.77 0.39 0.63 0.75 0.86 DPS (HKD) 0.26 0.15 0.21 0.25 0.28 Recurring P/E (x) 6.0 11.8 7.4 6.2 5.4 P/B (x) 0.88 0.88 0.82 0.76 0.70 P/CF (x) 7.60 6.18 4.44 3.93 3.53 Dividend Yield (%) 5.5 3.2 4.5 5.3 6.1 Analyst EV/EBITDA (x) 5.6 10.9 6.3 4.8 3.8 Ken Chui, CFA Return on average equity (%) 15.1 8.6 11.6 12.7 13.4 Net debt to equity (%) 15.8 18.5 12.0 6.0 0.1 +852 2103 9415 Our vs consensus EPS (adjusted) (%) (4.5) (3.0) 0.0 [email protected]

Source: Company data, RHB

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

Financial Exhibits

Financial model updated on : 2017-06-14 Asia Financial summary Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Hong Kong Recurring EPS (HKD) 0.77 0.39 0.63 0.75 0.86 Technology EPS (HKD) 0.76 0.45 0.63 0.75 0.86 Skyworth Digital DPS (HKD) 0.26 0.15 0.21 0.25 0.28 Bloomberg 751 HK BVPS (HKD) 5.28 5.28 5.69 6.15 6.69 Buy Weighted avg adjusted shares (m) 2,859 2,934 2,934 2,934 2,934

Valuation basis Valuation metrics Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F i. 9x FY18F P/E, above +1SD of its 3-year Recurring P/E (x) 6.0 11.8 7.4 6.2 5.4 forward P/E mean; P/E (x) 6.1 10.4 7.4 6.2 5.4 ii. DCF valuation of HKD6.20 per share. P/B (x) 0.88 0.88 0.82 0.76 0.70 Key drivers FCF Yield (%) 3.2 5.3 12.9 15.2 17.6 i. Strong growth of 4KTV shipment, which has a Dividend Yield (%) 5.5 3.2 4.5 5.3 6.1 higher GPM; EV/EBITDA (x) 5.6 10.9 6.3 4.8 3.8 ii. Rapid ramp-up of smart TV ad business. EV/EBIT (x) 7.3 22.9 9.5 6.8 5.2

Key risks Income statement (HKDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F i. Weaker-than-expected TV demand in China Total turnover 42,695 42,845 46,523 49,647 51,910 and overseas market; Gross profit 9,363 8,567 9,804 10,626 11,276 ii. Keener-than-expected competition; EBITDA 2,665 1,287 2,144 2,665 3,137 iii. Unfavourable raw materials costs (panel pricing). Depreciation and amortisation (639) (675) (722) (786) (850) Operating profit 2,026 612 1,422 1,879 2,287 Company Profile Net interest (239) (359) (349) (338) (330) Skyworth Digital (Skyworth) is one of the leading TV Income from associates & JVs 7 (4) (4) (4) (4) manufacturers in China and globally with an annual Exceptional income - net (55) 200 0 0 0 capacity of 14m units. The company has over 3,500 Pre-tax profit 3,150 1,984 2,687 3,198 3,655 specialty stores in China located across major cities Taxation (623) (455) (524) (624) (713) such as Shenzhen and Beijing, along with over 20k retail partners. Minority interests (357) (219) (305) (362) (414) Recurring net profit 2,214 1,156 1,858 2,212 2,528 Skyworth’s 3-year forward P/E band Cash flow (HKDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Change in working capital (1,406) 5 191 113 78 Cash flow from operations 1,753 2,213 3,080 3,477 3,874 Capex (1,324) (1,494) (1,313) (1,401) (1,465) Cash flow from investing activities (1,387) (1,295) (1,417) (1,505) (1,569) Proceeds from issue of shares (112) 5 0 0 0 Dividends paid (581) (750) (376) (656) (768) Cash flow from financing activities 4,667 (1,175) (874) (1,056) (1,207) Cash at beginning of period 3,317 5,023 4,815 5,335 6,044

Net change in cash 5,033 (257) 789 916 1,099

Source: Bloomberg, RHB Ending balance cash 8,350 4,766 5,604 6,251 7,143

Balance sheet (HKDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Total cash and equivalents 5,516 5,105 5,725 6,534 7,506 Tangible fixed assets 6,031 6,565 7,156 7,771 8,385 Intangible assets 113 637 637 637 637 Total investments 2,739 4,106 3,850 3,646 3,482 Total other assets 1,201 412 412 412 412 Total assets 42,060 43,059 45,557 48,307 51,008 Short-term debt 4,950 4,979 4,652 4,468 4,283 Total long-term debt 3,155 3,013 3,013 3,013 3,013 Total liabilities 25,360 26,246 27,393 28,646 29,590 Shareholders' equity 15,092 15,479 16,696 18,047 19,642 Minority interests 1,608 1,334 1,467 1,614 1,776 Total equity 16,700 16,813 18,164 19,661 21,418 Net debt 2,643 3,117 2,171 1,177 20 Total liabilities & equity 42,060 43,059 45,557 48,307 51,008

Key metrics Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Revenue growth (%) 6.4 0.4 8.6 6.7 4.6 Recurrent EPS growth (%) 27.2 (49.1) 60.8 19.0 14.3 Gross margin (%) 21.9 20.0 21.1 21.4 21.7 Operating EBITDA margin (%) 6.2 3.0 4.6 5.4 6.0 Net profit margin (%) 5.1 3.1 4.0 4.5 4.9 Dividend payout ratio (%) 33.7 33.5 33.0 33.0 33.0 Capex/sales (%) 3.1 3.5 2.8 2.8 2.8 Interest cover (x) 8.48 1.70 4.07 5.56 6.94

Source: Company data, RHB

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

FY17 Results Review

Figure 1: Skyworth’s FY17 results review FYE Mar (HKDm) 2H16 1H17 2H17 YoY 2H17 Diff FY16 FY17 YoY FY17 Diff FY17 Diff Actual Actual Actual RHB Actual Actual RHB BBG Consensus Revenue TV 15,790 13,887 15,750 -0.3% 16,456 -4.3% 30,112 29,637 -1.6% 30,343 -2.3% PRC 12,888 9,376 11,324 -12.1% 12,493 -9.4% 24,129 20,700 -14.2% 21,869 -5.3% Overseas 2,902 4,511 4,426 52.5% 3,963 11.7% 5,983 8,937 49.4% 8,474 5.5% Digital set-top boxes 3,732 2,580 3,140 -15.9% 3,392 -7.4% 5,913 5,720 -3.3% 5,972 -4.2% LCD modules 418 354 480 14.8% 495 -3.1% 772 834 8.0% 849 -1.8% White goods 1,234 1,075 1,019 -17.4% 1,188 -14.2% 2,366 2,094 -11.5% 2,263 -7.5% Other products 1,845 1,898 2,372 28.6% 2,348 1.0% 3,273 4,270 30.5% 4,246 0.6% Property holding 127 143 147 15.7% 177 -16.9% 259 290 12.0% 320 -9.4% Total revenue 23,146 20,291 22,554 -2.6% 23,702 -4.8% 42,695 42,845 0.4% 43,993 -2.6% 43,778 -2.1% Cost of revenue (17,806) (16,121) (18,157) (18,960) (33,332) (34,278) (35,081) Gross profit 5,340 4,170 4,397 -17.7% 4,742 -7.3% 9,363 8,567 -8.5% 8,912 -3.9% 8,672 -1.2% GPM 23.1% 20.6% 19.5% 20.0% 21.9% 20.0% 20.3% 19.8% Total opex (4,061) (3,769) (4,186) 3.1% (4,370) -4.2% (7,337) (7,955) 8.4% (8,139) -2.3% Opex / sales ratio -17.5% -18.6% -18.6% -18.4% -17.2% -18.6% -18.5% Operating profit 1,279 401 211 -83.5% 372 -43.3% 2,026 612 -69.8% 773 -20.9% OPM 5.5% 2.0% 0.9% 1.6% 4.7% 1.4% 1.8% Other income 805 737 798 711 1,411 1,535 1,448 Other gains (losses) (21) 180 20 (180) (55) 200 - Finance costs (154) (174) (185) (208) (239) (359) (382) Associates and JV 5 (2) (2) 9 7 (4) 7 PBT 1,914 1,142 842 -56.0% 704 19.6% 3,150 1,984 -37.0% 1,846 7.5% Income tax (372) (194) (261) (138) (623) (455) (332) Effective tax rate 19.4% 17.0% 31.0% 19.6% 19.8% 22.9% 18.0% MI (241) (112) (107) (97) (357) (219) (209) Net profit 1,301 836 474 -63.6% 468 1.2% 2,170 1,310 -39.6% 1,304 0.4% 1,301 0.7% NPM 5.6% 4.1% 2.1% 2.0% 5.1% 3.1% 3.0% 3.0% Recurring net profit 1,318 762 394 -70.1% 543 -27.4% 2,214 1,156 -47.8% 1,304 -11.4% 1,299 -11.0% NPM - recurring 5.7% 3.8% 1.7% 2.3% 5.2% 2.7% 3.0% 3.0% Source: Company data, RHB

Revenue grew by 0.4% YoY to HKD42.8bn, 2.6% and 2.1% below our and consensus’ estimates. Robust growth in overseas TV sales (+49.4% YoY) were offset by a decline in China TV sales (-14.2%) and also digital set-top box sales (-3.3%). Faster-than-expected smart TV platform’s ramp-up, revenue of which grew by 2.1x YoY to HKD166m, above our estimate of HKD150m and management’s original guidance of HKD100m. This was mainly driven by: i. Increase in number of daily active users (DAU) (+54%); ii. Build-up of paying habit for content in China; iii. More allocation of advertising dollar from advertisers to this platform. GPM contracted by 1.9ppts to 20%, 0.3ppts below our estimate but 0.2ppts above consensus. The contraction of GPM was mainly due to product mix change (lower contribution from higher-GPM China TV sales of 23.1%). Panel price increase also put pressure on China TV sales’ GPM (-1.7ppts to 23.1%). On the other hand, while growth from overseas TV sales was accretive to net profit, it was dilutive to the blended GPM (11.8%). Reported NP declined by 39.6% YoY to HKD1,310m, in line with our and consensus’ forecasts, as the company had issued a profit warning on 9 May 2017, citing that FY17’s reported NP would drop by ~40% YoY.

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

Excluding one-off items, recurring NP declined by 47.8% YoY to HKD1,156m, 11.4% and 11% below our and consensus’ estimates respectively. This was mainly dragged by: i. GPM contraction; ii. Lower-than-expected revenue leading to higher pressure on operating leverage (lower-than-expected contribution from higher-margin China TV sales); iii. Higher-than-expected tax rate of 22.9% (vs our estimate of 18%). For this, management explained that it was mainly due to some subsidiaries making losses in 2H17 that could not be used to offset the overall tax payment of the company. It expects the tax rate to retreat in FY18. Final dividend was 0.5 cents. Full year dividend and payout ratio was 14.6 cents and 33.5%, roughly in line with our estimate of 15 cents but below consensus of 16.4 cents. In FY17, the company’s cash conversion cycle worsened to 2 days, from -6 days in FY16, as: i. Inventory days increased by 10 days to 65 days; ii. Receivable days increased by two days to 47 days; iii. Payable days increased by four days to 110 days.

FY18 Outlook – Expecting a Strong Recovery We expect Skyworth’s recurring NP to rebound by 60.8% YoY to HKD1,858m, mainly driven by: i. Revenue growth accelerating to 8.6% YoY, due to rebound in China TV sales and also continuous rapid ramp-up of overseas TV sales; ii. GPM rebounding by 1.1ppts to 21.1%, due to a retreat of panel pricing and increase in blended ASP of China TV sales; iii. EBIT margin rebounding by 1.7ppts to 3.1%, due to better operating leverage (because of better revenue and China TV sales growth momentum), rebound in GPM and better cost control; iv. Besides, we also expect the smart TV platform to maintain a rapid ramp-up momentum, with revenue growing by 1x to HKD332m. Given the high scalability and profitability of this business segment, we expect it to become a more meaningful profit contributor from this year onwards. This is with its contribution to overall recurring NP rising to 6-7% and 9-10% in FY18F and FY19F, up from ~2-3% in FY17.

Revenue (+8.6% YoY) driven by: i. China TV sales (+6.0% YoY). We believe this would be mainly driven by a rebound in blended ASP of about 4% YoY and the resumption of growth in shipment of about 2% YoY (vs management’s guidance of +7% YoY). For ASP, based on our discussion with management previously, a YoY growth in blended ASP for its core China TV sales has gone up further to a high single digit in recent months. However, given the higher ASP has already shown a dampening effect to demand (Skyworth’s China TV shipments’ YoY growth stayed negative in recent months), we are slightly more cautious and lower our estimates for the blended ASP (only expecting +4% YoY). For shipment, although All View Cloud (AVC) a Beijing-based consultancy guided that China TV shipment would grow by 4.2% YoY in 2017, we believe that increase in blended ASP would dampen demand. Therefore, we only expect China TV shipment to grow by 1.7% YoY. We also expect that Skyworth should be able to gain back some market share this year (internet TV brands should be under greater pressure when compared to traditional TV brands like Skyworth due to the buoyant panel pricing) and outperform the overall market. ii. Overseas TV sales (+23.5% YoY). We believe this would be mainly driven by a continuous solid growth in shipments of about 30% YoY, due to a continuous market share gain and also new strategic partnerships like the one with Google on GoogleTV (vs management’s guidance of +30% YoY).

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

Figure 2: Key assumptions for Skyworth’s China and overseas TV sales segments 2015 2016 2017F 2018F 2019F Total shipment in China (m) 47.21 50.89 51.73 52.57 53.42 YoY 5.8% 7.8% 1.7% 1.6% 1.6%

FYE Mar FY16 FY17 FY18F FY19F FY20F Skyworth shipment in China (m) 10.04 9.34 9.56 9.72 9.87 YoY 6.1% -6.9% 2.3% 1.7% 1.6%

Shipment (m) -4K TV 2.79 4.29 5.58 6.69 7.36 -Cloud TV 4.25 3.63 3.27 3.02 2.51 -Other TV 2.99 1.42 0.71 0.00 0.00

YoY (%) -4K TV 101.6% 53.6% 30.0% 20.0% 10.0% -Cloud TV 23.7% -14.5% -10.0% -7.5% -17.0% -Other TV -35.5% -52.7% -50.0% -100.0% N.A

% of total shipment in China (%) -4K TV 27.8% 46.0% 58.4% 68.9% 74.6% -Cloud TV 42.3% 38.9% 34.2% 31.1% 25.4% -Other TV 29.8% 15.2% 7.4% 0.0% 0.0%

Skyworth's overseas shipment (m) 3.7 4.4 6.9 9.0 10.8 YoY 35.2% 18.7% 57.4% 30.0% 20.0%

ASP (HKD) China 2,404 2,217 2,297 2,359 2,331 Overseas 1,357 1,288 1,223 1,193 1,178

YoY (%) China -6.7% -7.8% 3.6% 2.7% -1.2% Overseas -12.5% -5.1% -5.0% -2.5% -1.3%

Revenue (HKDm) China 24,129 20,700 21,945 22,874 23,017 Overseas 5,983 8,937 11,037 12,914 14,665

YoY (%) China -1.0% -14.2% 6.0% 4.2% 0.6% Overseas 3.8% 49.4% 23.5% 17.0% 13.6%

GPM (%) China 24.8% 23.1% 25.3% 25.9% 26.2% Overseas 10.1% 11.8% 12.3% 12.9% 13.5% Source: AVC, Company data, RHB

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

GPM (+1.1ppts YoY to 21.1%) driven by: i. Panel price moderating. According to data from Witsview, pricing of the 32-inch thin film transistor liquid crystal display (TFT LCD) has already started to decline, while pricing of 40-, 43-, 50- and 55-inch TFT LCDs have also shown signs of peaking in recent months (pricing was flattish MoM recently). Pricing of the 65-inch TFT LCD also stopped rising since May. Given that the new capacity is kicking in, IHS expects that panel pricing to start dropping in 2H17; ii. Rebound in blended ASP of its China TV sales; iii. Product mix improvement of its China TV sales; we expect the 4K TV’s (higher- margin product with GPM of 28.8% in FY18F, vs the blended average of 25.3% in FY18F of China TV sales) contribution to total shipment of China TV sales to rise further to 58% in FY18F from 46% in FY17.

Figure 3: MoM change in panel pricing Figure 4: Skyworth China TV sales’ product mix

20.0% 80.0%

15.0% 70.0%

10.0% 60.0% 50.0% 5.0% 40.0% 0.0% 30.0%

-5.0%

2015/01 2015/02 2015/03 2015/05 2015/06 2015/07 2015/09 2015/10 2016/01 2016/02 2016/05 2016/06 2016/08 2016/09 2016/10 2016/12 2017/01 2017/02 2017/04 2017/05 2015/08 2015/11 2015/12 2016/03 2016/04 2016/07 2016/11 2017/03 2015/04 20.0% -10.0% 10.0% -15.0% 0.0% -20.0% FY15 FY16 FY17 FY18F FY19F FY20F

65" ASP 55" ASP 50" ASP 40" ASP 32'' ASP 4K TV Cloud TV Other TV

Source: Witsview, RHB Source: Company data, RHB

EBIT margin (+1.7ppts YoY to 3.1%) driven by: i. Better operating leverage (because of better revenue and China TV sales growth momentum) ii. Rebound in GPM; iii. Better cost control.

Smart TV platform to become a more meaningful profit contributor We expect the smart TV platform to maintain a rapid ramp-up momentum, with revenue growing by 100% and 50% to HKD332m (vs management guidance of HKD300m) and HKD498m in FY18F and FY19F. We believe our estimates are achievable, given: i. Content and advertising revenue should keep on ramping up robustly. For example, according to data from AVC, the over-the-top (OTT) (smart TVs plus others like IPTV) advertising market’s revenue growth would stay robust in the coming years, with a CAGR of about 1.2x in 2016-2019F and reaching CNY10bn by 2019F; ii. Skyworth has also started to tap other potentials of its smart TV platform, like the app store, ecommerce, gaming, travel and education; iii. Both Tencent (700 HK, BUY TP: HKD303.00) and iQiyi.com Inc have become Coocaa Network Technology Co Ltd’s (Coocaa) shareholder (Coocaa is a subsidiary of Skyworth, which operates the smart TV platform), holding 7.7% and 4.6% stake in the company respectively. Given their strong presence and expertise in content and advertising businesses, (according to Analysys Mason (Analysys), they capture more than a 40% market share of the online video advertising market), we believe these partnerships could help speed up Skyworth’s smart TV platform’s development going forward.

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

iv. Given the high scalability and profitability of this business segment, we expect it to become a more meaningful profit contributor from this year onwards, with its contribution to overall recurring NP rising to 6-7% and 9-10% in FY18F and FY19F, up from 2-3% in FY17.

Figure 5: Key assumptions of Skyworth’s smart TV platform revenue FY16 FY17 FY18F FY19F FY20F Skyworth's smart TV's activated users (m) 12.7 22.2 31.3 41.7 53.0 DAU (m) 5.6 8.6 13.0 18.5 25.0 Average DAU (m) 4.5 7.1 10.8 15.8 21.8 Conversion rate (%) 44.3% 38.9% 41.6% 44.4% 47.2%

Revenue per DAU 11.7 23.4 30.7 31.6 32.0 YoY 100.4% 31.5% 2.8% 1.4%

Skyworth's smart TV platform's revenue (HKDm) 53 166 332 498 697 Source: RHB

Figure 6: Changes to our earnings forecasts FYE Mar (HKDm) 2018F 2019F old new Chg old new Chg Revenue TV 34,000 32,982 -3% 36,465 35,839 -2% PRC 23,534 21,945 -7% 24,221 22,925 -5% Overseas 10,466 11,037 5% 12,245 12,914 5% Digital set-top boxes 5,818 5,439 -7% 5,673 5,289 -7% LCD TV panels 902 878 -3% 925 900 -3% White goods 2,258 2,089 -7% 2,252 2,084 -7% Other products 4,600 4,816 5% 4,965 5,206 5% Property holding 320 320 0% 320 330 3% Total revenue 47,898 46,523 -3% 50,600 49,647 -2% YoY chg 8.9% 8.6% 5.6% 6.7% Cost of revenue -37,725 -36,720 -39,748 -39,022 Gross profit 10,173 9,804 -4% 10,852 10,626 -2% YoY chg 14.1% 14.4% 0.0% 0.0% Gross profit margin 21.2% 21.1% 21.4% 21.4% Selling expenses -5,580 -5,365 -5,743 -5,577 Admin expenses -3,041 -3,017 -3,163 -3,170 Opex as % of revenue -18.0% -18.0% -17.6% -17.6% Operating profit 1,551 1,422 -8% 1,946 1,879 -3% YoY chg 100.6% 132.3% 25.5% 32.2% Operating profit margin 3.2% 3.1% 3.8% 3.8% Other income & gains 1,630 1,619 1,804 1,660 Gain on land sales 0 0 0 0 Finance costs -337 -349 -375 -338 JV / associates 7 -4 7 -4 PBT 2,850 2,687 -6% 3,383 3,198 -5% Income tax -513 -524 -609 -624 Effective tax rate 18.0% 19.5% 18.0% 19.5% MI -323 -305 -383 -362 Net profit - reported 2,014 1,858 -8% 2,390 2,212 -7% YoY chg 54.4% 41.9% 18.7% 19.0% NPM - reported 4.2% 4.0% 4.7% 4.5% Net profit - recurring 2,014 1,858 -8% 2,390 2,212 -7% YoY chg 54.4% 60.8% 18.7% 19.0% NPM - recurring 4.2% 4.0% 4.7% 4.5%

Source: RHB

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Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

Figure 7: Detailed P&L FYE Mar (HKDm) FY16 FY17 FY18F FY19F FY20F TV 30,112 29,637 32,982 35,839 37,681 PRC 24,129 20,700 21,945 22,925 23,017 Overseas 5,983 8,937 11,037 12,914 14,665 Digital set-top boxes 5,913 5,720 5,439 5,289 5,148 LCD modules 772 834 878 900 922 White goods 2,366 2,094 2,089 2,084 2,078 Others 3,273 4,270 4,816 5,206 5,640 Property holding 259 290 320 330 440 Total revenue 42,695 42,845 46,523 49,647 51,910 YoY change 6.4% 0.4% 8.6% 6.7% 4.6% Cost of revenue (33,332) (34,278) (36,720) (39,022) (40,634) Gross profit 9,363 8,567 9,804 10,626 11,276 YoY change 16.7% -8.5% 14.4% 8.4% 6.1% GPM 21.9% 20.0% 21.1% 21.4% 21.7% Total opex (7,337) (7,955) (8,382) (8,746) (8,989) Opex / sales ratio -17.2% -18.6% -18.0% -17.6% -17.3% Operating profit 2,026 612 1,422 1,879 2,287 YoY change 39.5% -69.8% 132.3% 32.2% 21.7% OPM 4.7% 1.4% 3.1% 3.8% 4.4% Other income 1,411 1,535 1,619 1,660 1,701 Other gains (losses) (55) 200 - - - Finance costs (239) (359) (349) (338) (330) JC entities 7 (4) (4) (4) (4) PBT 3,150 1,984 2,687 3,198 3,655 Income tax (623) (455) (524) (624) (713) Effective tax rate -19.8% -22.9% -19.5% -19.5% -19.5% MI (357) (219) (305) (362) (414) Reported net profit 2,170 1,310 1,858 2,212 2,528 YoY change -30.6% -39.6% 41.9% 19.0% 14.3% NPM - reported 5.1% 3.1% 4.0% 4.5% 4.9% Recurring net profit 2,214 1,156 1,858 2,212 2,528 YoY change 28.7% -47.8% 60.8% 19.0% 14.3% NPM - recurring 5.2% 2.7% 4.0% 4.5% 4.9% Source: Company data, RHB

Figure 8: DCF valuation FYE Mar (HKDm) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F EBIT 1,422 1,879 2,287 2,496 2,691 2,864 3,009 3,121 3,194 3,226 EBITx(1-tax) 1,144 1,513 1,841 2,009 2,166 2,305 2,422 2,512 2,571 2,597 Depreciation 722 786 850 928 1,000 1,065 1,119 1,160 1,188 1,199 Capex -1,391 -1,209 -1,375 -1,501 -1,617 -1,721 -1,809 -1,876 -1,920 -1,939 WC 189 113 78 85 92 97 102 106 109 110 FCFF 665 1,202 1,395 1,522 1,641 1,746 1,835 1,903 1,947 1,967 Discount factor 0.9217 0.8495 0.7829 0.7216 0.6650 0.6129 0.5649 0.5207 0.4799 0.4423 Discounted FCF 613 1,021 1,092 1,098 1,091 1,070 1,036 991 935 870 Total discounted FCF 9,817 WACC 8.5% Terminal growth rate 1.0% Terminal value 11,716 Enterprise value 21,532 Net cash 1,941 Minority Interest 1,467 Equity value (HKD) 18,124 Outstanding shares 2,934 Equity value/share (HKD) 6.20 Source: RHB

See important disclosures at the end of this report 8

Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

Figure 9: Peer comparison II 3-Yr 3-mth FY1 FY2 FY3 FY1 Mkt cap Hist P/E FY1 P/E FY2 P/E EPS Hist Div FY1 Div Hist Company Ticker Price avg t/o EPS EPS EPS PEG (x) P/BV (USDm) (x) (x) (x) CAGR Yld (%) Yld (%) P/BV (USDm) YoY YoY YoY (x) (%) Skyworth Digital 751 HK 4.66 1,818 7.6 6.0 11.8 7.4 (49.1) 60.8 19.0 29.8 0.4 3.2 4.5 0.8 0.8

HK-listed Tcl Multimedia 1070 HK 3.77 841 0.65 21.6 14.1 11.0 52.6 28.5 12.3 30.1 0.5 0.0 2.1 0.9 0.9 Haier Electronic 1169 HK 20.55 7,359 13.5 10.4 10.1 9.2 2.4 9.4 3.8 5.2 1.8 0.9 1.1 1.9 1.6 Average 16.0 12.1 10.1 27.5 18.9 8.1 17.6 1.1 0.5 1.6 1.4 1.2

China-listed Hisense Elec-A 600060 CH 14.50 2,792 54.5 10.8 10.1 8.9 6.4 14.0 13.1 11.1 0.8 2.3 2.6 1.4 1.3 Sichuan Chang-A 600839 CH 3.47 2,357 23.8 28.9 38.6 34.7 (25.1) 11.1 N/A N/A n.a. N/A 0.6 1.3 1.2 Konka Group-A 000016 CH 4.66 1,380 10.1 117.4 N/A N/A N/A N/A N/A N/A n.a. N/A N/A 3.8 N/A Average 52.3 24.3 21.8 (9.4) 12.5 13.1 11.1 0.8 2.3 1.6 2.2 1.3 Note: Prices are as at 14 Jun 2017 Source: Bloomberg, RHB

Figure 10: Peer comparison II Company Rev Hist Rev FY1 NP Hist NP FY1 Net Net Unlev Gross Net Net ROE Hist ROE FY1 Sh px Sh px (US$m) (US$m) (US$m) (US$m) gearing gearing beta margin margin margin (%) (%) 1-mth % 3-mth % Hist (%) FY1 (%) Hist (%) Hist (%) FY1 (%) Skyworth Digital 5,528 6,003 149 240 17 11 1.2 20.0 2.7 4.0 7.8 10.2 7.4 (12.9)

HK-Listed Tcl Multimedia 4,305 4,899 35 53 N/A N/A 0.8 17.4 0.8 1.1 2.8 6.0 1.3 3.6 Haier Electronic 9,397 10,544 410 464 0 0 1.6 17.3 4.4 4.4 17.2 16.5 9.2 35.2 Average 1.2 17.4 2.6 2.7 10.0 11.3 5.3 19.4

China-Listed Hisense Elec-A 4,658 4,860 259 266 0 0 1.5 16.1 5.6 5.5 11.5 12.4 4.2 (21.5) Sichuan Chang-A 9,816 10,852 82 62 50 N/A 1.1 13.7 0.8 0.6 3.0 3.3 0.9 (20.0) Konka Group-A 2,971 N/A 14 N/A 157 N/A N.A 13.2 0.5 N/A 3.9 N/A 6.9 4.3 Average 1.3 14.3 2.3 3.0 6.2 7.9 4.0 (12.4) Note: Prices are as at 14 Jun 2017 Source: Bloomberg, RHB

See important disclosures at the end of this report 9

Skyworth Digital Hong Kong Results Review

15 June 2017 Technology | Hardware & Equipment

SWOT Analysis

 Strong research & development (R&D) capabilities  Highly competitive  Strong distribution network and brand name in China market puts and around the world downward pressure on ASP and margins

 Diversification of revenue stream through white goods and monetisation of its cloud TV platform  Development of its own internet TV operating system could lock in users  As a hardware manufacturer with a large distribution network, it is difficult to cut prices to compete with online exclusive brands

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-06-14 Buy 6.40 4.66

8.4 Recommendations & Target Price 2017-06-07 Buy 6.40 4.62

7.05 7.05 4.70 8.20 8.30 7.05 7.05 6.24 5.90 5.30 6.90 9.10 8.00 7.00 5.65 5.65 2017-05-10 Buy 6.40 4.37 7.4

2017-04-11 Buy 7.00 4.60

6.40 6.40 6.03 6.03 8.60 6.4 2016-11-24 Buy 8.00 4.85 2016-09-14 Buy 9.10 5.63 5.4 2016-06-16 Buy 9.10 5.60 2016-05-09 Buy 8.30 4.68 4.4 2016-04-14 Buy 8.30 5.37 3.4 2016-03-14 Buy 8.30 4.65 Source: RHB, Bloomberg Buy Neutral Sell Trading Buy Take Profit Not Rated 2.4 Jun-12 Sep-13 Dec-14 Apr-16

Source: RHB, Bloomberg

See important disclosures at the end of this report 10

Skyworth Digital Hong Kong Results Review

Technology | Hardware & Equipment

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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