Skyworth Digital 1H profits up 23.4%

Skyworth reversed into a slight net cash position as at Sept from a net debt since March2012.

Here's analysis from OSK:

Skyworth released its 1HFY3/13 results yesterday evening: i) revenues climbed 25.4% y-o-y to HKD1,635m, 1.6% above our estimate, ii) net profit increased 23.4% y-o-y to HKD569m, 3.6% below our forecast and accounting for 36.7% of our FY3/13 full year estimate (37.6% last year based on core earnings); iii) an interim dividend of HKD0.07/share was declared, the same as our forecast.

1H FY3/13 gross profit margin (GPM) was 20.1% (1H FY3/12A: 21.2%), better than our expectation of 19.3% thanks to better sales mix optimization to higher end 3D/Cloud TVs. Net profit margin of 3.5% was 0.2pt below our forecast.

As of end September 2012, Skyworth reversed into a slight net cash position of HKD170m from a net debt of HKD1251m as of 31 March 2012 thanks to efficient working capital management.

As Skyworth's 1HFY3/13 results are in line and the 2H is traditionally stronger, we make no changes to our earnings. Our TP is also unchanged at HKD5.65, based on the same 8x FY3/14F PE which is – i) 23.1% above its current FY3/14F PE of 6.5x; ii) similar to the 8x FY12/13F we have set for its HK-listed rival TCLM (1070HK, BUY, TP: HKD5.86), and iii) a 18.4% discount to China’s TV sector’s 9.8x FY13F PE (Bloomberg consensus). Re-iterate BUY.

Sales mix optimization mitigating downward prices. Skyworth's 1H FY3/13 revenue of HKD16.4bn (+25.4% y-o-y) accounted for 46.9% of our full year FY3/13 revenue forecast (1H FY3/12A: 46.5%). Revenues from China and overseas TV grew 20.4% and 34.2% y-o-y respectively. Although 1HFY13 gross margin declined by 1.1pt to 20.1% in 1HFY12, it was 0.8pt higher than our expectation of 19.3%. This affirms our view that Skyworth's on-going product mix optimization to higher priced TVs is mitigating declining prices and margins for TV products. Notably, unit sales of higher priced and higher margin 3D/Smart/Cloud TV as a proportion of total unit sales rose from 27.6% in January 2012 to 38.4% in October 2012.

Stringent cost control and stronger balance sheet In 1HFY3/13, SG&A and other opex as a proportion of total revenue decreased from 15.5% in 1HFY3/12 to 15.0% in 1HFY3/13 due to management's ongoing efforts on cost control. Moreover, as at end-1H FY3/13 Skyworth had net cash of HKD170m against a net debt of HKD1,251m as at end-FY 3/12A.