Earnings expected to grow 60% YoY in 1H20Skyworth Group preannounced its 1H20 net profit （including minorityinterest） may rise over 60% YoY thanks to large one-off gains,including investment income of Rmb183mn from the sale of asubsidiary in Guangzhou and a VAT refund of Rmb286mn （afterdeducting related expenses）。 Excluding the above one-off gains, weestimate 1H20 net profit at Rmb133mn, down 62% YoY, which is inline with our expectation.
Skyworth has announced the proposed spin-off and separate listingof the business of Shenzhen Coocaa Network Technology CompanyLimited, whose principal businesses include internet-based operationof a smart TV system under the brand “Coocaa.”
Trends to watch
COVID-19 pandemic weighed on core businesses in 1H20. Itsmultimedia business revenue fell 22% YoY in 1Q20. TV and set-topbox sales improved in 2Q20, but profitability of TV sales stayed weak.
Valuation high for smart TV platform. Shenzhen Coocaa NetworkTechnology Company Limited was founded by Skyworth in 2006 andiQiyi, Tencent and Baidu invested in it over 2016–2018. It had marketvalues of Rmb3.0bn, Rmb4.0bn, and Rmb9.6bn in 2016, 2017, and2018, and booked revenue of Rmb948mn and net profit ofRmb148mn in 2019. Revenue from the internet operations businessincreased 36% YoY to Rmb264mn in 1Q20 thanks to consumers’
increasing amount of time spent watching TV during the pandemic.
Activated smart terminals hit 46.79mn at end-1Q20, with daily activeusers rising 22% from end-2019 to around 190,000.
Skyworth undervalued; share buyback shows managementconfidence. The book value of Skyworth was Rmb16bn（aroundHK$17.9bn） at end-2019, but its current market value is onlyHK$7.1bn. The firm’s core assets include a TV business, SkyworthDigital （57.5% stake）， Shenzhen Coocaa （56.79% stake）， and a largenumber of properties.
Valuation and recommendation
Given large one-off gains, we raise our 2020 net profit forecast 18%to Rmb849mn and leave our 2021 forecast unchanged at Rmb851mn.
The stock is trading at 7.4x 2020e and 7.4x 2021e P/E. We maintainNEUTRAL and TP of HK$2.80 （9.0x 2020e and 9.0x 2021e P/E），offering 21% upside.
Risks
Worse-than-expected impact from COVID-19 outbreak; marketcompetition.