** Skyworth Digital (751 HK; NR; HK$1.11): Roadshow update; accelerating
digitisation remains a KEY THEME; cash/share of HK$0.45 provides good
support to share price
We brought Skyworth’s mgt (CEO Mr Zhang Xuebin; CFO Mr Frederick Leung) to a
2-day roadshow in Singapore. Key take-aways:

Growth drivers, according to mgt, include: 1) domestic market: thanks to
accelerating TV digitisation; 2) overseas market: to focus on a few key strategic
OEM/ODM customers; 3) set-top boxes (again thanks to accelerating digitization); 4)
handsets (market size bigger than TV; mgt emphasised the business will be done in a
very cautious way)

Domestic market: Skyworth maintained its no. 1 market share in terms of
revenue in 100 major cities in China. According to GfK Skyworth’s market share was
11.82% as of Oct 2005. In unit volume terms market share stood at 14.83% after
Changhong. In terms of high end LCD market share Skyworth stood at no. 2 with
11.3% market share in Oct after Hisense

Admittedly the China TV market has been steady-mgt estimates the
overall market to grow by 5% on a yearly basis. The competition is very keen and its
difficult to further gain market share from key competitors. The TV market in China
is pretty consolidated with top 5 TV makers accounting for c80% of total sales. Mgt
admits that Skyworth’s growth in volume terms could be limited; but is confident to
report good sales value growth thanks to shift to high end products (HDTVS, LCD
and Plasma TVs accounted for 50% of total China TV sales in 1H06). LCD TVs
command a higher GP margin at 18% vs CRT TV’s 13%.

TV digitisation remains a major theme in China. China is scheduled to cut
off analogue TV broadcasting signal by 2010. TV digitisation is steaming along as we
are heading towards 2008 Olympic (games to be digital-broadcasted).

TV digitisation also benefits Skyworth’s set-top box sales. Currently there
are about 100m cable subscribers in China and in some cities (eg some parts of
Shenzhen and Qingdao people cannot watch TVs without a set top box). According to
mgt, Skyworth is no. 2 in set box sales in China (no. 1 is Coship, or Tongzhou in
Chinese). Mgt targets to sell 1m set top boxes in FY06 (340K sold in 1H06.

Overseas market: admittedly margins are lower as most of the sales are on
OEM basis. Mgt indicates that Skyworth will focus on a few strategic OEM/ODM
customers (with no names revealed) which could provide the company with big
volume despite lower GP margins. On net margin level margins are comparable as
Skyworth is not involved in any marketing or selling and distribution activities. Own
branded sales are tiny (2% of overseas sales).

Handsets: Skyworth’s sales (own branded Skyworth handsets) have been
launched in December 2005. Sales are tiny at the moment. Mgt emphasised that the
business will be done on very conservative basis-deposits or full amounts are to be
received before production/delivery. Skyworth will not push its inventory to the
channel. Mgt indicates that Lenovo’s business model (to focus on in-house R&D) is a
good example to follow. In sum, handsets business will remain small in medium term.

Skyworth is exercising bigger control on its sales to large chain stores
(GOME, Suning, China Paradise etc) on the back of high operating expenses involved.
TV sales to large chain stores accounted for 30% of total TV sales in China.
My personal view: Stock has been sold off aggressively after resumption of trading
(following a 14-month suspension). Many shareholders I believe have sold off their
holdings if they want to; otherwise will be holding on to the shares. I believe the share
price should be well consolidated at current level (ie big selling pressure should be
over). During the roadshow many investors remain +VE on the accelerating
digitization trend as well as the fast growing set top box sales. I think the stock should
be worth a revisit at current levels: 1) share price already trading at below book value
of HK$ 1.3; 2) cash per share of HK$0.45 to provide good support; 3) accelerating
TV digitisation theme to bode well; 4) improving corporate governance; 5)
ex-chairman Stephen Wong’s case to be decided on 8th Feb; hence uncertainties to be
removed.