ANCHOR REPORT
Equity Research
China Smart TVs: Take a second look
TV Hardware: Neglect breeds upside
potential
While China’s smartphone sector continues to evolve, our attention turns
to what we think will be the next “big thing” in China’s technology space —
the transition from conventional to Smart TVs.
We expect the Smart TV transition will unlock access to the USD22bn TV
contents market, and kick off 4K2K TV adoption on the hardware side,
which will benefit hardware vendors in terms of higher ASPs.
November 4, 2013
Research analysts
China Technology
Leping Huang, PhD - NIHK
leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
david.hao@nomura.com
+852 2252 2153
The market so far has been focused on the impact on the content side,
with the likes of LeTV up 6x YTD and trading at 130x FY13 consensus
EPS. But we see hidden gems on the TV hardware side, with Skyworth
(where we initiate with Buy) down 8% YTD and now on 5.7x FY14F EPS.
We also see Lenovo (Buy), TCL Multimedia and TPV (both Not Rated) as
potential beneficiaries from the transition.
Key analysis in this anchor report includes:

China Smart TV industry’s value chain and regulatory framework

SWOT analysis of key players’ abilities in Smart TV transition

Smart TV providers’ business models and growth potential

Impact of Smart TVs and 4K2K TVs on China’s TV hardware market
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
China Smart TVs
EQ U I T Y R E S E A R C H
TECHNOLOGY
Take a second look November 4, 2013
TV Hardware: Neglect breeds
upside potential
Hardware vendors deserve as much attention as content providers
We believe the transition from traditional to Smart TVs is the new game in
China technology after the smartphone revolution. But while the market
has been focused on content providers, we believe TV hardware vendors
are the hidden gems in the whole Smart TV eco-system, given potential
ASP uplift and market share gains.
4K2K is likely to be a key value driver for hardware
We expect Smart TV penetration to reach 60% by 2015F from 25% in
2013F. The single biggest impact of Smart TV adoption on TV hardware
will be acceleration of 4K2K TV sales, for which we project penetration in
China will rise to 27% by 2015F from 2% in 2013F. We estimate TV
hardware vendors such as Skyworth will see 2-5% ASP uplift and stable
gross margins driven by 4K2K and Smart TV upgrades from 2013 to 2015.
Valuations seem to have diverged unreasonably
In the past six months, we have witnessed a strong rally in share prices of
major content providers such as LeTV (up 6x YTD, at 130x consensus
FY13 EPS) in anticipation of the Smart TV boom and a potential USD22bn
TV advertisement and paid TV service market in China. That said, TV
vendors (eg, Skyworth and TCL) have seen their share prices fall by
43%/47% since April 2013. While we do not dispute the value in content
provision, we think the market has unfairly ignored the hardware plays.
Anchor themes
We believe Smart TVs are the
next major trend in China's
technology sector after China
smartphones. We think TV
hardware vendors are the
hidden gems in the whole
Smart TV eco-system.
Nomura vs consensus
We provide integrated analysis
covering both contents and
hardware for the Smart TV ecosystem.
Research analysts
China Technology
Leping Huang, PhD - NIHK
leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
david.hao@nomura.com
+852 2252 2153
Prefer Skyworth: market leader in Smart and 4K2K TVs
Among hardware vendors, we prefer Skyworth, the market leader in Smart
and 4K2K TVs. We believe Skyworth will be successful during its Smart
TV transition, unlike Nokia/Blackberry during their smartphone transitions;
the difference, in our view, is pioneering efforts in Smart and 4K2K TV
development among Chinese peers, nationwide sales and logistics
networks, and experience in supply chain management, in particular TV
panels. With Skyworth at a 3-year low, and P/E at a low 5.7x for FY14F on
a three-year earnings CAGR of 17%, we initiate with Buy.
Fig. 1: Stocks for action
Ticker
Company Name
Rating
751 HK
992 HK
Skyworth
Lenovo
Buy*
Buy
Price Target
(HKD)
6.0
9.8
Price
(HKD)
3.6
8.1
Upside
67%
21%
Note: Pricing as of October 29, 2013. * Initiating coverage
Source: Bloomberg, Nomura estimates
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | China Smart TVs
November 4, 2013
Contents
3
Big picture: TV hardware vendors are the hidden
gems in the Smart TV transition
6
Smart TV: the next game after China smartphones
6
Smart TVs provide more content and easier user interfaces
7
Three enablers: Broadband, Google TV, regulation changes
8
Smart TVs to shake up TV market share in China
9
Smart TV itself negative to TV industry’s margins/ASPs
10
But Smart TVs are likely to accelerate 4K2K TV adoption in China
13
Smart TV and 4K2K adoption rates to reach 60%/27% by 2015F
14
Smart TVs to unlock USD22bn TV content market
15
TV vendors lag in content, but their edge in supply chain / sales
network remains intact
22
Company Strategies
China TV market overview
25
26
Summary of TV subsidy programs
28
TV vendors’ panel sourcing strategies
30
TV exports next: Blue or red ocean?
31
Skyworth
48
Lenovo Group
53
TCL Multimedia
60
LeTV
64
TPV
67
Appendix A-1
2
Nomura | China Smart TVs
November 4, 2013
Big picture: TV hardware vendors are the
hidden gems in the Smart TV transition
Since the start of 2013, we have observed a clear industry trend to launch Smart TVs
and Smart TV boxes in China by both existing TV vendors, as well as the newcomers
such as IPTV service providers and smartphone vendors. We believe this reflects a shift
of the growth driver for China’s technology sector from smartphones to TVs.
Fig. 2: Smart TV players
Fig. 3: Major events in Smart TV segment
Date
12/3/2012
1/24/2013
5/7/2013
7/2/2013
7/4/2013
7/10/2013
7/17/2013
7/18/2013
8/28/2013
9/2/2013
9/3/2013
9/5/2013
9/10/2013
9/13/2013
9/23/2013
9/26/2013
10/10/2013
Skyworth, TCL, Hisense
TV Hardware
Vendor
IPTV Contents
Provider
Smartphone
Vendor
LeTV, Baidu,
Youku, Alibaba
Len ovo,
Huawei, Xiaomi
Source: Nomura research
Com panies
Skyw orth
Xiaomi
Baidu/Haier
Coship
LeTV
Sharp/Lenovo
LeTV
Alibaba/Wasu
Huaw ei/CNTV
Konka/CNTV
TCL/Baidu (iQIYI)
Xiaomi
Skyw orth/Alibaba
LeTV/Tencent
Coship/CIBN
Huaw ei/GBS
LeTV
Ne w products/services
Launch hollyw ood express Movie service
Launch Xiaomi box
Cooperation in Smart TV
Launch Smart TV product
Super TV S60
Supplying OS solutions for Sharp's TVs
Super TV X40
Alibaba box
MediaQ STB ( 秘盒)
Launch KKTV to be sold on Jingdong
Launch TV+ w ith identical price online and offline
Launch Xiaomi TV
Launch new smart TV models w ith Alibaba service
Partner on distribution channel for a new TV model
Launch Feikan STB, Mushroom UI, and Fei TV
Launch TV dongle w ith 芒果TV
Super TV S50
Source: Nomura research
Fig. 4: Summary of major Smart TV models
Brand
LeTV
Xiaomi
Skyworth
Lenovo
TCL
Hisense
Model
X40
Xiaomi TV
Coocaa TV
42A21
L48F3390A-3D
LED40K360X3D
Hardware Spec
40
47
42
42
48
40
Resolution
1920 x 1080
1920 x 1080
1920 x 1080
1920 x 1080
1920 x 1080
1920 x 1080
Processor
Dual-core
Quad-core
Hexa-core
Dual-core
Single-core
Dual-core
LeTV UI
MIUI TV
KuUI (Tianci & Ali)
Android 4.0
Android
Android
3D, Smart TV
3D, Smart TV
3D, Smart TV
3D, Smart TV
3D, Smart TV
3D, Smart TV
1999
2999
2999
2799
4999
4299
in USD
325
488
488
455
813
699
Sales/Marketing Annual Sub. (CNY)
strategy
Sales Channel
490
Free
360
Free
Free
Free
e-channel
e-channel
own channel,
Gome/Suning
own channel;
Gome/Suning
Outsource
Outsource
In-house
In-house/outsource
own or outsourced
staff
own or outsourced
staff
CNTV + LeTV
CNTV
SMC, Voole, others
Lenovo JV
Wasu
Hisense, Wasu
Screen Size (inch)
Operating System
Features
Retail price (CNY)
Logistics/ after
service
Industry Partner Content Provider
Internet Partner
Tencent
e-channel and retail e-channel and retail
Alibaba
iQIYI/Baidu
License
CNTV
CNTV
SMC
SMG
Wasu
BesTV
TV OEM
Hon Hai/TPV
Wistron
Skyworth
TPV
TCL
Hisense
Sharp
Samsung, LGD
LGD
Sharp
CSOT/Samsung
CSOT, Chimei
Panel
Source: Company data, Nomura research
Major Smart TV content players in the A-Share market such as LeTV, BesTV and Wasu
have seen strong rallies in the past six months. However, we believe the market
continues to remain cautious on the TV hardware vendors. Skyworth and TCL’s share
prices have declined by 43% /47% since April 2013.
3
Nomura | China Smart TVs
November 4, 2013
This has resulted in a large difference in P/E multiples between hardware and content
providers for Smart TVs. For example, Skyworth has traded at ~7x12-month trailing
EPS, vs LeTV at above 100x trailing EPS, and Coship at ~50x trailing EPS.
We think this reflects the market’s perception that content providers have a better
likelihood of revolutionizing the TV industry and unlocking China’s paid-subscription TV
market. At the same time, the market may think traditional TV vendors such as Skyworth
and TCL are in situations similar to that of Nokia and Blackberry at the beginning of the
smartphone transition in 2009.
Fig. 5: Relative price performance comparisons
800%
Fig. 6: P/E multiple comparisons
PE (x)
LeTV
LeTV
200
Coship
Coship
600%
150
Skyworth
400%
100
200%
50
0%
0
IPTV
Skyworth
STB
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
TV
Re-rating?
Source: Bloomberg, Nomura research
Source: Bloomberg, Nomura research
However, we believe traditional TV vendors also play important roles in the Smart TV
eco-system, including TV hardware supply chain management as well as sales and
logistics networks. The take-off of 4K2K and Smart TVs should benefit domestic TV
players in the acceleration of ASPs and earnings growth, in our view.
Fig. 7: Summary of investment themes and timing of 4K2K and Smart TV
Infrastructure
Segment
Changes in
market share
Growth in
market size
TV Hardware
TV Service
Network Service
Smart TV
China Telecom,
China Unicom
LeTV, Xiaomi
LeTV
Gehua, Topway
Samsung, Sony
iQiYi, Youku
Contents
Segment
Network
equipment
4K2K TV
Operating System
Beneficiary
ZTE, Huawei
Skyworth, TCL
Lenovo, Xiaomi
Source: Nomura research
In our view, the investment sequence will be infrastructure, hardware, and finally
services. We believe the investment theme is currently in the hardware phase, where
investors are likely to focus on over the next 12-18 months. Then investors should
gradually focus more on services, including content, ads, and applications.
The figure below summarizes the key enablers of Smart TVs, including: 1) Smart TV
hardware; 2) service providers; and 3) network infrastructure equipment vendors.
4
Nomura | China Smart TVs
November 4, 2013
Fig. 8: Smart TV enablers
Qualcomm, MStar
Chip
TV OEM
(assembly, branding,
channel)
Hardware
Smart TV
Enabler
Skyworth, TCL, Hon Hai, TPV,
Wistron, Samsung, Haier, Hisense,
Konka, Panda, Changhong
TV Panel
Samsung, LGD, Sharp, AUO,
Chimei, CSOT, Chimei, BOE
Software
OS: Google, Microsoft
UI: LeTV, Skyworth, Hisense,
Xiaomi, Alibaba, Lenovo
IPTV License holder
CNTV, BesTV, SMC, CIBN,
Wasu, CNBN, GBS
Service
IPTV content
providers
Youku, PPLive, LeTV, Voole,
iQIYI
Telecom service
operator
Network
Infrastructure
Telecom Equipment
vendor
China Telecom, China Unicom,
Gehua, Topway
Cisco, Huawei, Juniper
Network, ZTE, ALU
Source: Nomura research
Fig. 9: Peer valuation table
Code
Company
Trading
Price
Curncy 10/29/2013
Target
Price
M/Caps
Nomura
USD mn
Rating
P/E (x)
FY13F
P/BV (x)
FY14F
FY13F
ROE
FY14F
FY13F
Dividend
Yield(%)
EPS Growth
FY13F
HK/China Smart TV
751 HK
Skyworth
HKD
3.6
6.0
1,279
BUY
5.7
4.7
0.9
0.8
17%
5.50
992 HK
Lenovo
HKD
8.1
9.8
10,732
BUY
14.5
11.9
3.3
2.8
25%
2.70
18%
19%
1070 HK
TCLM
HKD
3.2
-
556
Not Rated
8.5
6.0
0.8
0.7
10%
6.59
-31%
41%
300104 CH LeTV
CNY
42.0
-
5,407
Not Rated
114.6
80.4
17.0
14.5
18%
0.13
002052 CH Coship
CNY
12.6
-
1,475
Not Rated
37.6
28.6
6.8
6.0
36%
-
600637 CH BesTV
CNY
38.8
-
7,130
Not Rated
60.4
44.2
11.5
9.2
21%
0.19
36%
26.1
20.3
5.1
4.4
0.2
1.4
0.2
Median
MXCN
MSCI China
HSCEI
H-Share index
na
61.2
10,471
Source: Bloomberg, Nomura research
• Skyworth (751 HK, initiate at Buy): We initiate coverage on Skyworth at Buy with a
TP of HKD6. We think the market has only factored in negative impacts from the
company’s Smart TV transition such as margin pressure, but has not reflected the
positive impacts, especially on the acceleration of 4K2K TV adoption in China. We
expect Smart and 4K2K TV penetration rates to reach 60%/27% in 2015F from
25%/2% in 2013F, benefiting Skyworth’s ASP growth, which should offset the
weakness in TV sales volume in China. We think the current low valuation at 5.7x
FY14F EPS provides a good entry point for investors. We value the company at 9x
FY14F EPS of HKD0.64, at a 10% discount to China Technology peers due to its
slower growth.
• Lenovo (992 HK, Buy): Although we believe Smart TVs will remain unprofitable in the
short term due to lack of scale and rising R&D expenses, we like Lenovo’s strategic
positioning in the Smart TV arena. We believe its channel hardware partnership with
Sharp and TPV, channel partnership with Gome and 360Buy, and content partnership
via Hony Capital (Lenovo’s parent company Legend Holding’s PE arm)’s recent
investment in PPTV are all filling the missing pieces for potentially explosive growth in
the future. We maintain our Buy rating and TP of HKD9.8, which is based on 13x
FY14F EPS of HKD0.56 plus HKD2.5/share net cash.
5
Nomura | China Smart TVs
November 4, 2013
Smart TV: the next game after China
smartphones
Smart TVs provide more content and easier user interfaces
A typical Smart TV provides new features such as: 1) access to interactive video content
on the internet; (2) innovative user interfaces to explore the interactive video content
more efficiently; (3) application stores to download third-party applications and 4)
seamless integration with smartphones/tablets, as illustrated below.
Fig. 10: Access to paid video library
Fig. 11: Innovative UI to improve the user experience –
Skyworth Tianci’s suspension UI
User may make menu selections without interrupting the current
programme
Source: Nomura research
Source: Skyworth
Fig. 12: App store for expansion of features
Fig. 13: Integration of screens: TVs, PCs, tablets, handsets
Source: Skyworth
Source: Google image
• Interactive internet-based media content
One major differentiation factor for Smart TVs is providing access to internet-based video
content on the TV screen.
Smart TVs also enable new features such as time-shift of TV programmes and VoD
(Video-On-Demand), which give audiences a new “two-way” interactive experience
which goes beyond the traditional “one-way” watching experience.
6
Nomura | China Smart TVs
November 4, 2013
Time-shift allows users to “go back in time” and watch any programme within a certain
period (eg, the past 7 days). VoD enables viewers to select content from a library
collection (eg, a basketball fan may no longer be tied to watching a live NBA game
shown by the channel, but can choose from all of the games currently available).
One major difference between China and the rest of the world is the availability of “free”
IPTV content thanks to the development of the IPTV industry in the last five years.
For example, some of the bigger IPTV service providers such as Wasu, BesTV, and
Youku, each claim to have several million hours of internet video content.
• Innovative user interfaces
Most of the Smart TV platforms in China are developed based on Google TV (Androidbased OS). Each vendor develops their own user interface and remote controller to
improve the user experience in searching / switching video programmes.
For example, Skyworth developed its Smart TV OS Tianci, which provides a unique fullsuspension UI and multi-task capability that allows users to carry out all operations
without interrupting the current TV programme.
• Application stores
In addition to IPTV contents, most Smart TV platforms also have an application store
which allows users to download third-party applications and allow for future monetization.
• Connectivity: seamless integration with multiple Smart devices
New connectivity options are needed to incorporate technologies such as Bluetooth,
NFC, WiFi, and wireless display features to enable Smart TVs (the largest screen in a
household) to become the main information terminal in these households.
For instance, Lenovo provides software and a unified user interface on its Smart TVs,
smartphones and tablets to access Lenovo’s cloud services, and seamless exchange of
content between those devices. In addition to the added value to users, this also helps
Lenovo to increase customer loyalty to its products.
Three enablers: Broadband, Google TV, regulation changes
We think the emergence of Smart TVs in 2013 has been mainly driven by the following
changes in China’s TMT eco-system.
• Rising broadband penetration
According to MIIT, China’s broadband penetration (2Mbps+) is expected to reach 40% in
2013 and 50% in 2015, with FTTH (20Mbps+) penetration expected to reach 6% in 2013
and 13% in 2015. A 2Mbps+ network connection can transmit high-definition video
without much risk of buffering, while a 20Mbps+ network can transmit UHD video.
• Google TV provides a free Smart TV platform
The launch of Google TV, a Smart TV platform based on Google’s Android OS, has
greatly lowered the entry barriers to the Smart TV business. New entrants can easily
enter the business by designing own user interface software and integrating propriety
applications and services above Google TV.
• The introduction of new IPTV regulations in China in 2011
Most important, the release of SARFT (State Administration of Radio, Film, and
Television)’s new regulatory document (no. 181 in Dec 2011) has set the framework for
China’s Smart TV business, in our view.
7
Nomura | China Smart TVs
November 4, 2013
Smart TVs to shake up TV market share in China
We expect the shift from traditional TVs to Smart TVs may create a similar magnitude of
impact as the shift from feature phones to smartphones in the mobile industry.
The figures below illustrate the market structure of China’s TV market and its trends in
the last few years. The “big three” domestic TV vendors (Skyworth, TCL, Hisense) and
the “small three” domestic TV vendors (Konka, Changhong and Haier) have maintained
their total market share at ~80%. In Tier 1-2 cities, major domestic brands are gaining
market share from international TV brands (such as Sony, Samsung) because of the
improvement in their product quality and brand awareness. On the other hand, domestic
brands have lost some market share in rural areas to local or non-brand vendors
because of the home appliance subsidy programme, which helps smaller players to
survive if their products can be qualified under the subsidy programme.
Fig. 14: China LCD TV market share of major vendors (2013)
Fig. 15: Market share trend (Big 3, Small 3, Intl, Others)
By shipment volume
Samsung,
3%
Sony, 3%
China Big 3
Foreign brand
60%
Others,
10%
Sharp, 3%
Skyworth,
17%
50%
48%
49%
27%
28%
China Small 3
Others
51%
50%
29%
29%
14%
15%
2012
1H13
40%
Haier, 6%
Changhong,
10%
Konka,
12%
Hisense,
16%
30%
20%
TCL, 19%
23%
19%
10%
0%
2010
Source: DisplaySearch, Nomura research
2011
Note: “China Big 3” includes Skyworth, TCL, and Hisense; “China Small 3” includes
Changhong, Konka, and Haier.
Source: DisplaySearch, Nomura research
The transition has created two key challenges for the TV industry. First, we see the rising
importance of content, since Smart TV service providers can provide differentiated
TV/video programmes once the vertical integration of content, license, and hardware is
achieved via partnerships. The ability to negotiate with the content providers and
integrate this content into their Smart TVs has become a critical competence for Smart
TV hardware vendors.
The second difference is the rising importance of software in a TV to develop competent
Smart TV OS and attractive user interfaces. This means TV OEMs need to newly build
an experienced software OS R&D team, and need to have enough scale in order to
cover the software-related R&D costs.
We think both requirements will gradually lead to consolidation in the existing TV
hardware industry. Smaller players (eg, the one with a combined market share of 10% or
below) may lose their market share because they lack the scale to cover the expense of
a Smart TV software team and negotiate with content providers.
On the other hand, we believe international brands may face difficulties as well since
panel quality and visual quality are not the only differentiation factors anymore. Our study
shows international brands tend to be cautious in forming partnerships with local content
providers due to complicated regulatory issues in China’s TV industry; thus they are
lagging behind domestic brands in content offerings.
Domestic brands such as Skyworth, TCL, and Hisense have demonstrated their flexibility
and speed in forming partnerships with local content and license holders. Skyworth / TCL
/ Hisense have all already linked up with their chosen content partners.
8
Nomura | China Smart TVs
November 4, 2013
As a result, we believe the Smart TV transition will help content providers (eg, LeTV) and
Smart OS providers (eg, Lenovo, Xiaomi) to gain market share at the expense of small
domestic brands as well as some international brands which cannot quickly form industry
alliances.
Smart TV itself negative to TV industry’s margins/ASPs
The figure below illustrates the cost structure and profitability between LeTV’s S40 and
similar TVs from Skyworth’s offline and online channels. In this case, “online channel”
rd
refers to sales through 3 party e-commerce platforms and the manufacturer’s own
website, whereas “offline channel” typically refers to sales through traditional retailers.
LeTV requires Super TV buyers to buy the CNY490 annual subscription for the first year
to marginally break-even, according to our discussions with LeTV. Thus, by assuming
8% channel cost and breakeven (~0%) margin, we estimate LeTV’s COGS for the S40
Super TV is ~CNY2.3k per unit.
Next, we assume Skyworth should have a similar per-unit COGS at CNY2.7k, adjusting
for the bigger panel. Then we also assume 7%/23% for online/offline channel costs, and
thus estimate Skyworth’s gross margin for online and offline channels is 9%/32%,
confirming our view that as Skyworth’s online channel Smart TV sales mix increases, its
gross margin will suffer.
Fig. 16: Cost analysis between LeTV and Skyworth’s online and offline channel sales
LeTV
Sales channel
Model
TV hardware
Mandatory 1-yr Subscription Fee
Skyworth
S40
Coocaa
Online
Online
Offline
40-inch
42-inch
42-inch
1,999
2,999
3,999
490
-
42E7DRS
-
Total revenue
2,489
2,999
3,999
COGS
2,365
2,729
2,729
124
270
1,270
32%
Gross profit
GPM (%)
Sales and Marketing and Other OPEX
Markup (%)
5%
9%
148
222
923
7%
7%
23%
Operating Profit
(24)
48
347
% of sales
-1%
2%
9%
Source: Company data, Nomura estimates
In light of traditional TV vendors’ launch of Smart TVs exclusive for online channels with
a model similar to Super TV, we performed sensitivity analysis on Skyworth (shown
below) to assess the impact on revenues, margins and profits when the Smart TV sales
mix from online channels increases.
For the scenarios where online cloud TV increases to 15%, 25%, and ultimately 50%,
operating profit would decline by as much as 16%, due to margin erosion of as much as
0.9bps. We should note that as the sales mix of online Smart TVs goes up, its
incremental negative impact on operating profit falls (highlighted in the chart below); we
attribute this to the reduction in channel costs by switching from offline to online.
9
Nomura | China Smart TVs
November 4, 2013
Fig. 17: Sensitivity analysis on the impact of Smart TVs
FY15/3F
GPM (%)
OPM (%)
Of f line TV
3,450
ASP (CNY)
25%
7.0%
Online TV
2,800
9%
5.0%
Be nchm ark
Case 1
Cas e 2
Case 3
95%
85%
75%
50%
5%
15%
25%
50%
34,270
34,036
33,802
33,100
-0.7%
-1.4%
-3.4%
6,928
6,694
5,992
-3.3%
-6.5%
-16.3%
Price premium
‐19%
FY15/3F
Of f line Channel %
Online Channel %
China TV busines s
Revenue
Impact (%)
Gross prof it
7,162
Impact (%)
Operating prof it
Impact (%)
2,260
2,173
-3.8%
2,096
-7.2%
1,889
-16.4%
GPM %
20.9%
20.4%
19.8%
18.1%
OPM %
6.6%
6.4%
6.2%
5.7%
Source: Nomura estimates
The chart below shows the Smart TV pricing strategies between traditional TV vendors and
Internet companies in the 40-42 inch and 47-50 inch ranges. Strategy one is to put forth
different prices based on sales channel; for example, Skyworth has taken the approach to
sell its 42-inch Smart TVs via offline and online channels at different prices; the online price
(typically ~30% cheaper than offline) is intended to match products launched by LeTV. This
strategy should help Skyworth maintain its market share and maybe margin (if online
channel cost is low enough). However, on the one hand, we think the price difference
between the online and the offline model may confuse some consumers, and drag down
the price of the offline model if Skyworth cannot clearly separate the definition of these two
models. On the other hand, strategy two is to set identical prices regardless of sales
channel with marketing focus on service and quality, such as TCL’s pricing for its TV+
product against Xiaomi. This strategy may help TCL to avoid price erosion, but at the same
time put its market share at risk, in our view.
Fig. 18: Illustration of TV vendors’ pricing strategy post LeTV launch
(Price USD)
900
700
TCL
(online &
offline)
Skyworth
(offline)
Strategy one
800
Skyworth
(offline)
600
500
LeTV
400
Xiaomi
Skyworth
Strategy two
300
200
100
39
40
41
42
43
44
45
46
Display size (inch)
47
48
49
50
51
Source: Nomura research
But Smart TVs are likely to accelerate 4K2K TV adoption in
China
Although Smart TVs are negative for TV hardware makers’ margins and ASPs, we
believe the attractive media content that Smart TVs provide will accelerate the adoption
of higher resolution Ultra High Definition (UHD, 4K2K) TVs in China.
4K2K TVs are the latest TV technology, which provides 4x higher resolution than existing
full high definition TVs. Thanks to the low-cost 4K2K panels supplied from Taiwanese
panel makers, Chinese TV OEMs have managed to lower the retail price of a 55-inch
4K2K TV below CNY10k (~USD1.5k).
10
Nomura | China Smart TVs
November 4, 2013
Skyworth has indicated that 4K2K TVs accounted for ~20% of total TV shipment
volumes during the 2013 National Day sales season, despite the more than 40% price
premium between 4K2K and FHD TV models. TCL also indicated 10% 4K2K TV share in
tier 1-2 cities during the National Day sales.
Fig. 19: Video formats
Abbrev.
Broadcasting Required bandwidth for videostarts from
on-demand (Mbps)
Picture quality
Resolution Disk Media
SD
Standard-definition
<1280*720
VCD
2008
HD
High-definition
1280*720
DVD
2012
4
3D HD
3D High Definition
1280*720
DVD
2015
8
Full HD
Full High Definition
1.5
1920*1080
Blue Ray
2015
8
UHD (4K2K) Ultra High Definition
3840*2160
Blue Ray
n.a.
30
8K
7680*4320
n.a.
n.a.
8K Ultra High Definition
Note: Bandwidth calculated based on H.264 AVC encoding standard
Source: Nomura research
We have noticed that there is a cautious view on 4K2K TVs within capital markets, since
there is not enough support from both the content sources and TV stations currently. But
the sales during the national holiday shows Chinese consumers are actually willing to
purchase 4K2K TVs even before the content is ready. This is a phenomenon that we
have seen in the 3D TV adoption in China over the past two years.
James Kim, Nomura’s Asia Technology analyst covering the global display industry, expects
the global 4K2K adoption rate to increase from 1% in 2013 to 8% in 2014 and 18% in 2015;
on top of that, he also expects the 4K2K adoption rate in China will be even faster.
In addition, we think the popularity of Smart TVs may accelerate 4K2K adoption in China.
By using the internet connection in Smart TVs, content providers can offer 4K2K video
streams directly to Smart TVs if subscribers’ network speed is fast enough. For example,
LeTV stated in August 2013 that it plans to launch a channel with 4K2K programming.
According to MPEG (Moving Picture Experts Group), 4K2K requires about 30Mbps
bandwidth to deliver on the internet, based on current encoding technology. However,
the newly developed HEVC/H.265 technology may further compress UHD streams by
40-50% down to ~15Mbps. According to China’s “Broadband China” strategy, China’s
FTTH (fiber-to-the-home, 20Mbps) penetration will reach 13% by 2015, meaning about
70mn broadband subscribers will be able to watch live 4K2K content at home by 2015.
Fig. 20: China’s broadband China project
Fig. 21: TV price breakdown by features
Broadband China target Unit
2013
2015
2020 2013-15 CAGR
Household
525
540
571
mn
Subscriber target
(CNY)
10,000
mn
210
270
FTTH (20Mbps+)
mn
30
70
52.8%
Urban broadband
mn
160
200
11.8%
7,000
Rural broadband
mn
50
70
18.3%
6,000
mn
330
450
16.8%
400
5,000
1,200
13.4%
Infrastructure target
3G/LTE base station
k
950
1,200
%
40
50
FTTH
%
6
13
Urban broadband
%
55
65
Rural broadband
%
20
30
%
25
33
12.4%
3G/LTE
55-inch LED
8,000
3,700
4,000
500
700
500
700
500
4,099
4,099
4,099
up to 65%
pricing upside
3,000
Penetration rate
Fixed line broadband
+ Smart TV
+ 3D
9,000
Fixed line broadband
3G/LTE
+ 4K2K
70
2,000
4,099
1,000
0
85
Source: Nomura estimates
Source: MIIT
We expect 4K2K adoption to follow similar patterns as other advanced TV technologies,
although at a slower rate, in China. It may take 12 months to reach 10% penetration
(early adopter), and 24 months to reach 50%+ (mass adoption).
11
Nomura | China Smart TVs
November 4, 2013
Fig. 22: Adoption rate
Fig. 23: 4K2K market share in China during 2013 Labour
Holiday (15 April to 5 May)
LCD
100%
Haier, 1%
LED LCD
90%
3D TV
80%
Changhong,
Changhong
,5%
5%
Smart TV
70%
Foreign,
10%
4K2K
60%
TCL, 9%
50%
Skyworth,
48%
40%
30%
20%
Konka,
11%
10%
0%
1
4
7
10 13 16 19 22 25 28 31 34 37
Hisense,
15%
Months
Source: Company data, Nomura research
Source: Skyworth
Historically, a revolutionary innovation in technology leads to several years of ASP
growth, as shown in the chart below during the transition from CRT to flat panel TVs.
Although 4K2K is more like an upgrade than a revolution, we expect moderate growth in
ASP with 4K2K adoption.
Fig. 24: Significant ASP growth during CRT to flat panel
transition
(CNY k)
ASP (LHS)
Flat panel penetration (RHS)
3.5
3.0
Fig. 25: Slight ASP growth during the 4K2K transition
(CNY k)
100%
80%
2.5
60%
2.0
1.5
40%
1.0
20%
0.5
0%
0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: Company data, DisplaySearch, Nomura estimates
3.5
ASP (LHS)
4K2K penetration (RHS)
Smart TV penetration (RHS)
3.0
100%
80%
2.5
60%
2.0
1.5
40%
1.0
20%
0.5
0.0
0%
FY11
FY12
FY13
FY14F FY15F FY16F
Source: Company data, DisplaySearch, Nomura estimates
Based on our observations in the retail channel, the 4K2K feature may command a price
premium of up to 65% for a 55-inch TV at the moment, though products made by
domestic vendors are still at least 50% cheaper than those from foreign brands. While
the incremental cost for a 4K2K TV is only 20-30% higher, we estimate the premium will
gradually decline by 35% over the next two years and help Skyworth to lift its ASP by as
much as 5% y-y and to stabilize GPM at ~21% in FY14-15F.
We present sensitivity analysis below on Skyworth’s FY15/3F revenue, profit, and
margins with regard to 4K2K volume penetration, with the assumption that the average
price of a 4K2K TV declines 47% from CNY8,999 to CNY4,800 over the next year. The
analysis shows that operating profit would rise up to 12%, led by gross margin expansion
by as much as 50bp.
12
Nomura | China Smart TVs
November 4, 2013
Fig. 26: Sensitivity analysis on the impact of 4K2K TVs in China’s TV market
FY15/3F
4K2K Smart TV
4,800
ASP (CNY)
GPM (%)
30%
OPM (%)
7.1%
HD Smart TV
3,450
25%
7.0%
Benchm ark
Case 1
Case 2
Case 3
27%
36%
46%
56%
Price premium
FY15/3F
39%
4K2K Penetration
China TV business
Revenue
34,270
Impact (%)
Gross prof it
35,770
4.4%
37,029 38,349
8.1%
11.9%
7,162
Impact (%)
Operating profit
7,543
5.3%
7,864 8,199
9.8%
14.5%
2,260
2,395
6.0%
2,458 2,524
8.8%
11.7%
Impact (%)
GPM %
20.9%
21.1%
21.2%
21.4%
OPM %
6.6%
6.7%
6.6%
6.6%
Source: Nomura estimates
Smart TV and 4K2K adoption rates to reach 60%/27% by
2015F
We forecast Smart TV shipment volume will show a 36% CAGR between 2013F and
2015F, with the Smart TV penetration rate reaching 60% by 2015F, from 25% in 2013F.
Meanwhile, we expect a quick ramp-up of 4K2K TVs in China in 2014/2015F, driven by
the new 4K2K content via Smart TV providers. We expect the 4K2K penetration rate will
reach 27% in 2015F, from 2% in 2013F.
On the other hand, we expect the Smart TV user base will show a 38% CAGR, with the
penetration rate over total TV users reaching 24% by 2015, from 8% by 2013F. The
rapid expansion in the IPTV user base will be critical for IPTV players to monetize nonhardware revenues such as advertising, paid subscriptions, apps, etc.
Fig. 27: China’s TV market summary
China TV forecast
CY11
CY12
CY13F
CY14F
CAGR
CY15F (2013-15)
TV User Forecast
TV User
mn sub
420
437
445
451
457
broadband Sub
mn sub
156
174
222
258
289
Smart TV User
mn sub
14
23
37
61
95
38%
Penetration rate
Smart TV/total TV users
3%
5%
8%
14%
24%
Smart TV/Broadband sub
9%
13%
16%
24%
34%
23.0
24.6
26.1
27.3
28.3
15%
7%
6%
5%
4%
51.9
54.1
55.4
56.3
6
14
25
34
1
7
15
493
502
China TV market size
bn USD
y-y
Volume
mn units
48.9
Smart TV
mn units
-
4K2K TV
mn units
-
-
471
473
483
0%
13%
25%
45%
60%
2%
12%
27%
Total China TV
ASP
USD
36%
Penetration rate
Smart TV
4K2K
Y-Y Growth
China TV volume
12%
6%
Smart TV
4%
3%
2%
112%
85%
35%
501%
128%
2%
2%
4K2K
ASP
2%
1%
2%
Source: AVC, Scotland, IDC, DisplaySearch, Gartner, Nomura estimates
13
Nomura | China Smart TVs
November 4, 2013
Smart TVs to unlock USD22bn TV content market
According to Digital TV Research, China’s total video service market reached USD23bn
in 2012, including USD21bn in TV advertising revenue, USD1bn in paid TV subscription
revenue and USD1bn in IPTV advertising. This market is dominated by TV stations and
local cable TV service providers currently.
New IPTV service providers such as Youku-Tudou and LeTV don't have access to TV
screens since they can only reach users via PCs, smartphones, and tablets.
By launching Smart TVs, these IPTV service providers may gain access to living room
screens, as a result capturing part of the USD22bn TV advertising and paid TV market at
the expense of TV stations, in our view.
In addition, unlike traditional delivery of TV ads, Smart TV service providers can apply
big data analytics to track and analyse viewing behavior to improve accuracy and
effectiveness in ad delivery.
From the viewpoint of traditional TV vendors, while they lack the expertise in content and
subscription services, some TV vendors have formed partnerships to test-trial new
business models. In December 2012, Skyworth announced its paid subscription service
“Hollywood Express” would provide Hollywood movies to its Smart TV users at an annual
subscription fee of CNY360. In this service, Skyworth linked with SMC (the license
holder) and Voole (content provider). According to Skyworth’s management, about 2% of
new TV buyers have subscribed to this service currently.
Fig. 28: Comparison between TV, Telecom, and IPTV market
sizes and ARPUs in China
(USDbn)
1,000
Fig. 29: Market share of paid-TV, TV ads, and IPTV ads
revenue
Service Revenue (LHS)
(USD)
100%
ARPU (RHS)
1,000
90%
Others
80%
70%
100
100
60%
Provincial
Satellite TV
(40
channels)
50%
40%
178
10
10
30%
21
20%
1
1
Paid TV
10%
1
TV Ad
Telecom
1
Others
LeTV
Tencent
Sohu
iQIYI
(PPS)
CCTV (16
channels)
Youku
Tudou
TV ads (2012)
IPTV ads (4Q12)
0%
IPTV Ad
Source: Digital TV Research, China Mobile, China Telecom, China Unicom, SARFT,
Nomura research
Source: Enfodesk, SARFT, Nomura estimates
Unlike the US, China’s TV market started off as a free-subscription business; thus the
nurturing and adoption of paid-TV was painful and slow. Although the penetration rate of
paid TV service subscribers in China is 42% in 2012, vs 86% in the US, which doesn’t
seem to be far behind, the ARPU gap between China and US audiences is huge, roughly
USD7 vs. USD888 per year. The chart below shows an example of the pricing difference
between cable and internet video service providers in China and the US.
Fig. 30: Comparison of Paid TV service ARPU
Operator
Country/Region
ARPU (CNY) per month
OCN
Shanghai
HK Broadband
Network
Time
Warner
Cable
23
73
615
LeTV China
33
Skyworth
Hollywood Netflix US
Express
30
74
Programme
TV Channels
151
50
100+
CNTV
n/a
Few
VOD
Yes
Yes
Yes
100k+ hrs
10k+ hrs
1mn+ hrs
Source: Company data, Nomura research
14
Nomura | China Smart TVs
November 4, 2013
According to Digital TV Research, at end-2012, China had 187mn paid TV households,
87% more than the 100mn paid TV households in the US. However, China’s paid TV
subscription fees in 2012 amounted to only USD1bn, a fraction (1.5%) of the USD89bn
paid by US audiences. We believe Smart TVs may help unlock the paid subscription
potential in China. Assuming annual APRU will increase to 20% of the amount paid by
US households at USD178 by the end of 2020, the incremental growth in China’s paid
TV market size could be as much as USD33bn.
Fig. 31: Potential room for growth in China paid-TV market [2013-20]
(USDbn)
Paid TV
Potential growth (LHS)
ARPU (RHS)
100
888
90
80
(USD)
1,000
USD178
70
100
60
50
40
30
20
10
10
7
USD33bn
1
0
China
US
Source: Digital TV Research, Nomura estimates
TV vendors lag in content, but their edge in supply chain /
sales network remains intact
We note a TV vendor needs to play more roles in Smart TV business compared with its
roles in traditional TV as shown below.
Fig. 32: China Smart TV’s value chain
Content Delivery
Network
Chipset
Panel
Module
Assembly
Sales & Marketing
Smart TV
Software
Consumer
New role in a Smart TV
eco-system
IPTV Contents
IPTV License
Existing role in a
TV eco-system
Source: Nomura research
We identify the following six competences:
• Funding: it is important to have sufficient financial strength to fight the battle against
competitors as Smart TVs are showing signs of becoming a low-margin business due
to new competition.
• License: the government has issued licenses to legally carry out IPTV services in
China.
• Content: content is a key differentiating factor for a Smart TV.
• Sales networks: due to TVs being heavier and bigger, and with longer replacement
cycles, sales and logistics networks are a major consideration when consumers make
purchasing decisions.
15
Nomura | China Smart TVs
November 4, 2013
• Software (OS/UI): OS and UI have direct impacts on user experience.
• Supplier chain: one major challenge for TV manufacturers is to manage inventory risk
of TV panels, which typically accounts for 70% of BOM costs.
Our analysis below shows TV hardware vendors are still lagging behind IPTV content
providers and smartphone vendors in software- and content-related competence, but in
the meantime it is difficult for content and smartphone vendors to catch up in areas such
as supply chain management and sales and logistics network.
Fig. 33: Comparison of Skyworth/LeTV’s Smart TV strategy
Skyworth
License
LeTV
Sales network
5
4
3
2
1
0
Contents
Source: Nomura research
Fig. 34: Comparison of Lenovo/Samsung’s Smart TV strategy
Lenovo
Supplier Chain
License
Samsung
Sales network
5
4
3
2
1
0
Funding
Contents
Funding
Supplier Chain
Software(OS/UI)
Software(OS/UI
)
Source: Nomura research
Funding capability
The Smart TV hardware market is showing signs of becoming a low-margin business as
IPTV players entering the sector are bringing the internet companies’ mindset of
providing service gateways to users at low cost or for free to quickly build up a user base
with critical mass. Thus, it is important to have a strong funding capability to fight for end
users against competitors.
So far, capital markets seem willing to give IPTV service providers higher P/E valuations
because they are perceived to have a better likelihood of revolutionizing the TV industry
and unlocking China’s paid-subscription TV market. The higher valuation will lower the
funding costs and enable the companies to further fuel their growth story. For example,
LeTV raised CNY1.6bn equity capital at ~130x P/E to purchase Huaer Yingshi (花儿影视
) and Leshi Xinmeiti (乐视新媒体) in September 2013.
For multi-business companies like Lenovo, they also have strong financial strength to
penetrate into the Smart TV business. In the case of Lenovo, its PC business, though
declining on the macro level, is the cash cow for the group to invade other sectors such
as smartphones and Smart TV.
On the other hand, companies such as Skyworth, whose core business is selling TV
hardware, will be hurt from the disruptive pricing practices by the new entrants, and the
capital markets are showing precisely that concern.
Fig. 35: Comparison of capital market valuations between IPTV and TV hardware companies
IPTV
Company
Market Cap
FY13F P/E
FY13F P/B
(USD mn)
(x)
(x)
TV Hardware
Company
LeTV
5,407
117.0
17.0
Skyworth
BesTV
7,130
60.4
11.5
TCLM
Wasu
4,520
99.6
8.4
Hisense
Market Cap
FY13F P/E
FY13F P/B
(USD mn)
(x)
(x)
1,317
6.2
1.0
556
8.5
0.8
2,370
7.7
1.4
Source: Bloomberg, Nomura research
16
Nomura | China Smart TVs
November 4, 2013
License
SARFT (State Administration of Radio, Film, and Television), China’s TV industry
regulator, published the regulatory framework for Smart TV business in Oct 2011
(document 181) and June 2012 (document 43). According to these two documents, all
Smart TV service providers need to co-operate with one IPTV license holder (as listed
below) in order to be a legalized IPTV system.
• CNTV (China Network Television, private) is a wholly-owned subsidiary of CCTV
(China Central Television). CNTV is now the sole national broadcast and control
platform provider; through it, viewers not only have access to channel programming
nationwide, but also have access to CNTV’s content library, the largest in China.
• BesTV (600637 CH, NR) is a publicly listed IPTV service provider. It is a joint-venture
between SMG (Shanghai Media Group) and Tsinghua Tongfang (600100 CH, NR).
SMG is the IPTV license recipient and through the JV, enables BesTV to become an
IPTV service provider. Viewers have access to 31 digital channels from SMG and a
digital content library consisting of more than 100k hours of HD video.
• Wasu (000156 CH, NR) is a venture owned by HCRT (Hangzhou Culture, Radio, and
Television Group) and ZRT (Zhejiang Radio and Television Group). Unlike BesTV,
Wasu is the direct recipient of the IPTV license. Viewers have access to more than 80
channels (including CCTV and other provincial satellite channels) and more than 1mn
hours of video content.
• SMC (Southern Media Corporation, private), is the consolidated entity of Guangdong
Province Cable Network, Southern Television Network, and Guangdong Television
Network, and others. SMC is the recipient of an IPTV license.
• GBS (Golden Eagle Broadcasting System, private) is the entity consisting of television
networks in Hunan province, newspapers, and new media.
• CIBN (China International Broadcasting Network, private) is wholly owned by China
Radio International as its television business arm with its IPTV license.
• CNBN (China National Broadcasting Network, private) is a recipient of an IPTV license.
Within the framework, private sector firms are now clear on how to carry out their IPTV
services without violating any regulations.
As shown below, all major domestic TV brands have formed a partnership with at least
one license holder. However, we have not seen any announcement of similar
partnerships between leading foreign brands (eg, Samsung/Sony/Sharp) and those
license holders. As a result, foreign TV vendors are likely to be at a disadvantage in
video content offering; we believe this may result in a further decline of their market
share in China.
On the other hand, we believe small local brands will need to install white-box Smart TV
platforms in order to keep with the pace of industry upgrades. In the end, we think these
trends will help the bigger vendors such as Skyworth, TCL, and Hisense to gain market
share.
Fig. 36: TV vendor content partnerships (2013)
CNTV
BesTV
Skyworth
TCL
Wasu
SMC
x
x
x
Hisense
x
Konka
x
GBS
CIBN
CNBN
x
x
Changhong
x
Coship
x
x
LeTV
x
Xiaomi
x
Lenovo
x
Source: Nomura research
17
Nomura | China Smart TVs
November 4, 2013
Content is king
Content is one major differentiating factor for a Smart TV. In China, TV stations (and
their subsidiaries holding the IPTV license) and IPTV service providers (eg, LeTV, iQiYi)
are the major owners of copyright for video content.
Players such as LeTV took a vertically integrated business model between content and
TV hardware by providing propriety content (or content in higher definition) over its own
platform. Other players such as iQiYi (content provider) and Skyworth (hardware
manufacturer) have chosen to form an alliance with a specific counterpart in order to
enrich their Smart TV eco-system.
Fig. 37: Comparison of IPTV contents by Smart TV brands (or content libraries)
CNTV
Skyworth
TCL
Hisense
Konka
Changhong
Hardware Haier
Vendor
Coship
LeTV
Xiaomi
Lenovo
Microsoft
x
x
BesTV
Wasu
x
x
x
SMC
x
Content Provider
GBS
CIBN
LeTV
Voole
x
Youku
x
iQIYI
x
x
x
x
x
x
x
x
x
x
x
x
Source: Nomura research
There are some cautious views on the sustainability and effectiveness of those alliances
given the conflict of interests between contents providers (which maximize user
penetration rates via different devices), and hardware providers (which provide as much
content over a single device) as a differentiation factor.
At the early stage of industry growth, we think it is useful for both sides to form such
alliances in order to quickly gain market share in their specific area.
For example, Skyworth has formed a partnership with Voole to provide Hollywood
movies in China, and formed a partnership with Baidu/iQiYi to provide set-top boxes, and
formed an alliance with Alibaba to integrate Alibaba’s lifestyle-related services. All these
services are provided over Skyworth’s Tianci Smart TV platform, which is critical in its
providing Skyworth with an understanding of consumers’ preferences and derives ads
and paid service revenues from this platform.
Fig. 38: Summary of Skyworth’s industry alliances in Smart TV segment
Annouced Date
Partner
Service Name
Details
Dec-12
SMC, Voole
Holllywood Express
CNY360 per year, ~2% of cloud TV users subscribed
Jun-13
Wasu
Sep-13
Baidu/iQiyi
Smart TV STB
CNY299 to be launched in 4Q13
Sep-13
Alibaba
Coocaa TV
Smart TV for online channels
Strategic partnership (hardware, content, and license)
Source: Nomura research
Sales networks
We think one major difference between the TV hardware business vs the PC and
smartphone businesses is the dependency on sales/logistics/after-sales networks
because TVs are much bigger and heavier than PCs or handsets, as shown below.
18
Nomura | China Smart TVs
November 4, 2013
Fig. 39: Comparison of TV, handset, and PC distribution methods
Product
Size (width, height, depth) in mm
Weight (g)
Sales Channel
TV
42-inch Smart TV
978 * 638 * 250
15,500
Large chain store
(Gome/Suning)
Operator
IT mall
e-channel
own franchise
Independent consumer
electronics shops
Logistics
Installation service
after-sales service
Warrenty and after sales service
Replacement cycle
Mobile Phone
PC
5-inch smartphone 14-inch notebook
70 * 140 * 9
245 * 350 * 33
150
2,200
23%
0%
0%
10%
9%
58%
5%
70%
10%
5%
5%
5%
20%
0%
60%
10%
10%
5%
Complicated
Required
Required
3 years (panel), 1
years (set)
10 years
Simple
not required
not required
1 year
Simple
not required
not required
1 year
2 years
2 years
Source: Nomura research
For example, on the one hand, Skyworth owns one of the most comprehensive sales,
logistics, and after-sales service networks in China, including over 20k retail shops and
service outlets with nationwide coverage. In FY2013, Skyworth’s own sales channel
(speciality stores and other electronics shops) contributed 62% of total TV sales volume.
We think the value of this network will remain as one of Skyworth’s major edges vs
internet companies like LeTV and international TV vendors.
On the other hand, Internet companies either provide minimal offline service or rely on
third-party service providers, but service quality is often not guaranteed due to lack of
dedication. We believe the sales network that local TV vendors own will remain one
major edge that they have over the internet companies.
Fig. 41: Skyworth store in 3rd tier cities to rural areas
Fig. 40: Skyworth’s sales by channel (2013/3)
Other
electronics
shops
cover 3rd
tier cities to
rural,
58.2%
Large scale
chain
stores,
18.4%
Hypermark
et, 4.5%
Hypermarket, 4.5%
Direct
sales, 4.9%
Online,
9.7%
Domestic /
Exports
distributors,
0.5%
Source: Skyworth disclosure, Nomura research
Skyworth
specialty
stores in
major cities,
3.8%
Source: Skyworth.com
Software and user interface
Most Smart TV platforms in China are developed based on Google’s Android or Linux’s
operating system. TV vendors integrate their own user interface software, IPTV
applications and app store to third-party applications, as summarized below:
19
Nomura | China Smart TVs
November 4, 2013
User interface
• Skyworth’s Tianci OS includes its own user interface supporting a unique fullsuspension UI and multi-task capability to allow users to carry out all operations without
interrupting current TV programmes.
• Hisense’s VIDDA UI features “waterfall channel switch” which allows audiences to
seamlessly and instantly change channels without the time lag that most other Smart
TV platforms have.
Fig. 42: Tianci – suspension UI and multi-tasking
Fig. 43: Hisense VIDAA TV’s “waterfall channel switch”
feature
Source: Nomura research
Source: Nomura research
Remote controller
• LeTV’s Super remote controller reduces users’ reliance on buttons and features touch
screen, voice input, gravity sensor, and gyroscope.
Big data and data mining capacity:
• Skyworth’s Tianci has a back-end engine to process and analyze content and user
behaviour, and data mining for various potential purposes such as content
recommendation and targeted advertising.
Fig. 44: LeTV’s Super remote controller
Fig. 45: Voice command feature
Gaming with G-sensor and gyroscope in play
Similar to iPhone's Siri
Source: LeTV
Source: LeTV
Supply chain management
One major challenge for the TV business is to manage inventory risk of TV panels, which
typically accounts for 70% of BOM costs. A typical TV OEM needs to carry roughly three
weeks of panel inventory in order to maintain flexibility to changing market demand and
to control costs amid fluctuations in panel pricing.
20
Nomura | China Smart TVs
November 4, 2013
As shown in the right side figure below, Skyworth has delivered consistent results partly
due to this strategy, in our view. On the one hand, whenever there is a sharp decline in
panel pricing, Skyworth had been able to maintain a healthy inventory level and stable
OPM; on the other hand, TCL has seen volatile OPM partly due to inventory write-offs.
2011
2012
2013
Source: Skyworth
Apr-13
2010
Jan-13
10
2009
-40%
Jul-12
0
-35%
Oct-12
1,000
-30%
Apr-12
2,000
-25%
Jan-12
20
Jul-11
3,000
-20%
Oct-11
20
-15%
Apr-11
21
0%
-5%
-10%
Jan-11
21
23
Jul-10
4,000
24
30
Apr-10
5,000
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Oct-09
Inventory days for unfinished goods (RHS)
6,000
Skyworth (LHS)
TCL (LHS)
40-inch panel ASP y-o-y (RHS)
(Days)
Inventory trend (LHS)
Jan-10
(HKDmn)
Fig. 47: Relation between TCL/Skyworth’s op margins and
panel prices
Oct-10
Fig. 46: Skyworth’s inventory trends and inventory days
-45%
Source: Skyworth
Unlike peers such as TCL, whose business model relies on its vertical integration
strategy into upstream components such as panels, Skyworth retains the flexibility to
shop between suppliers to procure the components to make products that can best meet
market trends (eg, a particular display size), whereas TCL may be constrained to make
products that best suit its upstream production capabilities, and not necessarily the
consumer market.
In order to better manage inventory and logistics, major TV vendors have taken the
approach to build geographically scattered production capacities throughout both China
and the world. The chart below illustrates how some major domestic TV vendors
geographically allocate their production capacities to better serve local markets at
reduced costs.
Fig. 48: Production capacity distribution of major TV vendors
Company
Skyworth
TPV
Shipment
Capacity
volume
(mn units)
2012
10.6
15.1
15.5
42
Region
Shiyan, Guangzhou, Inner Mongolia,
Lishui
Beihai, Beijing, Qingdao, Fuqing, and
Wuhan
Tijuana
Manaus and Tierra del Fuego
St. Petersburg, Gorzow, and Szekes
7
Hisense
12.1
0.2
Guiyang, Jiangmen
South Africa
Country
China
Comment
Ramp up to 19mn in 2015
China
Mexico
Brazil
Europe
China
South Africa
0.25
Algeria
Algeria
0.5
Egypt
Egypt
Source: Company data, Nomura research
Brand awareness
Due to the long replacement cycle (~10 years) for TVs, intangible measures such as
brand reputation and quality are considered when consumers are making a purchasing
decision. According to Fortune’s recent ranking of the top 50 most respected brands in
th
th
China, both TCL and Hisense made the list, at 25 and 28 , respectively. A separate
survey on consumer awareness of Smart TV brands, conducted by iiMedia, shows that
the big 5 domestic vendors (TCL, Skyworth, Hisense, Changhong, and Konka) have a
large lead over most other brands.
21
Nomura | China Smart TVs
November 4, 2013
In a time of Smart TV transition, we believe favourable brand perception should translate
into larger benefits to TV brands than ever before, since consumers need to rely more on
a trustworthy brand to have a better likelihood of receiving both a high quality TV with
comprehensive post-sales services and a Smart TV with a mature eco-system.
Fig. 49: Consumers’ awareness on Smart TV brands in China (2013)
60%
Fortune China Brand Ranking
53%
49%
46%
50%
37%
40%
40%
35%
30%
30%
Fig. 50: Fortune’s top 50 most respected
brands in China
30%
29%
24%
29%
16%
20%
13%
Source: iiMedia
Others
Sony
Panasonic
Sharp
LG
Samsung
Haier
Konka
Skyworth
Hisense
LeTV
TCL
0%
Changhong
10%
2013
2012
Company
1
2
Alibaba
2
1
Baidu
3
3
Haier
4
4
Huawei
5
7
Lenovo
6
6
Tencent
11
n/a
Xiaomi
11
15
BYD
25
28
TCL
28
29
Hisense
35
36
ZTE
Source: Fortune magazine
Company Strategies
Internet content providers
• LeTV (300104 CH, NR): LeTV is one internet video provider that also produces its own
content. By partnering with CNTV for content integration and license, LeTV first entered
the Smart TV arena via its LeTV box. In May 2013, LeTV moved further by announcing
the launch of its Super TVs using Foxconn/TPV as OEMs. X60 (60-inch) and S40 (40inch) were priced at CNY6,999/CNY1,999 and their first 10k units were sold out within
49/82 minutes respectively, showing the potential demand behind the new low-price
hardware + VAS business model. However, X60 and S40 sales had been slow after the
initial wave due to being “too big and too small” according to our discussion with the
management. LeTV launched S50 (50-inch Super TV) in October and gained
favourable market traction; the companies believes it will become “the product” to break
into the Smart TV sector and targets 200k/1mn units in 2013 and 2014, which will
translate into a 1.8% market share in China TV in 2014.
LeTV uses a “CP2C” (customer planning to customer) model where downstream
prepayment orders drive upstream production with transparent manufacturing and
delivery lead time constantly fed back to customers. In addition, LeTV partnered with
two call centres, 12 post-sale service companies, and 19 logistics companies to provide
customer service covering 92 cities (172 cities by end-2013). On the offline retail level,
LeTV has Gome as its exclusive partner to sell its Super TVs in stores from 4Q13.
On the content front, LeTV announced on 30 September that the company will be
acquiring 100% ownership of Huaer Yingshi (花儿影视) and Leshi Xinmeiti (乐视新媒体)
for CNY1.6bn. This move is to further fortify its existing advantage in online video
content production and copyright collection. After all, content is king.
• Baidu/iQIYI (BIDU US, NR): iQIYI started off as Baidu’s independent internet video
subsidiary in March 2010, focusing on aggregating content and providing online video
services featuring free, copyrighted, and high-definition content. iQIYI acquired PPS in
May 2013 for a cash payment of USD370mn, making it one of the largest online video
companies in China, equally large as Youku Tudou in terms of market share. Unlike
LeTV, its Smart TV strategy is not to make its own hardware, but to co-operate with
existing players, such as TCL, to jointly roll out TV+ from September 2013.
22
Nomura | China Smart TVs
November 4, 2013
• Alibaba (unlisted): Alibaba announced that its Smart TV strategy is to make TVs a
new source of internet traffic for its e-commerce platforms including Taobao and TMall.
Thus its strategy is for Alibaba to co-operate with existing players such as Wasu (Alibaba
box) and Skyworth (Coocaa TV) and to integrate its e-commerce platform and services.
• Tencent (700 HK, NR): LeTV recently announced a partnership with Tencent in Smart
TV development; and LeTV will host a major product announcement in October. While
details of the partnership are unknown, we think the partnership will be similar to
Skyworth/Alibaba, where it will focus mainly on integration of application platforms,
utilizing Tencent’s expertise in communication (WeChat/QQ) and games.
• Wasu (000156 CH, NR): it is one of seven IPTV license holders and a service provider
in interactive TV, mobile TV, and IPTV. Wasu has one of the largest digital TV content
libraries in China, with over 1mn hours of TV programming. In addition, Wasu provides
digital cable TV services to over 20mn households in Zhejiang province and 18 cities
outside of the province. To penetrate into Smart TVs and break geographical barriers,
Wasu had partnered with TV hardware vendors such as Skyworth, TCL, Hisense, and
Changhong to secure Smart TV gateways for its broadcast platform and content.
• BesTV (600637 CH, NR): it is one of seven IPTV license holders and China’s first
legitimate IPTV service provider. The company currently has 16mn IPTV users, the
largest user base in the world, according to the company. BesTV developed its
proprietary Smart TV box in 2013 and received 2mn serial numbers from SARFT. In
addition, it has partnered with Lenovo to carry its content on Lenovo Smart TVs.
TV vendors
• Skyworth (751 HK, initiate at Buy): Skyworth is a leader among domestic traditional
TV vendors to test different Smart TV models. In December 2012, it partnered with
SMC (license) and Voole (content) to launch a paid subscription service called
“Hollywood Express”. Skyworth also designed Tianci OS, an operating system not
simply adopted/modified from Android, but built from scratch around TV users’ unique
behaviours and TV functionalities. In addition, Tianci can be installed on TVs with other
operating systems such as Android, making it the first cross-platform Smart TV OS in
China.
Facing potentially disruptive price competition from internet players such as LeTV,
Lenovo, and Xiaomi, Skyworth co-operated with Alibaba to launch Coocaa TV to
compete in similar price ranges.
• TCL Multimedia (1070 HK, NR): Based on a survey by iiMedia, TCL is the brand that
most people are likely to associate with Smart TVs. TCL in September partnered with
iQIYI to launch TV+. Unlike Skyworth, TCL set identical pricing for both offline and
online distribution of its TV+ product at CNY4,567 with an emphasis on nationwide
service coverage via both online (eg, Jingdong, Suning.com, and TMall) and offline (eg,
Gome, Suning, TCL specialty stores) channels.
• Hisense (600060 CH, NR): Hisense’s VIDAA TV uses its proprietary operating system
that is often regarded as one of the two best TV systems in China, alongside Tianci.
However, we have yet to see a major strategic development for the company to
address potential threats coming from internet companies.
• TPV (903 HK, NR): As a TV OEM vendor, TPV is partnering with various vendors
including Lenovo, LG, and Sharp in Smart TV business. In addition, through TP Vision
(70% owned joint-venture), TPV has access to strong brand recognition, R&D
capabilities, and innovative products from Philips. CEC (China Electronics Corporation,
0085 HK, NR) is the major shareholder of TPV as well as Panda, one of several major
panel makers in China. According to Reuters, CEC/Panda/TPV has signed an
agreement with Sharp to build an 8.5Gen LCD panel line in Nanjin. As a TV OEM, TPV
will absorb the panels made by Panda. Given TPV’s large scale, this will increase
TPV’s panel sourcing flexibility, in our view.
23
Nomura | China Smart TVs
November 4, 2013
Smart Device and Set-top-box vendors
• Lenovo (992 HK, Buy): Smart TV is the final piece to complete Lenovo’s PC+ strategy.
The company launched K series (flagship) and S series Smart TVs in 2012 as its first
attempt to penetrate the market using Wistron and Compal as OEMs. Due to its
prohibitive pricing (CNY60k to CNY150k) compared to similar products, it failed to
generate meaningful sales.
Lenovo announced its A21 series Smart TVs in June with a similar strategy. A21 series
features 32-inch and 42-inch models, priced at CNY1799 and CNY2799, respectively
via www.JD.com’s e-channel. Lenovo targets to sell 1mn units of A21 series products in
three years in JD alone.
• Coship (002052 CH, NR): Coship is the largest STB provider in China, according to the
company, with product coverage over 17 provinces and more than 100mn users,
mainly via its co-operation with local SARFT authorities to promote digital TV migration.
On 23 September, Coship launched the Feikan (飞看) box, Mushroom UI (蘑菇 UI) and
a 55-inch Fei TV (飞 TV, priced at CNY4698) to kick off its Smart TV strategy. While its
offline distribution strategy for STBs and TVs is not yet clear, Coship will be partnering
with MTC (002429 CH, NR), a STB manufacturer, to invest CNY10bn to upgrade digital
TV STBs to Smart TV STBs for users in 10 major provinces free of charge. Coship
partners with CIBN for its license.
• Xiaomi (unlisted, NR): Xiaomi launched its Xiaomi box in January 2013 by partnering
with CNTV. In addition, Xiaomi TV was announced in September 2013, to be launched
around mid-October, using Wistron as an OEM and Samsung/LDG as panel suppliers.
Unlike LeTV, Xiaomi lacks the ability to produce and aggregate content. We expect
Xiaomi to utilize its expertise in UI design to continue to blossom in its TV product.
• Huawei (unlisted): Huawei launched MediaQ M310 STB (秘盒) on 28 August,
partnering with CNTV for license and content. Further, Huawei partnered with GBS to
launch a Smart TV dongle in September.
• China Telecom (728 HK, Buy): CT has 20mn IPTV subscribers now via co-operation
with BesTV and other IPTV license holders. In addition to broadband revenue, China
Telecom also shares content revenue with content providers. IPTV is a useful approach
to stimulate broadband upgrades, which is important to sustain ARPU.
24
Nomura | China Smart TVs
November 4, 2013
China TV market overview
According to DisplaySearch, in 2012, Chinese vendors had 84% volume share in China’s
LCD TV market in total, vs 16% by international brands. In particular, the top 6 China
brands captured 80% of the market, while the top 3 foreign brands only captured ~10%.
Foreign vendors mainly focused on Tier 1-2 cities, and mid (40-48’’) to premium (50’’ and
above) segments. Domestic vendors have dominant presence in mainstream sizes (3048’’) and low-tier cities.
Looking at panel sizes, there is a clear trend that demand for larger displays is rising. We
believe this trend is positive to drive both Smart TV and 4K2K adoption rates.
Fig. 51: Average TV size in China and by vendors
Fig. 52: Market share by panel size
Skyworth leads the market average
The contraction of 40-48 inch TV market share during the past 5 quarters
has mainly been due to the energy-saving subsidy focusing on 32-inch
TVs. We expect the trend to reverse starting In 3Q13 as the subsidy
programme expired in May.
China
Skyworth - China
TCL - China
(inch)
40
39
<29''
100%
90%
80%
70%
60%
50%
38
37
36
35
40%
30%
20%
10%
0%
34
33
32
31
30
1Q11
3Q11
1Q12
3Q12
1Q13
Source: DisplaySearch
5%
41%
43%
32-39''
40-48''
>50''
7%
9%
10%
10%
31%
29%
30%
28%
52%
54%
56%
52%
9%
6%
6%
5%
3Q12
4Q12
1Q13
2Q13
48%
11%
15%
1Q12
2Q12
13%
29%
Source: DisplaySearch
Within domestic vendors, Skyworth, Hisense, and TCL are the top three vendors in
terms of market share. Skyworth has a slightly higher market positioning, which results in
a higher ASP and gross margin.
Fig. 53: ASP comparisons in China market
Fig. 54: Gross margin comparisons
(USD)
25%
650
600
20%
550
500
15%
450
400
10%
350
China
Skyworth
300
TCL
Hisense
Skyworth
TCL
Hisense
5%
250
200
1Q11
Source: DisplaySearch
3Q11
1Q12
3Q12
1Q13
0%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Source: DisplaySearch
25
Nomura | China Smart TVs
November 4, 2013
Fig. 55: TV technology roadmap in China
OLED TV Launch
Internet TV
Smart TV set-top-box vs. all-in-one Smart TV transition
LED LCD TV: Direct vs. Edge transition
HD, FHD, 16:9
LED backlight LCD TV
becoming mainstream
2009
4K2K, 21:9
3D TV gaining
popularity
2010
2011
Smart TV emerging
2012
2013
2014
2015
Source: TCL, Nomura research
Fig. 56: Document 43 outlines the specific types of licenses and their functions
License
License Category
IPTV integrated broadcast
and control platform
Audiovisual Programming
Dissemination Permit for IPTV content service platform
Information Networks
Tier
Responsibility
Central management, planning, and unified design of
National
EPG, BOSS, and copyrights
Operations, service development, services, and
Provincial
connections with operators
National
Content related production, editing, censoring,
broadcasting, EPG, pricing, copyright, and ads
Provincial placement
IPTV transmission service
National
Provide additional programming and EPG entries to
integrated IPTV broadcast and control platforms after
review by the platform
License holders
CCTV (CNTV)
CNTV, BesTV, SMC, CIBN, CNBN,
Wasu, GBS
National TV stations (eligible)
Regional TV stations (eligible)
China Telecom, China Unicom
Source: SARFT, Nomura research
Summary of TV subsidy programs
The government’s home appliance subsidy programme has always been a major driver
of China’s TV market. We summarize the past programmes and expectations for the
next programme as below.
• Countryside subsidy (家电下乡, February 2009 to January 2013)
The government started a home appliance for countryside subsidy programme in
December 2007. MoF subsidized 10% of the home appliance’s listing price or up to
CNY400 for home-appliance purchases, including air conditioners, TVs, refrigerators,
and heaters. This programme expired on 31 January 2013, with a total subsidy payment
of CNY66.2bn.
• Old for new (以旧换新, May 2009 – December 2011)
Starting in June 2009, there was a parallel “old for new” subsidy alongside the
countryside subsidy. It promoted the trade-in of old home appliances for 10% or up to
CNY400 in subsidy support for new purchases. This programme ended in December
2011 with a total subsidy payment of CNY34bn.
• Energy saving subsidy (June 2012 – May 2013)
The latest energy-saving subsidy commenced in June 2012, subsidizing homeappliances that meet the tier 1 and 2 energy-saving standards for an amount of CNY100400. A total of CNY26bn was budgeted.
• Energy-saving leader (coming soon)
According to AVC, the government is exploring the possibility of introducing a new home
appliance subsidy programme called Energy-saving leader. In the new programme, the
government will only subsidize 2-3 models per OEM with the highest energy saving
efficiency in order to improve China’s energy efficiency. Another difference versus the
old programme is to subsidize vendors instead of consumers this time. This should
reduce working capital overheads for vendors, in our view.
26
Nomura | China Smart TVs
November 4, 2013
Fig. 57: Home appliance subsidy summary in China
2009 2010 2011 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Unit
Total
Countryside subsidy (家电下乡)
Up to CNY455 CNY66.2bn
Old for New subsidy
Up to CNY455
CNY34bn
CNY100-400
CNY26bn
Energy-saving subsidy
Awaiting new subsidy…
?
Coming soon
Source: Nomura research
According to China Video Industry Association (CVIA), 32% of the energy-saving subsidy
was used for flat-panel TV products in 1Q13 and more than 90% of LCD TVs meet the
energy-saving standard. CVIA also estimated that a total of 21.3mn units of flat panel
TVs were purchased using the subsidy (or 43% of LCD TVs sold in China in 2012),
generating total sales of CNY75.8bn with subsidy payments totalling CNY6bn.
Fig. 58: TVs account for 32% of total energy saving subsidy
Fig. 59: Skyworth’s monthly China TV sales
Energy-saving subsidy usage by product (1Q13)
Washing
machine,
17%
Flat-panel
TV, 32%
Refrigerator,
23%
Air
conditioner,
26%
Source: ZDC (1Q13)
('000 units)
1,400
China TV (LHS)
Volume Growth (China TV) (RHS)
80%
1,200
60%
1,000
40%
800
20%
600
0%
400
-20%
200
-40%
0
-60%
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Heater, 2%
Source: Skyworth
27
Nomura | China Smart TVs
November 4, 2013
TV vendors’ panel sourcing strategies
Panels are the most expensive component in an LCD display, and account for 60-70% of
a LCD TV’s total bill of material cost (source: Display Search). Although China’s market
and Chinese vendors contributed 22.3% and 21.8% of global TV shipment volumes in
2012, respectively, China only produced 8.4% of global panel supply, according to
DisplaySearch.
Fig. 60: Trend between TVs and panels made in China
(mn units)
Fig. 61: Global share between TVs and panels made in China
('000 m2)
China TVs
18
China Panels (RHS)
4,500
16
4,000
14
3,500
12
3,000
10
2,500
8
2,000
6
1,500
4
1,000
2
500
-
1Q11
2Q11
3Q11
4Q11
1Q12
Source: DisplaySearch
2Q12
3Q12
4Q12
1Q13
TV Market share (China)
30.0%
Panel Market share (China)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
Source: DisplaySearch
To resolve the mismatch, the government provides favourable financial and taxation
conditions to attract the development of the domestic TV panel industry.
Raise panel import tax to 5% to support domestic panel industry
On 1 April, 2012, the Ministry of Finance (PRC) raised the import tax rate for panels to
5%, from 3%. The government expects the 5% price difference due to taxation and
additional transportation costs will create cost advantages for domestically produced TV
panels, and encourage the relocation of the panel industry into China. According to news
published by Sohu.com in June 2013, China may further raise the panel import tax rate
from 5% to 8-12% to accelerate this trend.
Financial subsidies to promote domestic panel industries
In addition to the taxation scheme, local governments also provide financial subsidies to
China-based panel vendors such as BOE (00725 CH) and TCL Corp (000100 CH)’s
panel arm CSOT.
• BOE (00725 CH, NR)
BOE is currently constructing a second 8.5G line in Hefei and planning a third 8.5G line
in Chongqing. In addition, BOE established a 5.5 generation AMOLED line in Ordos
(Inner Mongolia, ~770 kms west from Beijing) in 2011. The government there provided
~1bn tonnes of coal mining rights to BOE in order to attract this investment of CNY22bn.
BOE had transferred part of the rights and cashed in CNY3.6bn, which was used as part
of the up-front capital for the project.
• TCL Corp (000100 CH)’s CSOT
It established a 50-50 JV with SIHC (Shenzhen Investment Holding Corp, which is an
investment vehicle for the city of Shenzhen) to establish CSOT (China Star
Optoelectronics Technology) in Shenzhen. In June 2013, SIHC announced it would
forgive CSOT’s CNY5.1bn in debt because CSOT had achieved the production capacity
requirement originally set by SIHC. The CNY5.1bn debt will be treated as deferred
revenue and recognized over seven years. CSOT is planning its second 8.5G line in
Shenzhen.
• CEC/Panda/TPV
CEC Group and Nanjing Panda are partnering with Sharp to build its first 8.5G line in
Nanjing, aiming to commence production in 1Q15.
28
Nomura | China Smart TVs
November 4, 2013
• LGD/Skyworth’s 8.5G Fab
Skyworth expects the new fab to start operations from summer 2014 with a monthly
capacity of 6k pieces of mother glass, which is equivalent to 60k 42-inch TV units.
Fig. 62: Summary of TV panel production lines in China
Tianma
BOE
Infovision
LGD
Samsung
CSOT
Innolux
Nanjing Panda
Truly
Plant
Shanghai 1
Chengdu 1
Wuhan 1
Chengdu B2
Beijing B1
Hefei B3
Beijing B4
Hefei B5
Chongqing B6
Beijing B7
Beijing B8
Ordos
KunShan
Guangzhou
Suzhou
Shenzhen 1
Shenzhen 2
Shenzhen
Nanjing
Nanjing
Shanwei
Gen
4
4
4
4.5
5
6
8.5
8.5
8.5
8.5
8.5
5.5
5
8.5
8.5
8.5
8.5
5
6
8.5
2.5
Capacity
(k/mo.) Started Operation
30
30
30
45
100
100
90
90
???
???
???
54
110
60
110
120
???
110
60
???
???
3Q06
3Q10
1Q11
3Q09
2Q06
4Q10
2Q11
4Q13
Planning
???
???
Construction
1Q06
2Q14
1Q14
4Q11
Planning
3Q06
1Q10
1Q15
2Q08
Source: Display Search
Implication for TV vendors
Within domestic TV vendors, only TCL adopts a vertically integrated business model
including a TV panel arm CSOT. When there is shortage in TV panels, TCL Multimedia
will benefit from priority supply from CSOT, but may be under pressure to lower TV
prices in order to maintain CSOT’s utilization rate.
Other TV vendors such as Skyworth and HiSense adopt an asset-light business model
and rely on external panel suppliers in Taiwan and Korea. In our view, the asset-light
business models have advantages in terms of flexibility to adopt the newest panel
technology in the market and launch products with the most popular panel sizes.
29
Nomura | China Smart TVs
November 4, 2013
TV exports next: Blue or red ocean?
Chinese TV vendors were suffering from export business till now due to lack of brand
awareness and channels. However, Chinese vendors see the retreat of Japanese TV
vendors as an opportunity to expand their footprints. We summarize Chinese TV
vendors’ overseas business strategies as below.
Fig. 63: Summary of Chinese TV vendors’ overseas business (FY12)
Total TV Shipment (2012)
CNY mn
Revenue
Y-Y%
ASP (CNY)
Volume ('000)
Market Share (%)
Gross Profit
GPM (%)
Operating Profit
Skyworth
24,498
26%
2,144
11,425
3.6%
4,564
19%
1,393
TCL
28,540
21%
1,626
17,556
5.6%
4,746
17%
863
TPV
30,759
34%
3,829
8,034
2.6%
2,967
10%
415
HiSense
20,400
3%
2,145
9,509
3.0%
-
China TV Shipment (2012)
CNY mn
Revenue
Y-Y%
ASP (CNY)
Volume ('000)
Market Share (%)
Gross Profit
GPM (%)
Operating Profit
Skyworth
21,977
22%
2,526
8,702
17.4%
4,461
20%
1,405
TCL
18,828
16%
2,126
8,857
17.8%
3,871
21%
734
TPV
4,122
45%
4,752
867
1.7%
HiSense
Changhong
7,971
16.0%
6,821
13.7%
Overseas TV Shipment (2012)
CNY mn
Revenue
Y-Y%
ASP (CNY)
Volume ('000)
Market Share (%)
Gross Profit
GPM (%)
Operating Profit
Skyworth
2,520
77%
926
2,723
0.7%
103
4%
(12)
TCL
9,712
34%
1,116
8,699
2.1%
876
9%
129
TPV
26,637
33%
3,717
7,166
1.7%
3,831
Changhong
17,122
-3%
2,338
7,322
2.3%
3,040
Konka
13,876
12%
2,333
5,949
1.9%
2,299
Konka
13,876
12%
2,333
5,949
11.9%
2,299
HiSense
Changhong
1,538
0.4%
501
0.1%
Konka
Source: Company data, DisplaySearch, Nomura research
• Skyworth is becoming more aggressive in international expansion. The company said
during its annual analyst briefing in July 2013 that it targets to raise its non-China TV
shipments to 4mn units in FY14, from 2.7mn units in FY13, growth of 47% y-y. On top
of volume growth and scale, Skyworth also aims to become profitable overseas.
• TCL Multimedia is looking to strengthen its existing overseas presence on top of its
2.1% market share in 2012. The company shipped 8.7mn LCD TVs overseas in 2012
and is targeting 7.8mn units (+17% y-y) in 2013.
• TPV: after acquiring Philips’ TV business in April 2012 (via a 70-30 JV with Philips),
TPV has 7.9% market share in Europe, and 4.1% market share in Latin America in
2012. But TPV is still restructuring this business in 2013 by shutting down some
factories in Europe and expanding the product offering from high-end to mid-to-low-end
models.
30
Skyworth
0751.HK 751 HK
EQ U I T Y R E S E A R C H
TECHNOLOGY
Initiate at Buy with HKD6.0 TP November 4, 2013
Rating
Starts at
Buy for Smart TV and 4K2K TV
upgrade
Action: Initiate with Buy, TP of HKD6.0 for Smart TV/4K2K upgrade
We initiate coverage on Skyworth at Buy with a TP of HKD6. We think the
market has only factored in negative impacts from the industry’s smart TV
transition such as margin pressure, but has not reflected the positive
impacts, especially on the acceleration 4K2K TV adoption in China. We
expect smart and 4K2K TV penetration rates to reach 45%/12% in 2014F
from 25%/2% in 2013F, benefiting Skyworth’s ASP growth, which should
offset the weakness in TV sales volume in China. We think the current low
valuation at 5.7x FY14F EPS provides a good entry point for investors.
Buy
Target price
Starts at
HKD 6.00
Closing price
October 29, 2013
HKD 3.59
Potential upside
+67.1%
Anchor themes
We believe Smart TVs are the
next major trend in China's
technology sector after China
smartphones. We think TV
hardware vendors are the
hidden gems in the whole
Smart TV eco-system.
Nomura vs consensus
We are more bullish on the
positive impacts of smart TV on
the TV product upgrade cycle.
Catalysts: Monthly data, especially ASP and smart TV adoption rate
Skyworth’s key assets during its smart TV transition
We believe Skyworth will be successful during its smart TV transition, unlike
Nokia/Blackberry during their smartphone transitions; the difference, in our
view, is pioneering efforts in smart TV development among Chinese peers,
nationwide sales and logistics network, and experience in supplier chain
management, in particular TV panels.
Service revenue should provide long-term upside to earnings for Skyworth
as smart TV adoption rises. Currently 2% of its smart TV buyers have
subscribed to its paid-TV service “Hollywood Express”. Skyworth has also
established revenue-sharing plans with Internet players such as Alibaba.
Research analysts
China Technology
Leping Huang, PhD - NIHK
leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
david.hao@nomura.com
+852 2252 2153
Valuation: 9x FY14F EPS of HKD0.64
We expect Skyworth to achieve 18%/18% y-y earnings growth in FY14/15F
driven by 8%/17% sales growth of its core China TV business. We derive
our TP of HKD6 based on 9x FY14F EPS of HKD0.64, a 10% discount to
China Technology peers due to its slower growth. The risk to our forecast is
write-off of panel inventory.
31 Mar
Currency (HKD)
Revenue (mn)
FY13
Actual
FY14F
Old
New
FY15F
Old
New
FY16F
Old
New
37,824
44,203
53,800
62,324
Reported net profit (mn)
1,501
1,766
2,089
2,469
Normalised net profit (mn)
1,501
1,766
2,089
2,469
54.36c
63.95c
75.66c
89.42c
17.5
17.6
18.3
18.2
4.0
FD normalised EPS
FD norm. EPS growth (%)
FD normalised P/E (x)
6.6
N/A
5.7
N/A
4.7
N/A
EV/EBITDA (x)
7.6
N/A
6.1
N/A
5.4
N/A
Price/book (x)
1.0
N/A
0.9
N/A
0.8
N/A
Dividend yield (%)
4.7
N/A
5.5
N/A
6.6
N/A
4.4
0.7
7.7
ROE (%)
16.3
16.7
17.5
18.3
Net debt/equity (%)
35.2
30.6
31.9
24.4
Source: Company data, Nomura estimates
Key company data: See page 2 for company data and detailed price/index chart.
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | Skyworth
November 4, 2013
Key data on Skyworth
Income statement (HKDmn) Year-end 31 Mar
Revenue
Cost of goods sold
Gross profit
SG&A
Employee share expense
Operating profit
EBITDA
Depreciation
Amortisation
EBIT
Net interest expense
Associates & JCEs
Other income
Earnings before tax
Income tax
Net profit after tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
Transfer to reserves
Relative performance chart (one year)
FY12
28,137
-22,181
5,956
-4,677
FY13
37,824
-30,418
7,406
-5,942
FY14F
44,203
-35,548
8,655
-6,876
FY15F
53,800
-43,266
10,534
-8,403
FY16F
62,324
-50,121
12,203
-9,662
1,279
1,464
1,779
2,131
2,541
1,516
-237
1,766
-302
2,179
-400
2,590
-459
3,054
-513
1,279
-88
1,464
-55
1,779
-73
2,131
-62
2,541
-44
385
1,576
-308
1,268
-16
517
1,926
-332
1,594
-93
557
2,262
-390
1,872
-106
600
2,669
-460
2,209
-120
648
3,145
-542
2,603
-134
1,252
1,501
1,766
2,089
2,469
1,252
-381
871
1,501
-464
1,037
1,766
-546
1,220
2,089
-646
1,443
2,469
-763
1,706
Valuation and ratio analysis
Reported P/E (x)
Normalised P/E (x)
FD normalised P/E (x)
FD normalised P/E at price target (x)
Dividend yield (%)
Price/cashflow (x)
Price/book (x)
EV/EBITDA (x)
EV/EBIT (x)
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin (%)
Effective tax rate (%)
Dividend payout (%)
Capex to sales (%)
Capex to depreciation (x)
ROE (%)
ROA (pretax %)
7.7
7.7
7.7
8.6
4.0
8.1
1.1
7.9
9.4
21.2
5.4
4.5
4.4
19.5
30.4
3.0
3.5
16.1
7.1
6.6
6.6
6.6
7.4
4.7
na
1.0
7.6
9.2
19.6
4.7
3.9
4.0
17.2
30.9
2.9
3.7
16.3
6.3
5.7
5.7
5.7
6.3
5.5
9.5
0.9
6.1
7.5
19.6
4.9
4.0
4.0
17.2
30.9
2.3
2.5
16.7
6.6
4.7
4.7
4.7
5.3
6.6
22.7
0.8
5.4
6.5
19.6
4.8
4.0
3.9
17.2
30.9
1.9
2.2
17.5
7.0
4.0
4.0
4.0
4.5
7.7
6.0
0.7
4.4
5.3
19.6
4.9
4.1
4.0
17.2
30.9
1.6
2.0
18.3
7.5
Growth (%)
Revenue
EBITDA
EBIT
Normalised EPS
Normalised FDEPS
15.6
9.9
14.9
4.8
4.8
34.4
16.5
14.5
17.5
17.5
16.9
23.4
21.5
17.6
17.6
21.7
18.9
19.8
18.3
18.3
15.8
17.9
19.2
18.2
18.2
46.28c
46.28c
46.28c
3.21
0.14
54.36c
54.36c
54.36c
3.64
0.17
63.95c
63.95c
63.95c
4.09
0.20
75.66c
75.66c
75.66c
4.62
0.24
89.42c
89.42c
89.42c
5.24
0.28
Per share
Reported EPS (HKD)
Norm EPS (HKD)
Fully diluted norm EPS (HKD)
Book value per share (HKD)
DPS (HKD)
Source: ThomsonReuters, Nomura research
(%)
1M
3M 12M
Absolute (HKD)
-4.0 -10.0 -12.4
Absolute (USD)
-4.0 -10.0 -12.5
Relative to MSCI China
Market cap (USDmn)
Estimated free float (%)
52-week range (HKD)
3-mth avg daily turnover
(USDmn)
Major shareholders (%)
Weiping Lin
-2.9 -17.8 -17.0
1,278.5
6.0
6.67/3.39
11.60
34.5
Source: Thomson Reuters, Nomura research
Notes
Source: Company data, Nomura estimates
32
Nomura | Skyworth
November 4, 2013
Cashflow (HKDmn) Year-end 31 Mar
EBITDA
Change in working capital
Other operating cashflow
Cashflow from operations
Capital expenditure
Free cashflow
Reduction in investments
Net acquisitions
Reduction in other LT assets
Addition in other LT liabilities
Adjustments
Cashflow after investing acts
Cash dividends
Equity issue
Debt issue
Convertible debt issue
Others
Cashflow from financial acts
Net cashflow
Beginning cash
Ending cash
Ending net debt
FY12
1,516
-1,158
841
1,199
-839
360
0
FY13
1,766
-2,012
-278
-524
-1,111
-1,635
0
FY14F
2,179
-140
-989
1,050
-1,000
50
0
FY15F
2,590
-1,632
-522
436
-1,000
-564
0
FY16F
3,054
-830
-555
1,669
-1,000
669
0
-33
103
-359
71
-199
23
-208
-406
204
700
-1,137
-177
13
1,512
0
-500
1,000
550
-464
0
800
0
0
500
-64
-546
0
-500
0
0
500
1,169
-646
0
-800
-47
-431
-360
2,524
2,164
2,119
-74
1,274
137
2,164
2,301
3,505
0
336
886
2,301
3,187
3,419
0
-1,046
-1,110
3,187
2,077
4,029
0
-1,446
-277
2,077
1,801
3,505
FY12
2,164
0
12,725
3,191
860
18,940
0
2,328
FY13
2,301
0
16,036
5,648
648
24,633
0
3,068
FY14F
3,187
0
15,879
5,071
1,298
25,436
0
3,668
FY15F
2,077
0
19,430
7,501
980
29,989
0
4,208
FY16F
1,801
0
21,474
5,879
880
30,034
0
4,695
0
956
22,224
3,568
5,064
3,489
12,121
715
0
720
13,556
199
0
269
7,202
998
0
1,362
29,063
5,581
7,387
4,710
17,678
225
0
924
18,827
267
0
280
8,569
1,120
0
1,362
30,466
6,381
7,164
4,710
18,255
225
0
424
18,904
373
0
280
9,789
1,120
0
1,362
35,559
5,881
10,546
5,358
21,785
225
0
424
22,434
493
0
280
11,232
1,120
0
1,362
36,091
5,081
9,970
5,426
20,477
225
0
424
21,126
627
0
280
12,938
1,120
8,469
22,224
9,969
29,063
11,189
30,466
12,632
35,559
14,338
36,091
Liquidity (x)
Current ratio
Interest cover
1.56
14.5
1.39
26.6
1.39
24.3
1.38
34.4
1.47
58.4
Leverage
Net debt/EBITDA (x)
Net debt/equity (%)
1.40
25.0
1.98
35.2
1.57
30.6
1.56
31.9
1.15
24.4
149.4
48.3
70.9
126.7
138.8
53.0
74.7
117.1
131.8
55.0
74.7
112.1
119.8
53.0
74.7
98.1
120.1
48.9
74.9
94.1
Notes
Source: Company data, Nomura estimates
Balance sheet (HKDmn) As at 31 Mar
Cash & equivalents
Marketable securities
Accounts receivable
Inventories
Other current assets
Total current assets
LT investments
Fixed assets
Goodwill
Other intangible assets
Other LT assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible debt
Other LT liabilities
Total liabilities
Minority interest
Preferred stock
Common stock
Retained earnings
Proposed dividends
Other equity and reserves
Total shareholders' equity
Total equity & liabilities
Activity (days)
Days receivable
Days inventory
Days payable
Cash cycle
Notes
Source: Company data, Nomura estimates
33
Nomura | Skyworth
November 4, 2013
Catalysts ahead
Catalyst one: ASP uplift driven by 4K2K adoption
Due to the high benchmark set in FY13 riding on the energy-saving subsidy programme,
China’s TV industry is currently feeling the after-effects of the subsidy programme (which
expired in May 2013), as purchasing decisions made during what is a typically seasonal
cycle have been pushed forward. Thus we expect 2H14F volume growth to remain
challenging, at least until a new subsidy programme is implemented, something we
expect in 4Q13.
The chart below shows differences in growth rates before and after the energy-saving
subsidy programme. The black dotted circle indicates periods covered by the subsidy
and the red circle indicates periods after subsidy expiration.
Fig. 64: Volume growth remaining challenging
2H14F volume growth is likely to remain challenging due to high base in 2H13
China TV (LHS)
('000 units)
1,400
y-o-y Volume Growth (China TV) (RHS)
80%
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
Apr-13
-60%
May-13
0
Mar-13
-40%
Feb-13
200
Jan-13
-20%
Dec-12
400
Oct-12
0%
Nov-12
600
Sep-12
20%
Jul-12
800
Aug-12
40%
Jun-12
1,000
May-12
60%
Apr-12
1,200
Note: TV shipments for October, November, and December are Nomura estimates, as indicated by the black dotted bars.
Source: Company data, Nomura research
Innovation in technology is a key driver of ASP for Skyworth. Historically, mass adoption
and transition from CRT to LCD TV that drove the LCD TV penetration rate from ~25% to
99% from 2H08 to 1H10 marked a significant improvement in ASP (+40%). In turn,
Skyworth’s share price increased 12x during that period.
Fig. 65: ASP uplift should accelerate
(CNY k)
4
4K2K/Smart TV
100%
CRT --> Flat Panel
80%
3
60%
2
27%
16%
4K2K Penetration
Smart TV Penetration
1
40%
6%
China TV ASP (LHS)
China TV ASP Forecast (LHS)
33%
36%
36%
FY14F
FY15F
FY16F
20%
18%
0
0%
FY09
FY10
FY11
FY12
FY13
Source: Company data, Nomura estimates
34
Nomura | Skyworth
November 4, 2013
We believe we are currently at a similar crossroad, this time driven by the adoption of
4K2K/smart TV; although we do not think the magnitude of the upcoming ASP growth
will be as dramatic as before, we forecast 12% growth in ASP over the next two years.
Catalyst two: New energy-leader subsidy programme coming
soon
Besides technology innovation and ASP growth, subsidy programmes also serve as an
important catalyst to boost stock performance. Historically, shown in the chart below, a
company’s stock price tends to react strongly after the announcement of a subsidy
programme. After the expiration of the energy-saving subsidy programme, we expect a
new “energy-saving leader” subsidy programme to be officially announced in 4Q13F.
Price peaks within 12-months of a subsidy announcement:
• Countryside subsidy (announced in December 2008): HKD0.45  HKD7.92
(+1,670%)
• Old-for-new subsidy (announced in May 2009): HKD0.79  HKD9.91 (+1150%)
• Energy-saving subsidy (announced in May 2012): HKD3.27  HKD6.65 (+103%)
Upcoming energy leader subsidy programme:
According to AVC, the government is exploring the possibility of introducing a new home
appliance subsidy programme called energy-saving leader. In the new programme, the
government will only subsidize 2-3 models per OEM with the highest energy saving
efficiency in order to improve China’s energy efficiency. Another difference versus the
old programme is to subsidize vendors instead of consumers this time. This should
reduce working capital overheads for vendors, in our view.
Fig. 66: Share price and subsidy-related news
(HKD)
12
10
Official
announcement
Industry wide
inventory build-up
8
LCD TV
penetration
from 50%-99%
6
Official
announcement
4
Official
announcement
?
Energy-saving
subsidy
Old for new subsidy
2
Country side subsidy
Oct-13
Jul-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Oct-08
Jan-09
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Oct-06
Jan-07
Jul-06
Apr-06
0
Jan-06
Energy-saving leader
subsidy coming soon
Source: Bloomberg, Nomura research
35
Nomura | Skyworth
November 4, 2013
Earnings forecasts
China TV and digital set-top boxes are two major earnings drivers for Skyworth. In FY13,
China TV business contributed 72% of the sales and 76% of operating profit, while the
digital set-top box business contributed 10% of sales and 17% of profits. In addition,
Skyworth also entered the overseas TV and white-goods business markets recently, but
the earnings contribution remains trivial now.
Fig. 67: Revenue breakdown, FY13
White
Property
appliances
rental
5%
income
0%
Other
electronics
3%
Fig. 68: Operating profit breakdown, FY13
Sales of
properties
1%
LCD
module
1%
Other
electronics,
-5%
White
Property
appliances,
rental
4%
income, 2%
LCD
module, 6%
Digital Settop boxes
10%
Digital Settop boxes,
17%
Overseas
TV
8%
China TV
72%
Source: Company data, Nomura research
China TV,
76%
Overseas
TV, -1%
Source: Company data, Nomura research
Fig. 69: Segment forecast summary
(HKDmn)
China TV
Overseas TV
China Digital STB
Overseas digital STB
LCD module
White appliances
Others
FY13/3 Sales
27,104
3,108
1,898
2,008
535
1,691
1,480
GPM
21%
4%
28%
20%
11%
14%
2013-16 CAGR
12%
26%
5%
20%
50%
49%
Market Position
No.1 (18% share)
<2% market share
No.1 (12.7% share)
No.4 market share
new business
Major competitor
TCL, Hisense, Konka, Changhong
Samsung, LGE, Sony
Coship, Jiuzhou Elec, Cisco, Changhong
Technicolor, Pace, Motorola, Huawei, ZTE
BYDE
Haier, Changhong
Source: Nomura estimates
We estimate Skyworth to achieve 17% y-y revenue growth driven by 8% y-y revenue
growth of Skyworth’s China TV business, and 70% y-y sales growth in its white
appliances business. In addition, we expect Skyworth’s overseas TV business to turn
profitable in FY14F driven by scalability and higher LCD TV penetration.
Overall, we believe Skyworth’s GPM and OPM will be stable over the next three years,
driven by innovations in 4K2K and Smart TV.
36
Nomura | Skyworth
November 4, 2013
Fig. 70: Earnings forecast summary
(CNYmn)
1H14
NOM
2H14
NOM
FY12A
Turnover
19,532
24,671
19%
15%
COGS
(15,598) (19,950)
Gross Profit
3,934
4,721
OPEX
(3,257) (3,619)
Operating Incomes
677
1102
% chg y-o-y
11%
29%
Other revenue
152
237
Pretax income
875
1,387
% chg y-o-y
13%
20%
Taxes
(176)
(214)
Minority adjustments
(60)
(46)
Net income
638
1,127
% chg y-o-y
12%
21%
EPS (HKD, cents)
-Dilluted (HKD, cents)
23.3
41.2
Ratios (%)
Gross margin
20.1%
19.1%
SG&A / revenue
16.7%
14.7%
Operating Profit margin
3.5%
4.5%
Pretax income/revenue
4.5%
5.6%
Tax rates
-20.2% -15.4%
Net Income margin
3.3%
4.6%
FY13A
FY14F
(NOM)
28,137 37,824 44,203
16%
34%
17%
(22,181) (30,418) (35,548)
5,956
7,406
8,655
(4,677) (5,942) (6,876)
1279
1464
1779
15%
14%
21%
297
462
459
1,576
1,926
2,262
5%
22%
17%
(308)
(332)
(390)
(16)
(93)
(106)
1,252
1,501
1,766
7%
20%
18%
% chg y-o-y
FY15F
(NOM)
FY16F
(NOM)
53,800
62,324
22%
16%
(43,266) (50,121)
10,534
12,203
(8,403) (9,662)
2131
2541
20%
19%
404
470
2,669
3,145
18%
18%
(460)
(542)
(120)
(134)
2,089
2,469
18%
18%
0.46
0.54
0.64
0.76
0.89
21.2%
16.6%
4.5%
5.6%
19.5%
4.4%
19.6%
15.7%
3.9%
5.1%
17.2%
4.0%
19.6%
15.6%
4.0%
5.1%
17.2%
4.0%
19.6%
15.6%
4.0%
5.0%
17.2%
3.9%
19.6%
15.5%
4.1%
5.0%
17.2%
4.0%
Source: Company data, Bloomberg, Nomura estimates
We are slightly below FY14 consensus revenue and profit forecasts due to the not yet
clear impact from Internet/IT companies. We are bullish on FY15F due to our anticipation
of large demand for 4K2K and Skyworth’s market-leading position in the segment.
Fig. 71: Nomura vs. Consensus
FY2013
Actual
Revenue
FY2014
(NOM)
(CON)
FY2015
diff
(NOM)
(CON)
FY2016
diff
(NOM)
(CON)
diff
37,824
44,203
44,981
-2%
53,800
51,052
5%
62,324
58,098
7%
1,464
1,779
2,216
-20%
2,131
2,546
-16%
2,541
2,848
-11%
Pretax Profit
1,926
2,262
2,303
-2%
2,669
2,678
0%
3,145
3,288
-4%
Net Profit
1,501
1,766
1,802
-2%
2,089
2,112
-1%
2,469
2,594
-5%
0.54
0.64
0.64
-1%
0.76
0.75
1%
0.89
0.85
5%
OperatingProfit
EPS
Source: Company data, Bloomberg, Nomura estimates
37
Nomura | Skyworth
November 4, 2013
China TV business to grow 8%/17% in FY14F and FY15F
We expect Skyworth’s China TV business to grow 8%/17% in FY14F/15F driven by
3%/11% volume growth and 5%/5% ASP growth. We expect Skyworth to increase its
China TV market share by 0.6pp/0.8pp driven by market share in smart and 4K2K TV.
Fig. 72: Earnings forecasts of China TV business
(HKD mn)
Assumption
China TV Volumen (mn)
% chg yoy
Sales
% chg yoy
Gross Profit
% of sales
Operating profit
Y-Y
% of sales
KPI
Volume
% chg yoy
Market Share
ASP
% chg yoy
1H14
NOM
2H14
NOM
FY12
A
FY13
A
FY14F
(NOM)
FY15F
(NOM)
FY16F
(NOM)
27
6%
13,535
11%
2,883
21%
678
1%
5.0%
29
-3%
15,830
6%
3,254
21%
1,258
18%
7.9%
49
12%
21,920
15%
4,779
22%
1,510
17%
6.9%
55
13%
27,104
24%
5,665
21%
1,733
15%
6.4%
55
1%
29,365
8%
6,137
21%
1,936
12%
6.6%
58
4%
34,270
17%
7,162
21%
2,260
17%
6.6%
59
3%
38,445
12%
8,035
21%
2,535
12%
6.6%
4,221
8%
15.6%
3,207
3%
4,779
0%
16.5%
3,312
6%
7,024
10%
14.3%
3,121
5%
8,702
24%
15.8%
3,115
0%
9,000
3%
16.4%
3,263
5%
10,000
11%
17.2%
3,427
5%
11,000
10%
18.6%
3,495
2%
Source: Company data, Nomura estimates
Set-top box business to maintain ~13%/12% OP growth in
2014/15F
We expect Skyworth’s set-top business to achieve 13%/12% y-y revenue growth, driven
by the strong export sales as well as the emergence of smart TV box sales in China.
Skyworth has announced to list its set-top box business in A-share via asset swap. After
the completion of this transaction, Skyworth’s ownership in the set-top box business unit
will decline from 70% to 58%.
Fig. 73: Earnings forecast for Set-top box business
(HKD mn)
Sales
% chg yoy
Gross Profit
% of sales
Operating profit
Y-Y
% of sales
1H14
NOM
2,251
12%
502
22%
242
12%
10.7%
2H14
NOM
2,163
14%
482
22%
206
14%
9.5%
FY12
A
3,270
-12%
700
21%
347
-6%
10.6%
FY13
A
3,906
19%
871
22%
396
14%
10.1%
FY14F
(NOM)
4,414
13%
984
22%
447
13%
10.1%
FY15F
(NOM)
4,943
12%
1,102
22%
501
12%
10.1%
FY16F
(NOM)
5,487
11%
1,224
22%
556
11%
10.1%
Source: Company data, Nomura estimates
We note that there is a large difference in the valuation in A-shares (~47x of FY13F
EPS) and H-share (~6x of FY13F EPS) listed TV/set-top box vendor. Skyworth’s share
price may be positively affected because of the re-rating post the listing of its set-top box
business in the A-share market.
If Skyworth’s set-top business is traded at the same valuation as Coship’s, the largest
STB vendor supplying the domestic market in China (according to a statement released
by Coship), the market cap of the set-top-box business in A-share will become
USD2.3bn or equivalent to a whopping 172% of Skyworth’s H-share market cap, from
22% before the spin-off.
38
Nomura | Skyworth
November 4, 2013
Fig. 74: Market cap potential for Skyworth’s set-top-box business spin-off
(CNYm n)
Coship
Revenue
Gross Profit
OPEX
Operating Income
Net Profit
GPM
OPM
Before Spin-off
Market Cap (USDmn)
P/E (FY13 EPS)
Post Spin-off
Market Cap (USDmn)
P/E (FY13 EPS)
Skyw orth
2,084
545
382
164
193
26%
8%
Set-top box
3,476
775
423
352
299
22%
10%
Group
34,806
6,815
5,414
1,401
1,391
20%
4%
STB/Group
10%
11%
8%
25%
1,487
47.3x
287
5.9x
1,336
5.9x
22%
1,487
47.3x
2,302
47.3x
1,336
5.9x
172%
Market cap is calculated based on 29 October 2013 closing price
Source: Bloomberg, company data, Nomura estimates
• Experience in Digital China
We saw a similar phenomenon in Digital China in August 2013. Digital China spun-off its
IT software business and listed it on the A-share market at the IT software peers’
average P/E is of ~25x FY14F EPS (IT software peers’ average using consensus
estimates) when Digital China was valued at 7.7x FY14F EPS of HKD1.13. Post the
spin-off, we have observed a 200%+ increase in SZ Techno (DCITS’s A-share holding
company)’s price, which in turn helped to re-rate and drive up DC’s share price in Hshare by ~17% in the two months from August to October 2013. The chart below shows
the correlated trend in both companies’ market cap. We believe a similar trend may be
observed in the Skyworth spin-off.
295
33
9,751
% of DC
102%
30%
10
25%
8
20%
6
15%
4
10%
2
5%
0
0%
7-Aug
Source: Nomura research
24%
12
30-Oct
Corporate
35%
23-Oct
DCITS
14
16-Oct
9,576
9-Oct
HKDmn
8
2-Oct
(x)
1,241
25-Sep
HKDmn
Nomura
18-Sep
Source
Digital China
Digital China (LHS)
SZ Techno (LHS)
SZ Techno vs. DC Mkt Cap (RHS)
(HKDbn)
11-Sep
Market
Cap
4-Sep
Valuation
28-Aug
Net
Profit
21-Aug
FY14
Fig. 76: Correlation between Digital China and SZ Techno
(DCIT’s parent company)’s market cap
14-Aug
Fig. 75: Comparison of DCITS
Source: Bloomberg, Nomura research
Discussion on comparisons between Smart TV and Smart TV box
Although STB is a higher-margin business than TVs, it has seen rapid growth in the past
five years as the cheap complementary upgrade to enable digital and smart TVs.
However, over the long term, we believe the potential still resides with TVs as STBs are
easily replaceable with little consumer loyalty, especially when all-in-one TVs (with the
STB features imbedded) are introduced, they will ultimately erode the market for STBs.
39
Nomura | Skyworth
November 4, 2013
Overseas TV business to achieve breakeven
We forecast Skyworth to achieve 38%/27% revenue growth in its overseas TV business,
in FY14-15F, driven by volume growth of own-brand TV sales and higher LCD TV
penetration in emerging markets. We expect Skyworth’s overseas TV business to turn
profit in 2014F thanks to improved economies of scale.
Fig. 77: Earnings forecast of overseas TV business
(HKD mn)
Global TV volume
% chg yoy
Sales
% chg yoy
Gross Profit
% of sales
Operating profit
Y-Y
% of sales
KPI
Volume (k units)
% chg yoy
ASP (HKD)
% chg yoy
1H14
NOM
105
-5%
1,735
47%
80
5%
1
47%
0.1%
2H14
NOM
120
-1%
2,554
32%
0%
4
-122%
0.1%
FY12
A
243
-2%
1,728
58%
105
6%
(11)
na.
-0.6%
FY13
A
231
-5%
3,108
80%
131
4%
(15)
na.
-0.5%
FY14F
(NOM)
224
-3%
4,289
38%
202
5%
5
na.
0.1%
FY15F
(NOM)
221
-2%
5,426
27%
282
5%
39
673%
0.7%
FY16F
(NOM)
223
1%
6,267
16%
326
5%
51
32%
0.8%
1,378
23%
1,259
20%
1,888
18%
1,353
12%
2,227
21%
776
31%
2,721
22%
1,142
47%
3,266
20%
1,313
15%
3,755
15%
1,445
10%
4,131
10%
1,517
5%
Source: Company data, Nomura estimates
LCD module business
Skyworth’s LCD module business includes a handset LCD module business for external
smartphone OEM customers (eg, Samsung) and an internal TV module business.
We forecast LCD module revenue to maintain 50% CAGR revenue growth and ~10%
OPM in 2014F/2015F, driven by strong demand for handset LCD modules for Korean
smartphone customers, and internal TV LCD modules.
Fig. 78: Earnings forecast for LCD module business
(HKD mn)
Sales
% chg yoy
(External sales)
Gross Profit
% of sales
Operating profit
Y-Y
% of sales
1H14
NOM
942
50%
323
106
11%
104
50%
11.0%
2H14
NOM
1,292
50%
480
0%
119
50%
9.2%
FY12
A
905
11%
285
111
12%
123
1657%
13.6%
FY13 FY14F
A (NOM)
1,489
2,234
65%
50%
535
803
161
241
11%
11%
148
222
20%
50%
9.9%
9.9%
FY15F
(NOM)
3,350
50%
1,204
362
11%
333
50%
9.9%
FY16F
(NOM)
5,025
50%
1,806
543
11%
500
50%
9.9%
Source: Company data, Bloomberg, Nomura estimates
White-goods and other business
Skyworth’s white-goods business currently includes (1) refrigerator; (2) washing
machine; (3) Other electronics such as LED lighting and automotive electronics.
We believe Skyworth has its natural advantages in rolling out its white goods products
via its nationwide 20k distribution outlet and brand image. We estimate the segment’s
contribution to total revenue will increase to 15% in 2015F with ~6% earnings
contribution.
Skyworth’s refrigerator and washing machine business line turned profitable in FY13F for
the first time with 0.5% OPM, but other electronics remains in loss making status.
We expect its revenue to grow 70%/50% in FY14F/15F with further improvement in OPM
behind scalability.
40
Nomura | Skyworth
November 4, 2013
Fig. 79: White-goods and others
(HKD mn)
Sales
% chg yoy
% of group sales
Operating profit
Y-Y
% of sales
1H14
NOM
1,652
100%
8%
(22)
na.
-1.3%
2H14
NOM
3,598
53%
15%
22
na.
0.6%
FY12
A
934
153%
3%
(14)
na.
-1.5%
FY13
A
3,088
231%
8%
(26)
na.
-0.8%
FY14F
(NOM)
5,250
70%
12%
79
na.
1.5%
FY15F
(NOM)
7,874
50%
15%
118
50%
1.5%
FY16F
(NOM)
10,237
30%
16%
205
73%
2.0%
Source: Company data, Bloomberg, Nomura estimates
In addition, Skyworth also established a finance company (创维集团财务有限公司) in
September 2013, strategically partnering with seven major banks including China
Development Bank, ICBC, BOC and CCB. We think Skyworth can leverage this platform
to provide funding to its own supplier chain as well as retailers and consumers in order to
improve the efficiency of its cash usage.
Balance sheet analysis
Skyworth has a very liquid balance sheet, as cash, accounts receivable and inventory
combine to account for 82% of its assets. Despite its significant increase in AR and
inventory from FY11 to FY13, its AR turnover days have declined by 12 days (from 134)
and inventory days have remained stable at 53 days, indicating strong earnings quality
associated with top-line growth.
Its negative operating cash flow in FY13 is mainly the result of an aggressive sales
strategy and inventory building, which together translate into a high benchmark year in
FY13 in terms of sales volume. Thus we think the negative operating cash flow is only
temporary and is likely to reverse in FY14 as inventory build-up is digested and net
accounts receivable decrease.
Fig. 80: Skyworth asset structure
Cash & Equivalent
AR
100%
6%
16%
13%
7%
80%
11%
17%
60%
Inventory
Fig. 81: Skyworth operating cash-flow and free cash flow
PP&E
Others
8%
9%
10%
7%
11%
14%
14%
19%
8%
(HKDmn)
3000
Operating cash flow (LHS)
Capital Expenditure (LHS)
Free Cashflow (LHS)
Capex-sales (RHS)
3.5%
3.0%
2000
2.5%
1000
2.0%
0
40%
57%
48%
55%
57%
55%
20%
0%
1.5%
-1000
1.0%
-2000
13%
11%
14%
10%
8%
2009
2010
2011
2012
2013
Source: Company data, Nomura research
0.5%
0.0%
-3000
2009
2010
2011
2012
2013
2014F
Source: Company data, Nomura research
41
Nomura | Skyworth
November 4, 2013
Fig. 82: Skyworth working capital trend
(Days)
16,000
2009
2010
2011
Fig. 83: Skyworth operating turnover days
2012
2013
(Days)
2009
2010
2011
2012
2013
160
14,000
140
12,000
120
10,000
100
8,000
80
6,000
60
4,000
40
2,000
20
0
Inventory
AR
Source: Company data, Nomura research
AP
Working
Capital
0
Inventory Days
AR Days
AP Days
Cash Days
Source: Company data, Nomura research
42
Nomura | Skyworth
November 4, 2013
Share price analysis and valuation
Skyworth’s share price has traded between 5-10x times of 12-month forward P/E and
1 – 1.8x of 12-month forward P/B multiples in the past year. Due to the combination of
concerns around LeTV’s Super TV launch and weak monthly sales post the expiration of
the energy-saving subsidy, Skyworth’s price is currently trading near its three-year low,
as shown below.
Fig. 84: 12-month P/E bands
Fig. 85: 12-month P/B bands
(HKD)
12
(HKD)
12
15x
10
3x
10
8
4
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
0
Jan-09
0
Jul-08
2
Jan-08
2
1x
Jan-10
5x
Jul-09
4
2x
6
Jan-09
6
Jul-08
10x
Jan-08
8
Source: Bloomberg, Nomura research
Source: Bloomberg, Nomura research
Fig. 86: Share price vs. Monthly China TV shipment volume
Fig. 87: Share price vs. Monthly China TV ASP growth trends
1,200
6
1,000
5
800
4
Source: Bloomberg, Nomura research
Sep-13
May-13
Jan-13
Sep-12
Jan-12
May-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
0
Sep-09
0
May-09
200
Jan-09
2
15%
10%
3
5%
2
0%
1
-5%
0
-10%
Sep-13
400
20%
Jun-13
600
4
30%
25%
Mar-13
6
7
('000 units)
ASP growth y-o-y (RHS)
Dec-12
8
1,400
Series5
Sep-12
10
(HKD)
Jun-12
('000 units)
Mar-12
12
Price (LHS)
Dec-11
China Volume (RHS)
Sep-11
(HKD)
Source: Bloomberg, Nomura research
The largest share price hike (~16x appreciation) that took place from January 2009 to
March 2010, was during the period when flat-panel TV went into a fast growth cycle
(50% to 99% penetration) and completely replaced CRT TV, and the “countryside
subsidy” and “old-for-new subsidy” were both announced. Similarly, we are now at a time
when smart TV is heading into an up-cycle, replacing “feature-TV”, 4K2K TV is replacing
HD TV, and “energy-leading subsidy” is expected to be announced soon.
43
Nomura | Skyworth
November 4, 2013
Fig. 88: Skyworth: Share price vs. news flow
(HKD)
HKD900mn
Equity Offering
12
SSDT asset
swap
JV with LGD
(10% stake)
10
Growth
slowing,
severe
inventory
build-up on
World Cup
demand misjudgement
Inside scandal
8
Mr. Zhang Xuebin as
new Chairman
6
LeTV
launches
Super TV
Mr. Zhang
Xuebin left
LCD TV
penetration
from 50%-99%
4
Subsidy
expired
2
Oct-13
Jul-13
Apr-13
Oct-12
Jan-13
Jul-12
Mr. Wong returns
to Skyworth
Apr-12
Jan-12
Jul-11
Smart TV
launches
Oct-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
0
Jan-06
3D TV
launches
Source: Bloomberg, Nomura research
Fig. 89: Share price and subsidy-related news
(HKD)
12
10
Official
announcement
Industry wide
inventory build-up
8
LCD TV
penetration
from 50%-99%
6
Official
announcement
4
Official
announcement
?
Energy-saving
subsidy
Old for new subsidy
2
Country side subsidy
Oct-13
Jul-13
Apr-13
Oct-12
Jan-13
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Oct-08
Jan-09
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
0
Jan-06
Energy-saving leader
subsidy coming soon
Source: Bloomberg, Nomura research
44
Nomura | Skyworth
November 4, 2013
Fig. 90: Peer comparison valuations
Code
Company
Trading
Price
Target
M/Caps
Curncy
29-Oct
Price
USDmn
Nomura
P/BV (x)
P/E (x)
ROE Dividend
Rating FY13F FY14F FY13F FY14F FY13F
Yield (%)
EPS Growth
FY13F
HK/China Smart TV
1169 HK
Haier Elec
HKD
15.6
-
5,153
Not Rated
15.5
13.0
4.2
3.3
30%
751 HK
Skyworth
HKD
3.6
6.0
1,317
BUY
5.7
4.7
0.9
0.8
17%
1070 HK
TCL Multimedia
0.6
12%
5.5
18%
-31%
HKD
3.2
-
556
Not Rated
8.5
6.0
0.8
0.7
10%
6.59
600060 CH Hisense
CNY
11.2
-
2,370
Not Rated
7.7
6.7
1.4
1.5
20%
1.09
21%
300104 CH LeTV
CNY
42.0
-
5,407
Not Rated 114.6
80.4
17.0
14.5
18%
0.13
41%
600839 CH Changhong
CNY
3.0
-
2,190
Not Rated
26.3
22.2
0.9
0.9
7%
0.00
38%
002052 CH Coship
CNY
12.6
-
1,475
Not Rated
37.6
28.6
6.8
6.0
36%
0.00
na
600637 CH BesTV
CNY
38.8
-
7,130
Not Rated
60.4
44.2
11.5
9.2
21%
0.19
36%
903 HK
HKD
1.6
-
478
Not Rated
na
8.2
na
na
na
5.9
na
TPV
000156 CH Wasu
CNY
24.9
-
4,520
Not Rated
99.6
81.5
8.4
6.0
15%
0.52
65%
700 HK
Tencent
HKD
418.6
-
101,980
Not Rated
37.6
29.5
11.1
8.3
34%
0.18
26%
YOKU US
Youku Tudou
USD
27.9
-
4,619
Not Rated
n/a
n/a
n/a
n/a
n/a
0.00
na
31.9
22.2
5.5
4.6
0.2
0.4
26%
Median
MXCN
MSCI China
HSCEI
H-Share index
61.2
10,471
Source: Bloomberg estimates for NR stocks, Nomura estimates for Skyworth
45
Nomura | Skyworth
November 4, 2013
Company background
Skyworth was established by Mr Wong Wangsang in 1988, and listed on the Hong Kong
stock exchange in 2000. As of end FY13, Mr Wong and his wife Ms Lin still owned
34.53% of Skyworth’s shares.
Fig. 91: Major corporate events
Date
4/7/2000
Event
IPO in HK
11/1/2004
Trading suspended
7/13/2006
Legal issue
4/1/2007
Management Change
Amount
HKD1bn
Comment
HKD2.07 per share
9/19/2007
Divestiture
CNY21mn
Trading suspended for 14 months when Mr. Wong Wangsang was
investigated for insider trading
Mr. Wong Wangsang was found guilty and sentenced to 6 years in jail by HK
court
Mr. Zhang Xuebin was appointed as Chairman to replace Mr. Wong
Wangsang
Sell 11.7% stake of Set-top box business unit to its management
12/31/2007
6/18/2008
Divestiture
Divestiture
CNY118mn
CNY1
Sell 16% stake of Set-top box business unit to its management
Skyworth Mobile Communication Shenzhen 80% sold to founder
100mn shares at HKD9 per share
7/4/2009
Legal issue
4/12/2010
Equity offering
HKD900mn
Mr. Wong Wangsang was bailed out of jail
2/15/2012
5/22/2012
Management Change
JV
BEF133mn
8/9/2012
4/1/2013
Management Change
Management Change
4/23/2013
Divestiture
9/9/2013
Management Change
CNY3.4bn
Yang Dongwen is apointed as CEO
Setup with TV panel JV with LG Display in Guangzhou (Skyworth owns 10%
of JV)
Mr. Wong WangSang is appointed as Skyworth's advisor
Chairman Mr. Zhang Xuebin resigned, Ms. Lin Weiping is appoointed as his
sucessor.
List set-top box business unit in A-share via asset swap
CFO Ferderick Leung resigned, effective on 12/31/2013
Source: Company disclosure, Nomura research
Skyworth management changes
From 2006 to 2013, Skyworth was managed by a professional management team (Mr
Zhang Xuebin, Mr Yang Dengwen, Mr Ferderick Leung, etc.), after its founder Mr Wong
WangSang was sentenced to six years in jail by a Hong Kong court following an insider
trading scandal investigation. During Mr Wong’s absence, his wife Mrs Lin Weiping
remained an executive director of the company.
In 2013, Chairman Zhang Xuebin and CFO Ferderick resigned their positions, and Mrs.
Lin was appointed as the group’s chairman. We think this reflects that the founding
family is gradually becoming more involved with Skyworth’s daily operation again.
We have noticed some negative concerns from investors on the return of Mr Wong’s
influence on the company. Based on our research, we believe Mr Wong is helping
Skyworth group in accelerating its diversification strategy, which includes Skyworth’s
finance service license, and the approval Skyworth obtained in 2012 to construct a
semiconductor building. We believe his contribution to Skyworth is positive for minority
shareholders.
Senior current management profile
Ms Lin Weiping (Age 55): Ms Lin Weiping, Chairman (from 1 April 2013), spouse of Mr
Wong Wangsang (Stephen), founder of Skyworth group. Ms Lin joined the Group in
1993. Ms Lin was the deputy manager of the purchasing department and administration
manager for Skyworth in Hong Kong as well as head of the human resources
department of the Group.
Mr Yang Dongwen CEO (Age 48): Mr Wang joined Skyworth in May 1998 as the
financial controller, and rejoined the group in September 2005 as the president of the
46
Nomura | Skyworth
November 4, 2013
China TV business unit of the Group. Mr Yang was appointed as CEO in 15 February
2012.
Fig. 92: Skyworth corporate structure
Wong Wangsang &
Weiping Lin
Public
shareholder
Other Management team
34.53%
0.8%
64.67%
Skyworth Digital Holdings
(751 HK)
100%
Skyworth Holdings Ltd
100%
100%
Skyworth
Investment
(Holdings)
100%
Skyworth TV
Holdings
Shenzhen Skyworth
Jingmi Technology
100%
Xin Skyworth Home
Appliance (Shenzhen)
100%
Skyworth
Enterprises
100%
100%
Skyworth
Overseas
Development
Skyworth Automobile
Electronics Company
Limited
100%
49% Skyworth Electronics
100%
Skyworth LCD
Technology Limited
Shenzhen
Chuangwei-RGB
Electronics Co.
51%
49% Guangzhou Skyworth
Flat Display
Technology
70%
Shenzhen Skyworth
Digital Technology
(SSDT)
(Inner Mongolia)
Skyworth Flat Display
Technology
(Shenzhen)
100%
51%
Incorporated in Bermuda
Incorporated in Samoa
Incorporated in BVI
Incorporated in Hong Kong
Incorporated in PRC
Source: Company data, Nomura research
47
Lenovo Group
0992.HK 992 HK
EQ U I T Y R E S E A R C H
PC HARDWARE
Smart TV as part of the PC+ strategy November 4, 2013
Rating
Remains
Accumulate for PC+ driven
earnings expansion
Action: Maintain Buy at HKD9.8 for PC+ strategy
We maintain our Buy recommendation on Lenovo at a TP of HKD9.8 for
its PC+ strategy. We think Smart TV is an important part of Lenovo’s PC+
strategy. By providing a unified user experience and cloud services over
four screens (PC, tablet, smartphone, TV), we believe Lenovo can
increase customer loyalty toward its products and improve the total market
share in the global smart connected devices market.
Revenue (mn)
FY13
FY14F
FY15F
Actual
Old
New
Old
New
37,171
40,493
40,493
752
752
917
917
Normalised net profit (mn)
635
752
752
917
917
6.07c
7.19c
7.19c
8.77c
8.77c
FD norm. EPS growth (%)
32.7
18.5
18.5
21.9
21.9
FD normalised P/E (x)
17.2
N/A
14.5
N/A
11.9
7.4
N/A
6.8
N/A
5.2
Price/book (x)
3.8
N/A
3.3
N/A
2.8
Dividend yield (%)
2.3
N/A
2.7
N/A
3.3
24.2
24.6
24.6
25.7
25.7
net cash
net cash
net cash
net cash
net cash
Source: Company data, Nomura estimates
Key company data: See page 2 for company data and detailed price/index chart.
+21.4%
David Hao - NIHK
david.hao@nomura.com
+852 2252 2153
37,171
Net debt/equity (%)
Potential upside
Leping Huang, PhD - NIHK
leping.huang@nomura.com
+852 2252 1598
635
ROE (%)
HKD 8.07
China Technology
33,873
EV/EBITDA (x)
Closing price
October 29, 2013
Research analysts
Reported net profit (mn)
FD normalised EPS
HKD 9.80
Nomura vs consensus
We are in-line with consensus
on FY14F earnings and 4%
above on FY15F earnings.
Lenovo’s weaknesses in Smart TV business
Compared with other new entrants such as LeTV, BesTV, and Wasu, we
think Lenovo lags behind in its video content offering. We note Hony
Capital, Legend Group (Lenovo’s parent company)’s private equity unit,
and Suning have invested USD420mn to acquire 30%/44% stakes in
PPTV, one of the largest IPTV service providers in China. If Lenovo can
leverage PPTV’s content resources and distribution capability from this
investment, this may greatly improve Lenovo’s competitiveness in the
Smart TV market, in our view.
Currency (USD)
Target price
Remains
Anchor themes
We believe Smart TVs are the
next major trend in China's
technology sector after China
smartphones. We think TV
hardware vendors are the
hidden gems in the whole
Smart TV eco-system.
Lenovo’s strengths in the Smart TV business
We think Lenovo has the following edges in Smart TV: 1) Smart device
related software assets such as cloud-based storage and security service,
and seamless connectivity between multiple devices; 2) solid distribution
channel and brand awareness in China and globally; and 3) solid financial
strength that Lenovo’s PC business provides the resources essential for
the company to strike other competitors in the smart TV arena.
31 Mar
Buy
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | Lenovo Group
November 4, 2013
Key data on Lenovo Group
Income statement (USDmn) Year-end 31 Mar
Revenue
Cost of goods sold
Gross profit
SG&A
Employee share expense
Operating profit
EBITDA
Depreciation
Amortisation
EBIT
Net interest expense
Associates & JCEs
Other income
Earnings before tax
Income tax
Net profit after tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
Transfer to reserves
Relative performance chart (one year)
FY12
29,574
-26,128
3,446
-2,863
FY13
33,873
-29,799
4,074
-3,294
FY14F
37,171
-32,035
5,136
-4,257
FY15F
40,493
-34,722
5,771
-4,682
583
780
879
1,088
948
-135
-230
583
3
1,043
-150
-113
780
16
1,231
-218
-133
879
-9
1,503
-271
-144
1,088
-9
-4
582
-107
475
-2
5
801
-170
631
4
63
933
-197
736
16
63
1,143
-242
901
16
0
473
0
473
-183
290
0
635
0
635
-248
387
0
752
0
752
-293
459
0
917
0
917
-358
560
Valuation and ratio analysis
Reported P/E (x)
Normalised P/E (x)
FD normalised P/E (x)
FD normalised P/E at price target (x)
Dividend yield (%)
Price/cashflow (x)
Price/book (x)
EV/EBITDA (x)
EV/EBIT (x)
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin (%)
Effective tax rate (%)
Dividend payout (%)
Capex to sales (%)
Capex to depreciation (x)
ROE (%)
ROA (pretax %)
22.3
22.3
22.8
27.6
1.7
5.6
4.4
7.4
12.1
11.7
3.2
2.0
1.6
18.4
38.7
1.1
2.4
22.3
5.9
16.9
16.9
17.2
20.8
2.3
544.8
3.8
7.4
9.9
12.0
3.1
2.3
1.9
21.2
39.0
1.3
3.0
24.2
6.1
14.3
14.3
14.5
17.6
2.7
na
3.3
6.8
9.6
13.8
3.3
2.4
2.0
21.1
39.0
1.0
1.7
24.6
6.2
11.7
11.7
11.9
14.4
3.3
5.6
2.8
5.2
7.2
14.3
3.7
2.7
2.3
21.1
39.0
1.2
1.8
25.7
7.4
Growth (%)
Revenue
EBITDA
EBIT
Normalised EPS
Normalised FDEPS
37.0
40.6
27.4
64.7
70.0
14.5
10.0
33.8
31.9
32.7
9.7
18.0
12.7
18.5
18.5
8.9
22.2
23.8
21.9
21.9
4.67c
4.67c
4.57c
0.24
0.02
6.16c
6.16c
6.07c
0.27
0.02
7.30c
7.30c
7.19c
0.32
0.03
8.90c
8.90c
8.77c
0.37
0.03
Per share
Reported EPS (USD)
Norm EPS (USD)
Fully diluted norm EPS (USD)
Book value per share (USD)
DPS (USD)
Source: ThomsonReuters, Nomura research
(%)
1M
3M 12M
Absolute (HKD)
-2.3 12.9 29.1
Absolute (USD)
-2.3 12.9 29.1
Relative to MSCI China
Market cap (USDmn)
Estimated free float (%)
52-week range (HKD)
3-mth avg daily turnover
(USDmn)
Major shareholders (%)
LEGEND HOLDINGS LTD
RIGHT LANE LTD
-1.2
5.1 24.5
10,731.7
52.6
9.07/6.13
34.59
25.9
7.8
Source: Thomson Reuters, Nomura research
Notes
Source: Company data, Nomura estimates
49
Nomura | Lenovo Group
November 4, 2013
Cashflow (USDmn) Year-end 31 Mar
EBITDA
Change in working capital
Other operating cashflow
Cashflow from operations
Capital expenditure
Free cashflow
Reduction in investments
Net acquisitions
Reduction in other LT assets
Addition in other LT liabilities
Adjustments
Cashflow after investing acts
Cash dividends
Equity issue
Debt issue
Convertible debt issue
Others
Cashflow from financial acts
Net cashflow
Beginning cash
Ending cash
Ending net debt
FY12
948
1,348
-356
1,940
-329
1,611
FY13
1,043
-965
-58
20
-446
-426
FY14F
1,231
-1,479
63
-185
-360
-545
FY15F
1,503
795
-346
1,952
-500
1,452
-385
-4
0
-300
-106
1,120
-115
0
-212
196
-234
-195
0
0
139
-406
-248
0
0
1,152
-293
0
-242
11
-316
804
2,954
3,758
-3,695
125
-70
-304
3,758
3,454
-2,975
0
-248
-654
3,454
2,800
-2,321
-535
616
2,800
3,416
-2,937
FY12
3,758
477
2,994
1,218
3,373
11,820
0
496
FY13
3,454
218
3,458
1,965
3,295
12,390
0
664
FY14F
2,800
218
4,641
1,602
3,295
12,555
0
934
FY15F
3,416
218
4,182
1,666
3,295
12,777
0
1,163
3,091
453
15,860
63
4,178
7,569
11,810
0
3,326
502
16,882
176
3,724
8,191
12,091
303
3,535
502
17,527
176
3,064
8,191
11,431
303
3,792
502
18,235
176
3,055
8,601
11,831
303
1,603
13,413
39
1,807
14,201
-153
2,653
14,387
-153
2,401
14,535
-153
33
2,376
34
2,800
33
3,259
33
3,818
-1
2,408
15,860
2,834
16,882
3,292
17,527
3,852
18,234
1.00
na
1.02
na
1.10
97.6
1.08
120.8
net cash
net cash
net cash
net cash
net cash
net cash
net cash
net cash
29.4
14.2
45.2
-1.6
34.8
19.5
48.4
5.9
39.8
20.3
38.7
21.4
39.8
17.2
32.2
24.8
Notes
Source: Company data, Nomura estimates
Balance sheet (USDmn) As at 31 Mar
Cash & equivalents
Marketable securities
Accounts receivable
Inventories
Other current assets
Total current assets
LT investments
Fixed assets
Goodwill
Other intangible assets
Other LT assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible debt
Other LT liabilities
Total liabilities
Minority interest
Preferred stock
Common stock
Retained earnings
Proposed dividends
Other equity and reserves
Total shareholders' equity
Total equity & liabilities
Liquidity (x)
Current ratio
Interest cover
Leverage
Net debt/EBITDA (x)
Net debt/equity (%)
Activity (days)
Days receivable
Days inventory
Days payable
Cash cycle
Notes
Source: Company data, Nomura estimates
50
Nomura | Lenovo Group
November 4, 2013
Lenovo’s Smart TV strategy
Smart TV is the final piece to complete PC+
Smart TV is the final piece to complete Lenovo’s PC+ strategy. The company launched
its K series (flagship) and S series smart TVs in 2012 as its first attempt to penetrate the
market using Wistron and Compal as OEMs. Due to its prohibitive pricing (CNY6-15k)
compared to similar products, it failed to generate meaningful sales.
Lenovo announced its A21 series smart TVs in June 2013 with a similar pricing strategy to
LeTV. A21 series features 32-inch and 42-inch models priced at CNY1.8k and CNY2.8k.
Lenovo’s Smart TV partners: TPV, Sharp, Gome, 360Buy, BesTV
Lenovo partners with TPV and Sharp for its A21 series smart TV, with Gome and
360Buy for offline/online distribution, and with BesTV (600637 CH, Not rated) in
providing a CNY399/year video-on-demand subscription. Lenovo management targets to
sell 1mn smart TVs through 360Buy channels alone by 2015.
Lenovo is the third-largest smart-connected device vendor
globally
Lenovo is one of the few companies in the world that has products positioned throughout
all smart-connected-device value chains. In our view, it is capable of creating compatible
products that interact across devices, platforms and ecosystem with a unified user
experience.
Over the past few years, we have observed the emergence of smartphones and tablets,
both of which have disrupted the traditional handset and PC markets by redrawing the
boundaries of functionality, mobility and connectivity.
In times of multi-device convergence, hardware vendors that do not focus on the
ecosystem and multi-device connectivity are likely to face increasingly more pressure, in
our view, since it is becoming more difficult for consumers to differentiate based on
hardware and user experience.
Based on IDC’s 2Q13 data, Lenovo is ranked third in the world in smart-connected
devices, with 7.2% market share, behind Samsung and Apple. There are several
differentiating benefits for this kind of horizontal integration:
Fig. 93: Lenovo’s product positioning vs. peers, 2013
Feature phone
Smartphone
Tablet
Laptop
Desktop
Storage
Lenovo
Apple
Samsung
Huawei
ZTE
Dell
HP
Asus
Acer
TV
Strong presence
Material presence
Some presence
Source: Nomura research
• Interface/user experience harmonization: Lenovo is able to harmonize interface and
device-connectivity across different platforms and products to ensure the best possible
user experience
• Cross-selling: Consumers are likely to purchase other Lenovo products after the initial
purchase. As noted in Nomura Global Telecommunication Equipment analyst Stuart
Jeffrey’s report (Apple, Inc. - Initiating at Neutral: The Pie Is Almost Baked): “once a
consumer buys one Apple product, there seems to be a gravitational force that
convinces them to buy another – ie, Mac sales got a boost from the iPod and the
iPhone, while many iPhone users were first to buy an iPad.”
51
Nomura | Lenovo Group
November 4, 2013
• Brand loyalty: We believe Lenovo is in the ranks of Apple and Samsung as one of the
few companies that appears well positioned to offer products in every smart-connected
device category. That said, Lenovo is in relatively good shape compared to traditional
PC vendors such as HP and Dell; as we estimate the PC market to shrink, Lenovo is
capable of penetrating into new growth areas (smartphones and tablets) as a way to
come back and fortify its stance in the PC market.
Fig. 94: Sales breakdown in 1QFY14
Fig. 95: MIDH sales trend and growth rates
MIDH includes smartphones and Smart TVs
Other
9%
MIDH
14%
(USD mn)
MIDH (LHS)
1,400
MIDH % y-y (RHS)
160%
1,200
140%
1,000
120%
100%
800
80%
600
60%
400
40%
200
Source: Company data, Nomura research
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
PC
77%
20%
Jun-11
0
0%
Source: Company data, Nomura research
Fig. 96: Lenovo’s A21 series vs. peers (as of October 2013)
Brand
Model
Hardware Spec
Screen Size (inch)
Resolution
Processor
Operating System
Features
Retail price (CNY)
Sales/Marketing
strategy
in USD
Sales Channel
Logistics/ after
service
Content Provider
License
Industry Partner
TV OEM
Panel
Lenovo
32A21
Lenovo
42A21
LeTV
X40
Xiaomi
Xiaomi TV
Skyworth
Coocaa TV
32
1920 x 1080
Dual-core
42
1920 x 1080
Dual-core
40
1920 x 1080
Dual-core
47
1920 x 1080
Quad-core
42
1920 x 1080
Hexa-core
Android 4.0
3D, Smart TV
Android 4.0
3D, Smart TV
LeTV UI
3D, Smart TV
MIUI TV
3D, Smart TV
KuUI (Tianci & Ali)
3D, Smart TV
1,799
2,799
1,999
2,999
2,999
293
455
325
488
488
e-channel and retail
e-channel and retail
e-channel
e-channel
e-channel and retail
In-house/outsource
In-house/outsource
Outsource
Outsource
In-house
Lenovo JV
SMG
TPV
Sharp
Lenovo JV
SMG
TPV
Sharp
CNTV, Proprietary
CNTV
Hon Hai/TPV
Sharp
CNTV
CNTV
Wistron
Samsung, LGD
SMC, Voole, others
SMC
Skyworth
LGD
Source: Nomura research
52
TCL Multimedia
1070.HK 1070.HK
EQUITY RESEARCH
Technology
PN
Strike with TV+ and IMAX November 4, 2013
4K2K and Smart TV to drive
ASP expansion
NOT R AT ED
TCL's Smart and 4K2K TV strategy
TCL’s Smart TV business mainly includes: (1) TV+ series Smart TV jointly
developed together with Baidu/iQiYi, (2) TCL’s own Smart TV user interface
software (MagicCube); and (3) TCL’s premium Internet-based home theatre
solution jointly developed by IMAX. TCL believes the rising mix of Smart TV
should help TCL to achieve ASP and margin expansion in long term.
Company description
TCL Multimedia Technology
Holdings Limited manufactures
television sets, trades television
related components, and
manufactures audio visual
products. The company was
the third-largest LCD TV
manufacturer globally behind
Samsung and LG as of 2Q13,
according to DisplaySearch.
Closing price
TV+: TCL’s Smart TV business model
In September 2013, TCL launched a new 4K2K Smart TV series called TV+
together with Baidu/iQIYI, with positive market feedback including shipment
of 22k units in October. Unlike other TV vendors, TCL adopted a new
marketing strategy for its 48-inch TV+ at a uniform price of CNY4,567 for
both online and offline channels.
Research analysts
IMAX cooperation: first 4K2K IPTV premium content delivery
TCL Multimedia announced on 30 October a joint venture with IMAX to
provide premium high-end private theatre systems and also high quality, upto-date content consisting of Chinese and foreign films, TV channels, music
and gaming. This is one of the first trials to deliver 4K2K content directly
from the source to end users.
China Technology
Leping Huang, PhD - NIHK
Leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
David.hao@nomura.com
+852 2252 2153
4K2K and Smart TV shipment target
TCL’s Smart TV penetration rate reached 30% by September 2013, and
TCL management targets to increase this to more than 50% by year-end. In
addition, TCL’s 4K2K penetration rate reached 10% in tier 1-2 cities during
the National Day, exceeding the company’s expectations. TCL expects
4K2K penetration to reach 5% in 2H13 and 8% in 2014, positive for TCL’s
ASP trend.
Currency: HKD
FY09
FY10
FY11
FY12
30,343
26,949
32,932
39,685
Ope profits (mn)
685
-725
463
1,039
EPS
0.39
-.92
0.42
0.69
P/E (x)
21.7
n/a
5.9
6.2
EV/EBITDA (x)
10.2
n/a
12
8
P/B (x)
2.4
1.1
0.8
1.2
Dividend yield (%)
1.6
n/a
7.4
6.5
Sales (mn)
Source: Company data
Key company data: See page 2 for company data, and detailed price/index chart.
HKD3.16
October 29, 2013
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | TCL Multimedia
November 4, 2013
TCL’s unique advantage in vertical
integration
TCL Multimedia is the TV OEM arm of TCL Corp. (000100 CH, NR). By cooperating with
TCL group's internal panel arm CSOT (panel), mobile phone arm TCL Com (2618 HK,
Neutral) audio device arm Tonly (1249 HK, Not rated), TCL multimedia targets to
differentiate itself from other TV OEMs in 1) faster time-to-market via tight integration of
the TV value chain; and 2) seamless integration between TVs and smartphones.
Fig. 97: TCL’s vertical integration
TCL Group
China Star Optoelectronics
Technology (CSOT)
8.5 Generation LCD Panel
Production volume: 120,000 glass
pieces per month in Dec. 2012
Yield rate: 95.9%
TCL Multimedia
TCL Optoelectronics
Technology
TV Manufacturing
End user
Distribution & Service
LCD Module
TCL Optoelectronics
Technology
TCL Coretronic
Huizhou Bri-King Optronics
LED Backlight Modules
Source: Nomura research
Fig. 98: Earnings summary
(HKD mn)
Turnover
% chg yoy
COGS
Gross Profit
OPEX
EBIT
% chg yoy
Pretax income
% chg yoy
Taxes
Net income
% chg yoy
Gross margin
SG&A / revenue
Operating Profit margin
Pretax income/revenue
Tax rates
Net Income margin
Volume ('000 units)
Global TV
China LCD
Overseas LCD
Fig. 99: Segment summary
3Q12
A
10,865
16%
(9,058)
1,807
(1,641)
166
1409%
217
-30%
(14)
201
-23%
16.6%
15.1%
1.5%
2.0%
-6.5%
1.8%
4Q12
A
12,440
19%
(10,444)
1,996
(1,853)
143
-33%
297
148%
(19)
276
345%
16.0%
14.9%
1.1%
2.4%
-6.4%
2.2%
1Q13
A
10,260
24%
(8,597)
1,663
(1,458)
205
11%
306
-13%
(96)
196
-37%
16.2%
14.2%
2.0%
3.0%
-31.4%
1.9%
2Q13
A
8,693
8%
(7,400)
1,293
(1,439)
(146)
-228%
21
-84%
59
-53%
14.9%
16.6%
-1.7%
0.2%
0.0%
0.7%
2011
(A)
32,932
22%
(27,643)
5,289
(5,009)
280
-129%
613
-173%
(151)
453
-146%
16.1%
15.2%
0.9%
1.9%
-24.6%
1.4%
2012
(A)
39,685
21%
(33,107)
6,578
(5,933)
645
130%
994
62%
(73)
911
101%
16.6%
15.0%
1.6%
2.5%
-7.3%
2.3%
4,758
4,372
1,738
5,050
4,678
1,793
4,255
3,912
1,378
4,232
3,906
1,899
15,036
10,860
4,127
17,556
15,526
6,669
Source: Company data, Nomura research
(HKD mn)
Turnover
y-y
Segment turnover
PRC TV
Overseas TV
Tonly (AV)
Others
Segment GP
PRC TV
Overseas TV
Tonly (AV)
Others
Segment OP
PRC TV
Overseas TV
Tonly (AV)
Others
OPM
PRC TV
Overseas TV
Tonly (AV)
Others
3Q12
A
10,865
16%
4Q12
A
12,440
19%
1Q13
A
10,260
24%
2Q13
A
8,693
8%
2011
(A)
32,932
22%
2012
(A)
39,685
21%
6,601
2,874
969
421
7,904
3,282
1,170
84
6,683
2,561
876
140
5,479
2,985
229
19,615
8,743
3,880
694
23,146
11,939
3,574
1,025
1,348
271
127
61
1,553
223
134
87
1,326
217
117
4
1,035
225
4,040
849
380
20
4,916
1,112
404
146
33
140
44
33
49
289
7
(4)
66
363
(53)
46
-
76
(60)
(16)
527
(1)
102
13
903
159
73
87
2%
2%
3%
12%
4%
0%
0%
79%
5%
-2%
5%
0%
1%
-2%
2.7%
0.0%
2.6%
1.8%
3.9%
1.3%
2.0%
8.5%
-7%
Source: Company data, Nomura research
54
Nomura | TCL Multimedia
November 4, 2013
TCL’s Smart TV strategy
TCLM’s Internet TV + Smart TV penetration reached 78% in December 2012, the last
month TCLM reported Internet TV numbers. Starting in January 2013, Smart TV
penetration continued to show growth, peaking at 32% in June (last month of subsidy)
from 21% in January. Management expects it to reach more than 50% by year-end.
Fig. 100: TCL's Smart TV strategy
Source: TCL Multimedia
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
0%
Jan-13
5%
Source: Company data, Nomura research
Source: Company data, Nomura research
Fig. 103: TCL TV+
Fig. 104: TCLM Smart TV controller
Source: Company presentation, Nomura research
Source: Company presentation, Nomura research
Dec-12
10%
Sep-12
15%
Jun-12
20%
Mar-12
25%
Dec-11
30%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Sep-11
35%
Jun-11
Fig. 102: TCLM Internet TV + Smart TV penetration
Mar-11
Fig. 101: TCLM Smart TV penetration
55
Nomura | TCL Multimedia
November 4, 2013
Operating performance
After spinning off Tony Holdings, its AV unit, TCL Multimedia will mainly have two
business units: China TV and overseas TV, as shown below.
Fig. 105: TCL Corp revenue breakdown by segments (1H13)
Fig. 106: TCL Multimedia GP breakdown by segments (1H13)
Others
2%
Overseas
TV
16%
Overseas
TV
31%
Others
1%
PRC TV
67%
Source: Company data, Nomura research
PRC TV
83%
Source: Company data, Nomura research
According to DisplaySearch, TCLM is the second-largest TV OEM in China in terms of
shipment volume, and the second-largest TV OEM in terms of revenue in 2Q13.
Samsung,
4%
(USDmn)
1,400
Skyworth,
16%
2Q12
3Q12
4Q12
1Q13
2Q13
Haier
Others,
12%
Fig. 108: Comparison of major TV OEM LCD TV sales in
China
Changhong
Fig. 107: Comparison of major TV OEM LCD TV shipment
volume in China (2Q13)
1,200
1,000
Sony, 4%
800
Sharp, 2%
Hisense,
15%
Haier, 6%
600
400
Source: DisplaySearch, Nomura research
Konka
Konka, 12%
TCL
TCL, 16%
Hisense
0
Skyworth
200
Changhong,
12%
Source: DisplaySearch, Nomura research
TCLM has a large presence in the overseas TV market, especially in Europe, APAC-ex
China and MEA. TCLM established its overseas business mainly through its acquisition
of Thomson Electronics in 2003.
56
Nomura | TCL Multimedia
November 4, 2013
Fig. 109: TCLM TV shipment volume by region and market
share (2012)
18%
14%
GPM (RHS)
14%
OPM (RHS)
12%
12,000
12%
10%
8%
10%
10,000
8%
8,000
6%
4%
6%
4%
2%
Revenue (LHS)
(HKD mn)
14,000
15.9%
16%
Fig. 110: TCLM overseas business performance
1.8%
2.1%
0.3%
0.9%
1.4%
Europe
China APAC-ex
China
LA
MEA
Source: Company data, DisplaySearch Nomura research
2%
4,000
0%
-2%
2,000
0%
NA
6,000
-4%
0
-6%
2010
2011
2012
Source: Company data, DisplaySearch, Nomura research
57
Nomura | TCL Multimedia
November 4, 2013
China Star Optoelectronics Technology
China Star Optoelectronics Technology (CSOT) is TCL Corp’s TV panel arm. By end2012, CSOT had an 8.5G LCD panel line (from Oct 2011) with a monthly production
capacity of 120k glass substrate. The project is located in Guangming New District Hitech Zone, Shenzhen with a total investment of CNY24.5bn. The company plans to build
the second line focusing on both small-size AMOLED and large-size LCD panels.
CSOT was founded on 16 November 2009 by TCL Corp, SIHC (Shenzhen Investment
Holding Corporation) and Samsung, with an ownership allocation of 55%, 30% and 15%,
respectively. On 3 May 2013, SIHC transferred its share to TCL Corp. for CNY3.182bn.
Post the transaction, the remaining two shareholders, TCL Corp and Samsung, have
85% and 15% of the shares, respectively.
Fig. 111: CSOT development milestone and honours
Source: CSOT
58
Nomura | TCL Multimedia
November 4, 2013
Company background
Fig. 112: TCL corporate structure
Huizhou
Investment
Holdings
Mr. Li Dongsheng
9.8%
China Asset
Management
6.04%
E Fund
Management
2.1%
Others
2.04%
80.02%
TCL Corp
(00100 CH)
Mr. Li Dongsheng
2.89%
3.53%
61.31%
Dimensional Fund
Advisors
Others
85%
50.15%
1.07%
3.34%
TCL Multimedia
(1070 HK)
Mr. Zhao
Zhongyao
61.31%
Mr. Li Dongsheng
Mr. Leung Laibing
TCL
Communication
(2618 HK)
Tonly Holdings
(1249 HK)
0.56%
1.75%
CSOT
(unlisted)
34.17%
MAG Investment
Others
41.23%
Samsung
15%
Source: Company disclosure, Nomura research
Senior management profile
Chairman Mr Li Dongsheng (Age 55) is the founder of TCL Multimedia. In addition, Mr
Li is the founder and chairman of TCL Multimedia’s parent company, TCL Corp, as well
as Chairman and an executive director of TCL Communication, another subsidiary of
TCL Corp.
CEO: Mr Zhao Zhongyao (Age 50) is currently the CEO and an Executive Director of
the company, also an Executive Director and Senior Vice President of TCL Corporation.
Mr Zhao has over 20 years of experience in sales and marketing and management of
consumer electronics business. On 5 June 2013, TCLM announced that Mr Zhao
Zhongyao would leave the post due to personal health issues. Chief Sales Officer Mr
Hao Yi will be the acting CEO during his absence.
Acting CEO and Chief Sales Officer Mr Hao Yi (Age 39) a member of the Executive
Committee, is currently Vice President of TCL Corporation, the Chief Sales Officer and
General Manager of Overseas Business Group of the Company. Mr Hao joined TCL in
March 2004. He had held the positions of Assistant to Board Chairman of TCL
Corporation, Vice President of the company and General Manager of the Emerging
Market Business Center of the company. Mr Hao graduated from York University,
Toronto, with a Bachelor’s degree in Economics, and also holds an EMBA degree from
Cheung Kong Graduate School of Business.
59
Leshi Internet Information &
Technology Corp Beijing
300104.CH 300104.CH
EQUITY RESEARCH
PN
TECHNOLOGY
Reinventing the TV business November 4, 2013
Innovator in Smart TVs
NOT R AT ED
Closing price
CNY41.95
October 29, 2013
LeTV is a pioneer in Internet video content aggregation and creation
LeTV (300104 CH, NR) is a major IPTV (Internet-Protocol TV) service
provider in China. By leveraging one of the most comprehensive copyright
video libraries in China, LeTV is a leader in Internet video copyright
acquisition and distribution. LeTV offers both free and paid video-ondemand services to its more than 700k smartphone, PC and TV users.
Unlike most of its peers, LeTV is heavily involved in the content production
business (eg, recent acquisition of Huaer Yingshi), an upstream move to
further solidify its collection of original Internet video copyrights.
LeTV’s Smart TV Strategy: SuperTV and LeTV Box
LeTV entered the hardware business in December 2012 by launching LeTV
Box, an Android-based Smart TV box. In May 2013, LeTV launched its Smart
TV product line called Super TV, including one 60-inch, 50-inch, and 40-inch
model. The significance of Super TV is LeTV’s strategy to sell TV hardware
at cost levels online (30-50% cheaper than the average retail price), and to
generate profit via service revenue in the future. In particular, LeTV believes
its S50 50-inch Super TV is gaining viable market traction and targets to sell
200k/1mn units in 2013/14 to obtain a 1.8% China TV market share in 2014.
For Smart TV hardware, LeTV mainly cooperates with TPV, Foxconn and
Qualcomm. On the distribution side, LeTV mainly sells TVs through its own
online channel, and distributes TVs via partnering with 3rd-party distributors.
Company description
Leshi Internet Information &
Technology (Beijing) Co., Ltd.
Researches and develops
Internet video and mobile
networking video technology.
The company's service
includes network infrastructure
services and the services for
video platform.
Research analysts
China Technology
Leping Huang. PhD - NIHK
Leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
David.hao@nomura.com
+852 2252 2153
Re-inventing the TV business
CP2C production strategy: LeTV’s customer planning to customer (CP2C)
model drives upstream production, with downstream prepayment orders to
reduce inventory and liquidity risks.
Ecosystem: LeTV plans to reach a subscriber critical mass on its IPTV
platform via both STB and Smart TV sales. According to management,
LeTV currently has 1mn STB and 20k Smart TV users on the platform.
Subscriber strategy: LeTV focuses on long-term revenue streams from: 1)
paid-content subscription, 2) ads and 3) applications.
Currency: CNY
Sales (mn)
Ope profits (mn)
EPS
FY09
FY10
FY11
FY12
139
228
568
1122
52
77
163
240
0.07
0.11
0.17
0.24
P/E (x)
n/a
76.6
47.3
40.9
EV/EBITDA (x)
n/a
46.3
19.9
13.2
P/B (x)
n/a
6.9
5.9
6.3
Dividend yield (%)
n/a
0.2
0.3
0.3
Source: Company data
Key company data: See page 2 for company data, and detailed price/index chart.
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | Leshi Internet Information & Technology Corp Beijing
November 4, 2013
Product line-up and Smart TV ecosystem
Fig. 113: LeTV product offerings
Brand
Model
LeTV
X40
LeTV
S50
LeTV
S60
LeTV
C1
40
1920 x 1080
Dual-core
LeTV UI
3D, Smart TV
1999
325
490
50
1920 x 1080
Dual-core
LeTV UI
3D, Smart TV
2999
488
490
60
1920 x 1080
Quad-core
LeTV UI
3D, Smart TV
6999
1138
Dual-core
Android
Smart TV
399
65
e-channel
e-channel
490
e-channel
e-channel
Outsource
Outsource
Outsource
CNTV + LeTV
Tencent
CNTV
Hon Hai/TPV
Sharp
CNTV + LeTV
Tencent
CNTV
Hon Hai/TPV
LGD
CNTV, Proprietary
Tencent
CNTV
Hon Hai/TPV
Sharp
Hardware Spec
Screen Size (inch)
Resolution
Processor
Operating System
Features
Retail price (CNY)
in USD
Sales/Marketing Annual Sub. (CNY)
strategy
Sales Channel
Logistics/ after
service
Industry Partner
Content Provider
Internet Partner
License
TV OEM
Panel
CNTV + LeTV
CNTV
Source: LeTV, Nomura research
Fig. 114: LeTV eco-system
Smart TV
Ecosystem
Super TV
LeTV Box
LeTV Cloud
Broadcast
Platform
LeTV UI
Source: LeTV, Nomura research
61
Nomura | Leshi Internet Information & Technology Corp Beijing
November 4, 2013
Company summary
From 2010 to 2012, LeTV’s revenue grew 390%, mainly driven by growth in copyright
distribution and advertising, utilizing its IPTV content library and growing is user base.
During the same period, copyright distribution and advertising revenue grew 947% and
522%, respectively. In 2013, the company expects Super TVs to become a new revenue
driver for the company.
Fig. 115: Earnings summary
(CNY mn)
Turnover
% chg yoy
COGS
Gross Profit
OPEX
EBIT
% chg yoy
Pretax income
% chg yoy
Taxes
Net income
% chg yoy
Gross margin
SG&A / revenue
Operating Profit margin
Pretax income/revenue
Tax rates
Net Income margin
Fig. 116: Segment summary
2010
A
238
63%
80
158
85
73
54%
75
57%
5
70
58%
66%
36%
31%
31%
6%
29%
2011
A
599
151%
275
323
162
161
121%
164
119%
33
131
87%
54%
27%
27%
27%
20%
22%
Source: Company data
2012
A
1,167
95%
684
483
286
197
22%
228
39%
38
190
45%
41%
24%
17%
20%
17%
16%
(CNY mn)
Turnover
Internet video service
Copyright distribution
HD video service
UD video service
Video platform VAS
Ads distribution
Inter-streaming
Software development
Revenue structure
Internet video service
Copyright distribution
HD video service
UD video service
Video platform VAS
Ads distribution
Inter-streaming
Software development
2010
A
238
158
53
104
1
80
67
13
-
2011
A
599
484
356
121
7
114
114
-
2012
A
1,167
746
555
152
38
422
419
2
66.3%
22.3%
43.7%
0.4%
33.7%
28.3%
5.4%
80.9%
59.5%
20.3%
1.1%
19.1%
19.1%
63.9%
47.6%
13.0%
3.3%
36.1%
35.9%
0.2%
Source: Company data
Potential impact of Super TV on LeTV’s sales
LeTV sold 10k units of S60 at an average price of CNY7,489, consisting of the TV
(CNY6,999) and a one-year subscription fee (CNY490). Thus, cash flow on 3 June alone
was roughly CNY75mn, or 6% of LeTV’s 2012 sales. Thus, LeTV is using the mandatory
one-year subscription charge to subsidizing its TV hardware, one of the reasons for its
cheap Smart TV pricing.
Fig. 117: LeTV’s revenue breakdown by segment (2012)
Other
0.2%
HD video
13.0%
Fig. 118: LeTV’s revenue trend by segment (2012)
(CNY mn)
600
2010
555
2011
500
400
Advertising
35.9%
300
Copyright
distribution
47.6%
UD video
3.3%
Source: Company data, Nomura research
419
2012
356
200
152
104121
100
114
53
1
7
38
67
0
HD video
Copyright
distribution
UD video
Advertising
Source: Company data, Nomura research
62
Nomura | Leshi Internet Information & Technology Corp Beijing
November 4, 2013
Fig. 119: Company structure
Jia Yaoting
Jia Yaofang
46.8%
Liu Hong
6.3%
Others
3.5%
43.4%
Leshi Internet Information and
Technology Corp Beijing
(300104 CH)
APP developers
Qualcomm
(QCOM US)
LeTV.com
Set-top-box
Foxconn
(2354 TT)
Super TV
Sakai Display
Products (SDP)
(unlisted)
Nanjing Sharp
Electronics Corp
(NSEC)
(unlisted)
PC
Tablet
Smartphone
CNTV
Broadcast Platform
CNTV
Content library
End user
Source: Nomura research
LeTV founder profile
Mr Jia Yaoting (Age 40), Chairman & CEO
Mr Jia Yaoting founded LeTV in 2004. His prior entrepreneur experiences include
founding Xbell Union Communication Technology (Beijing) Co. in 2003 and Shanxi Xi
Bei Er Tong Xin You Xian Gong Si (山西西贝尔通信科技有限公司) in 2002. Mr. Jia
Yaoting was CEO for Shanxi Yuanqu Xian Zhuo Yue Shi Ye Gong Si (山西垣曲县卓越实
业公司) from 1996 to 2002. From 1995 to 1996, he was the network administrator for the
tax department of Yuanqu County in Shanxi Province.
63
TPV
0903.HK 0903.HK
EQUITY RESEARCH
TECHNOLOGY
PN
Leading Smart TV platform provider November 4, 2013
Benefiting from vertical
integration of LCD TV business
NOT R AT ED
Smart TV strategy: platform suppliers
As the largest TV OEM in the world, TPV provides Smart TV solutions to
both traditional TV vendors and new entrants such as Lenovo and LeTV. In
addition, through TP Vision, a 70-30 joint venture between TPV and Philips,
TPV is also selling Smart TVs under the Philips brand, mainly in the
international market (eg, in Europe).
Company description
TPV Technology Limited is a
display solutions provider. The
Group designs and produces a
full range of PC monitors and
LCD TVs on ODM basis for its
distribution worldwide. The
company also sales TVs under
its brands AOC and Philips.
Closing price
HKD1.59
October 29, 2013
TPV’s background: largest PC monitor and TV OEM in the world
According to Display Search and TPV's own research, TPV is ranked No.1
globally in terms of PC monitor shipments, and is the largest TV OEM in the
world and fourth-largest within all TV brands and OEM makers in terms of
TV shipments.
In addition, TPV is a major subsidiary of CEC (China Electronics
Corporation, 0085 HK, NR). CEC also owns Panda (600775 CH, NR), one
of the major panel manufacturers in China. CEC group has decided to build
an 8.5Gen LCD panel line in Nanjin in cooperation with Sharp (6753 JP,
Neutral).
Business overview
 PC Monitor business
Research analysts
China Technology
Leping Huang, PhD - NIHK
Leping.huang@nomura.com
+852 2252 1598
David Hao - NIHK
David.hao@nomura.com
+852 2252 2153
In the PC monitor business (47% of 1H13 overall sales), the company
mainly focuses on the OEM business (63% of 1H13 segment sales). Its
main customers include all of the world’s major PC vendors; in addition, it
also sell PC monitors under its own brand, AOC.
 TV business
In the TV business (41% of 1H13 overall sales), TPV mainly focuses on the
OEM business (74% of 1H13 segment sales, excluding TP Vision) for
Japanese and domestic TV brands. In April 2012, TPV and Philips formed
TP Vision, which is exclusively licensed to sell Philips brand TVs worldwide.
Currency: USD
FY09
FY10
FY11
FY12
8,032
11,632
11,040
11,975
Ope profits (mn)
144
144
36
155
EPS
Sales (mn)
0.06
0.06
0.05
0.05
P/E (x)
9.2
8.7
3.6
5.7
EV/EBITDA (x)
5.5
7.3
3.5
1.7
P/B (x)
0.9
0.8
0.2
0.3
Dividend yield (%)
3.0
3.4
8.4
5.3
Source: Company data
Key company data: See page 2 for company data, and detailed price/index chart.
See Appendix A-1 for analyst
certification, important
disclosures and the status of
non-US analysts.
Nomura | TPV
November 4, 2013
TPV in Smart TV
Fig. 120: Shareholders’ structure and relationship with CEC/Panda (1H13)
China Electronics Corporation (0085 HK)
China Greatwall Computer
(000066 CH)
Mitsui & Co. Ltd
20.2%
CEIEC HK Ltd.
10.7%
China Greatwall Co.
Chi Mei
Optoelectronics
Panda Electronics Group
36.63%
15.8%
TPV
(903 HK)
Nanjing Panda
(600775 CH)
8.5%
6.4%
Source: Nomura research
Fig. 121: Revenue by segment (1H13)
AIO,
Chassis,
CKD/SKD,
8.1%
Rest of the
world,
14.4%
Others,
4.3%
LCD TV,
40.6%
Fig. 122: Revenue by geography (1H13)
Monitor,
47.0%
SA,
11.7%
NA,
16.1%
PRC,
29.3%
Europe,
28.5%
Source: Company data, Nomura research
Source: Company data, Nomura research
Fig. 123: LCD TV revenue by segment (1H13)
Fig. 124: LCD TV revenue by geography (1H13)
Rest of the
world, 3.1%
OBM, 9.9%
ODM,
28.0%
Source: Company data, Nomura research
SA,
22.3%
TP Vision,
62.1%
NA,
14.4%
PRC,
15.9%
Europe,
44.3%
Source: Company data, Nomura research
65
Nomura | TPV
November 4, 2013
Fig. 125: Earnings summary
Fig. 126: Segment summary
(USDmn)
2010
2011
2012
(HKDmn)
2010
2011
2012
Turnover
11,632
45%
11,007
624
414
211
17%
202
16%
43
159
12%
5%
4%
2%
2%
21%
1%
11,040
-5%
10,382
658
514
144
-31%
136
-32%
26
111
-30%
6%
5%
1%
1%
19%
1%
11,975
8%
11,076
899
727
172
19%
115
-16%
31
83
-25%
8%
6%
1%
1%
27%
1%
Turnover
11,632
45%
4,043
6,300
85,721
637%
3,722
6,080
94,071
10%
5,002
5,734
624
184
89%
11%
658
186
82%
18%
415
65%
35%
26
428
64%
36%
44
899
483
33%
13%
55%
375
66%
34%
41
17
167
-59
188
67
118
56.5
14.8
59.1
13.4
56.2
15.1
5.8
% chg y-o-y
COGS
Gross Profit
OPEX
EBIT
% chg y-o-y
Pretax income
% chg y-o-y
Taxes
Net income
% chg y-o-y
Gross margin
SG&A / revenue
Operating Profit margin
Pretax income/revenue
Tax rates
Net Income margin
% chg y-o-y
LCD TV
Monitor
Gross profit
LCD TV
ODM
OBM
TP Vision
Monitor
ODM
OBM
Other
Operating Profit
LCD TV
Monitor
Source: Company data, Nomura research
Shipment (mn units)
Monitor
LCD TV
TP Vision
Source: Company data, Nomura research
Directors and Senior Management
Dr Jason Hsuan (Age 69), Chairman and CEO
Dr Hsuan joined the Group in 1990 and has been the chairman and chief executive
officer of the company since 1999. Before joining the company, he had over 20 years of
managerial experience in well-known multinational listed enterprises, which include
General Electric Company and PepsiCo Inc. Dr Hsuan is also a non-executive director of
Nanjing Panda Electronics Company Limited, and chairman of Standard Investment
(China) Limited. Dr Hsuan is the brother-in-law of Dr Chen Nai-Yung, vice president and
chief information officer of the company.
Mr. Shane Tyau (Age 56), CFO
Mr Tyau joined the group in 1998, is responsible for managing the financial risks and
investor relations of the group. Prior to joining the group, he had over 15 years of
experience in commercial and corporate banking.
Mr. Lee Neng-Sung (Age 62), CTO
Mr Lee joined the Group in 2002, and is in charge of new products research and
development. Prior to joining the Group, he worked for Sampo Electronic Company for
over 20 years and was in charge of products manufacturing, research and development.
Dr Chen Nai-Yung (Age 62), CIO
Dr Chen joined the Group in 2008, is in charge of the information technology and human
resources of the group. Prior to joining the Group, he worked for the Texas Instruments
Incorporated and Semiconductor Manufacturing International Corporation. Dr Chen is
the brother-in-law of Dr Hsuan, the chairman and chief executive officer of the group.
66
Nomura | China Smart TVs
November 4, 2013
Appendix A-1
Analyst Certification
I, Leping Huang, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers
Issuer
TCL Communication Tech
Sharp
China Telecom
Skyworth
Lenovo Group
Ticker
2618 HK
6753 JP
728 HK
751 HK
992 HK
Price
HKD 7.34
JPY 292
HKD 4.06
HKD 3.89
HKD 8.44
Price date
01-Nov-2013
01-Nov-2013
01-Nov-2013
01-Nov-2013
01-Nov-2013
Stock rating
Neutral
Neutral
Buy
Buy
Buy
Sector rating
N/A
N/A
N/A
N/A
N/A
Disclosures
A1,A3,A4,A5,A6,A7,A8,A11
A10,A11
A1,A2,A3
A1
The Nomura Group has received compensation for non-investment banking products or services from the issuer in the past 12 months.
A2
The Nomura Group had a non-investment banking securities related services client relationship with the issuer during the past 12 months.
A3
The Nomura Group had a non-securities related services client relationship with the issuer during the past 12 months.
A4
The Nomura Group had an investment banking services client relationship with the issuer during the past 12 months.
A5
The Nomura Group has received compensation for investment banking services from the issuer in the past 12 months.
A6
The Nomura Group expects to receive or intends to seek compensation for investment banking services from the issuer in the next three
months.
A7
The Nomura Group has managed or co-managed a publicly announced or 144A offering of the issuer's securities or related derivatives in
the past 12 months.
A8
Nomura Securities Co., Ltd., has lead managed a public offering of equity or equity linked securities of the issuer in the past 12 months.
A10 The Nomura Group is a registered market maker in the securities / related derivatives of the issuer.
A11 The Nomura Group holds 1% or more of any class of common equity securities of the issuer.
Skyworth (751 HK)
HKD 3.89 (01-Nov-2013) Buy (Sector rating: N/A)
Chart Not Available
Valuation Methodology We derive our TP of HKD6 based on 9x FY14F EPS of HKD0.64, a 10% discount to China Technology
peers due to its slower growth. The benchmark index for this stock is MSCI China.
Risks that may impede the achievement of the target price Downside risks may include 1) slower than expected growth in
4K2K TV and smart TV; 2) intensified competition from Internet players; 3) Inability to create a mature smart TV eco-system and
to monetize; and 4) Overseas and other business segments incur bigger than expected losses.
67
Nomura | China Smart TVs
Lenovo Group (992 HK)
November 4, 2013
HKD 8.44 (01-Nov-2013) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date
30-Jan-13
22-Jan-13
22-Jan-13
08-Nov-12
16-Aug-12
23-May-12
06-Feb-12
02-Nov-11
19-Aug-11
20-Apr-11
17-Feb-11
01-Dec-10
01-Dec-10
Rating
Target price
9.80
Buy
9.40
7.50
7.20
7.40
6.50
5.70
5.10
4.70
5.40
Neutral
5.80
Closing price
8.30
7.68
7.68
6.58
6.60
6.78
6.17
5.60
4.56
4.43
4.92
5.27
5.27
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We derive our TP of HKD9.8 based on 13x of FY14F EPS of HKD0.56 plus HKD2.5 per share net
cash. The benchmark index for this stock is MSCI China.
Risks that may impede the achievement of the target price Downside risks include: 1) weaker-than-expected global PC and
China smartphone demand; 2) worse-than-expected operating margin performance due to irrational price competition from
leading PC OEMs or China smartphone players; 3) slow market share gains in the consumer segment; 4) disappointing cost
control if restructuring and resource integration are protracted; 5) rising component prices or shortages, which could affect gross
margin and shipment schedules; 6) intensifying competition in the China PC/smartphone market; and 7) a hard landing in
China's economy.
TCL Communication Tech (2618 HK)
HKD 7.34 (01-Nov-2013) Neutral (Sector rating: N/A)
Rating and target price chart (three year history)
Date
20-Feb-13
14-Aug-12
14-Aug-12
29-May-12
01-Mar-12
12-Oct-11
25-Feb-11
24-Jan-11
24-Jan-11
Rating
Target price
2.40
Neutral
1.80
4.70
6.00
8.00
12.00
Buy
11.00
Closing price
2.39
1.65
1.65
2.67
4.18
3.02
8.25
7.92
7.92
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We derive our TP of HKD2.40 based on 1.0x of FY13F P/B of HKD2.36. We believe P/B is a fair
valuation metric since we expect TCL's FY13 earnings will be around break-even point.The benchmark index for this stock is
MSCI China.
Risks that may impede the achievement of the target price Downside risk includes further margin erosion in the high-end
feature-phone market. Upside risk includes faster-than-expected transition to smartphones.
68
Nomura | China Smart TVs
Sharp (6753 JP)
November 4, 2013
JPY 292 (01-Nov-2013) Neutral (Sector rating: N/A)
Rating and target price chart (three year history)
Date
05-Nov-12
03-Aug-12
30-Apr-12
10-Apr-12
27-Mar-12
02-Feb-12
27-Oct-11
28-Apr-11
Rating Target price
150
300
494
505
560
600
790
810
Closing price
154
192
516
530
495
528
694
741
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We think deteriorating earnings will continue to damage BPS in 13/3. Our target price of ¥150 is our
end-13/3 adjusted BPS forecast, which factors in a private placement of new shares to Hon Hai Precision Industry.
Risks that may impede the achievement of the target price Risk factors for Sharp include changes in macroeconomic
conditions and fiercer international competition. In particular, while we base our target price on BPS, we note that shareholders’
equity may be affected by a change in the private placement contract with Hon Hai Precision Industry and a pension deficit as
well as earnings deterioration. As factors that could cause the share price to exceed our target price, we note stronger-thanexpected shipments of large LCD TVs and small LCDs.
China Telecom (728 HK)
HKD 4.06 (01-Nov-2013) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date
14-May-13
18-Feb-13
07-Mar-12
18-Nov-11
22-Mar-11
Rating Target price
4.80
Buy
5.10
5.20
4.90
Closing price
4.11
4.08
4.55
4.80
4.49
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of HKD4.80 is based on DCF analysis. We assume a WACC of 10.3% and a longterm growth-to-perpetuity rate of 0.5%. Our DCF is based on 10 years of free cash flow and is discounted back to December
2013.The benchmark index for this stock is MSCI China.
Risks that may impede the achievement of the target price Risks to our investment view include the following: 1) irrational
tariff competition — if China Mobile or China Unicom were to lower mobile tariffs in an attempt to gain market share, we believe
that China Telecom might respond by launching similar tariff plans. 2) Regulatory environment — any significant change in the
regulatory environment could have important implications for mainland telecom operators. 3) Introduction of new technologies —
these could disrupt the industry landscape and could complement or cannibalise existing technologies (e.g., GSM, GPRS, and
EDGE). Given that telecom operators have invested heavily in their existing networks, the potential obsolescence of networks
could lead to asset write-offs, in our view. 4) Mobile data may increasingly eat into mobile voice revenue.
69
Nomura | China Smart TVs
November 4, 2013
Rating and target price changes
Issuer
Ticker
Old stock rating
New stock rating
Old target price
New target price
Skyworth
751 HK
Not rated
Buy
N/A
HKD 6.00
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The distribution of all ratings published by Nomura Global Equity Research is as follows:
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The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
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STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
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that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia exJapan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
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SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
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Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
70
Nomura | China Smart TVs
November 4, 2013
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
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71
Nomura | China Smart TVs
November 4, 2013
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