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Page 1 / 36
26 August 2015
Hayman Chiu
(852) 2235 7677
Trading Data
52-Week Range (HK$)
3 Mth Avg Daily Vol (m)
No of Shares (m)
Market Cap (HK$m)
Major Shareholders (%)
Auditors
Result Due
3.74/1.60
9.84
800.3
2,080.8
Tang Wing Fong
& Family (52.87
%)
Ernst & Young
1H15:Aug 28 2015
Company description
Founded in 2000 and listed in July 2015, Sky
Light (‘SL”) initially engaged in the business of
disposable single use camera and digital camera.
Through continuous growth and progressive
product development, SL has extended the
breadth and depth of its product lines,
transforming successfully into one of the leading
digital device and solution providers. Its own
brand “SKYPIX” products, as well as other
design-driven JDM and ODM products have been
offered to world renowned brands such as GoPro,
NETGEAR, Canary and Ion etc. SL is the world’s
second largest action camera manufacturer with
31% market share in 2014.
Price Chart
Sources: Bloomberg, CIRL
1H15 positive earnings alert, strong demand drives earnings
SL issued a 1H15 positive earnings alert in mid-July, stating that both the
revenue and the core next profit (excl. one-off listing expense) will rise >80%
Yoy, thanks to the strong demand for action cameras and home imaging
products. Though facing a higher base in 2H15 (cf. 2H14), we still expect
Skylight’s revenue and core net profit still manage to grow 45.4% and 49.2%
in FY15E with GPM maintained at~21%, we believe the growth is mainly
driven by: i) peak season demand for GoPro products, ii) take off of home
imaging segment (mainly NETGEAR) and iii) high utilization rate &
stable cost control.
Core competence : first mover advantage, unique JDM solutions to
clients and strong R&D capabilities
SL enjoys first mover advantage in both action camera and IP camera market.
SL offers design-driven JDM and ODM solutions to customers, which involves
in products design and development, hence having established advanced
product planning, as well as strong R&D capabilities. SL has not only built up
more intact strategic relationship with clients, but also able to stay ahead of
the market in the light of the rapid development of consumer electronics’
market. JDM business model enable them to possess competitive advantage
over industry peers, hence enjoying a higher GPM than peers.
Action camera market to soar, well-built partnership with GoPro
According to Frost & Sullivan, worldwide action camera is expected to grow at
18.4% CAGR from now to 20.3mn pieces by 2019, driven by largest player
GoPro (18.2% CAGR). Since SL has been working with GoPro since 2003,
and accounted for 42% of GoPro’s total shipment in FY14. We believe SL
would continue to benefit from GoPro’s existing product upgrades and
product line expansion. Tap into to home imaging products, a new growth engine According to Frost & Sullivan, global IP camera shipment is expected to grow at 73.0% CAGR to 25.1mn pieces by 2019. Since SL has only begun to ship IP camera products in 3Q14 and established business relationship with new clients (such as NETGEAR, iON and Canary). Our current topline forecasts for FY16E and FY17E are conservative (shipment volume grows in tandem with industry) , and we see there is an upside catalyst. SL’s management expressed a strong order flow and together with low base, we believe this Sky Light can achieve a higher than industry growth rate in FY15E-FY17E and account for >15% of SL’s revenue in FY16E and >20% in FY17E .
FY16E 6.0xPE, initiate with BUY to ride on booming action camera
and home imaging market
We expect SL’s revenue and net profit attributable to shareholders to grow at
32.5% and 30.7% CAGR from FY14-16E respectively, driven by rapid order
growth from action camera and IP camera. SL is trading at FY16E 6.0x PE,
~42% discount to Chicony’s (2385 TT) 3 year average. Due to its unique
business model , superior gross margin and rosy outlook for clients’ products,
we believe SL deserves a re-rating. We arrive SL’s TP at HK$4.33, which
translates into 9.9x FY16E PE (~15% to Chicony’s 3 year average, due to its
smaller scale, short listing history and market’s lower risk appetite for
mid-small caps). We initiate Sky Light with BUY rating, we believe the recent
sell-off do provide a sweet entry point for investors to accumulate .
Sky Light Holdings Limited (3882 HK)
An undervalued play on GoPro
Rating Initiate BUY
Target price
HK$4.33
Current price
HK$2.60
Upside.65.1%
Page 2 / 36
1H15 positive earnings alert, strong demand drives earnings
Sky Light issued a 1H15 positive earnings alert in mid-July, stating that both the
revenue and the core net profit (excl. one-off listing expense) will rise >80% Yoy,
thanks to the strong demand for action cameras and home imaging products.
Though facing a higher base in 2H15 (vs. 2H14), we still expect Skylight’s
revenue and net profit still manage to grow 49.2% and 52.9% in FY15E to
HK$3,040mn and HK$279mn respectively with GPM maintained at ~21%. We
believe the growth is mainly driven by : i) ramp up of GoPro’s new products and
sales of higher margin accessories, ii) robust demand for NETGEAR’s home
imaging products, as well as new clients’ contribution (iON and Canary)
(HK$161mn order book and HK$96mn revenue already recognized in 4M15) and
iii) stable cost control.
Exhibit 1: Action cameras and accessories accounted for over 70% of SL’s revenue
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company, CIRL
Action cameras and accessories accounted for >70% topline
In FY14, Sky Light’s revenue and net profit attributable to shareholders rose
29.0% and 37.0% Yoy, driven by 36.7% Yoy increase in action camera &
accessories’ revenue, initial revenue contribution of home imaging products,
improved GPM, as well as stable costs.
During the period, action camera & accessories’ revenue came in at HK$1,784mn
and accounted for 85.2% of Group revenue (vs. 80.4% in FY13). The rise was
contributed by 54.5% increase in total volume (2.4mn units shipped), in which
92% of the volume shipped belonged to GoPro.
75.1% 79.9% 82.7%
24.9% 20.1% 17.3%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
FY12 FY13 FY14
GoPro & its supply chain Others
Page 3 / 36
Exhibit 2: Sky Light’s action camera allocation
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
GoPro’s launch of a new camera model in 4Q13 and together with another new
entry-level camera model in 3Q14 which caused a slight drag on ASP in FY14,
but still able to maintain an ASP at ~HK$500. Sales of accessories also grew by
25.0%, mainly driven by 95.3% increase in volume, partially offset by a lower ASP.
As Sky Light received more purchase orders for simple accessory parts (such as
waterproof housing, mounts, remote controls etc) that generally sold at lower
ASP.
Sky Light’s GPM increased gradually from 19.8% in FY12 to 21.3% in FY14 due
to greater sales of accessories which had generally higher margins than action
cameras. Sky Light adopts a cost-plus model for JDM clients (GoPro and
NETGEAR) and targets to achieve ~20% GPM. For digital imaging products, due
to the smaller purchase quantity than JDM clients, Sky Light generally asks for a
higher GPM. Though we believe the digital imaging products’ GPM would be
higher than company’s average, it will have minimal impact on company’s overall
GPM due to its declining revenue contribution. (FY14: 9.5% of total revenue vs.
FY12: 22.7%).
2.3
3.8
5.2 68.8%
37.4%42.0%
0.0%
20.0%
40.0%
60.0%
80.0%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY12 FY13 FY14
GoPro total shipment (Mn Units) Sky Light's allocation (%)
Page 4 / 36
Exhibit 3: Sky Light ‘s revenue breakdown
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
Client diversification in progress
To reduce customer concentration risk, Sky Light has begun to adopt a
diversification strategy, and expand their product offerings to develop the home
imaging and smart wearable businesses. Sky Light began commercial production
and shipment of homing imaging products in 3Q14 and expects to begin shipment
of smart wearable products by June 2015.
Sky Light seeks to capitalize on the fast-growing market demand for these
consumer electronic products, thereby creating new sources of revenue and
diversify Sky Light’s customer base. Sky Light currently sells the majority of their
products directly to brand customers including camera brands such as GoPro
(GPRO US) and iON, established technology equipment brands such as
NETGEAR (NTGR US), as well as high-potential start-up companies such as
Canary, of which their product offerings include WiFi routers, WiFi range
extenders and cloud cameras (IP cameras).
Capacity expansion to fulfill clients’ demand
Sky Light has a total production capacity of approximately ~3.3 million units of
action cameras and approximately ~120.0 million units of accessories in FY14.
During the period, the utilization rate stayed high for the production facility in
Shenzhen and Heyuan (86.0% and 92.2% respectively), which reflected the
strong order flow from Sky Light’s existing clients. Sky Light plans to use ~37% of
the IPO net proceeds for the purchase of production facilities as well as machinery
and equipment to fulfill clients’ strong order book. Management sees the total
capacity will increase by 50% by FY15E vs. FY14.
75.9% 80.4% 85.2%78.9%
22.7% 13.9%9.5%
5.8%
0.0%0.0% 2.4%
13.1%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
FY12 FY13 FY14 FY15E
Action camera & accessories Digital ImagingHome Imaging Others
Page 5 / 36
Exhibit 4: Sky Light production facilities’ utilization rate reached >80% in FY14
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
Exhibit 5: Sky Light’s planned use of IPO proceeds
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
FY12 FY13 FY14
Shenzhen Production Facility
Designed capacity ('000 pieces) 2,656 2,709 3,293
Actual production volume 2,123 2,204 2,831
Average utilisation rate 79.9% 81.4% 86.0%
Heyuan Production Facility
Designed capacity ('000 pieces) 42,426 86,342 119,960
Actual production volume 33,059 52,589 110,551
Average utilisation rate 77.9% 60.9% 92.2%
37.0%
19.0%
19.0%
15.0%
10.0%
Purchase of PP&E Marketing expenditure M&As
R&D related expenditure Working capital & others
Page 6 / 36
Core competence: first mover advantage, unique JDM solutions to
clients
Sky Light’s early mover advantage in action camera and IP camera market
Multinational corporations (MNCs) often impose stringent requirements on product
quality and look for business partnerships that can maintain consistent product
quality. Therefore, manufacturers with advanced technology have a clear
advantage because MNCs are willing to offer a higher price for better and stable
product quality. Given the capacity and technology constraints, small-scaled
manufacturers may be less flexible or adaptive to customers’ changes in design
and delivery schedule.
In the early stages of product life cycle, customers may make changes to their
design delivery schedule. They expect manufacturers to be flexible and
responsive to their changes. In addition, the ability to deliver according to
schedule is important to ensuring regular order placing.
Since Sky Light has already entered their supply chain and involve in the design
and production of the whole products, in order to ensure product quality, clients
would not easily change their respective suppliers, we believe Sky Light will fully
benefit from GoPro’s ongoing product innovation pace together with the ramping
up of home imaging devices from NETGEAR, iON and Canary in the coming 2-3
years.
Page 7 / 36
Exhibit 6: Skyline’s current product offerings
Exhibit 1:
Pork
products
sold in
supermark
et counters
Source: Company
Provide JDM+ODM solutions to clients: more intact strategic relationship, stay ahead of market
The major manufacturers for the global action camera industry include JDM/ODM
manufacturers (e.g. Sky Light), OEM and own brand manufacturers from China,
Taiwan (e.g. Chicony, Hon Hai Precision) and Japan. Sky Light differentiates
themselves from other manufactueres by currently offering design-driven JDM
(Joint Design Manufacturing) and ODM (Original Design Manufacturing) solutions
to customers (such as GoPro, NETGEAR etc). This involves in product design and
development, hence having established advanced product planning, as well as
R&D capabilities.
Page 8 / 36
For JDM, Sky Light engage in joint product design and development with their
customers for products that Sky Light manufacture. Once they win a customer
project, Sky Light’s design quality assurance team will collaborate with the
customer with to jointly design and develop a product. After the customer confirms
the specification, they will place a purchase order and Sky Light will begin to
procure materials and manufacture the product. The customer is typically entitled
to any IP tights relating to the product design and development.
Through JDM business model, Sky Light has not only built up more intact strategic
relationship with clients, but also able to stay ahead of the market in the light of the
rapid development of consumer electronics’ market. We believe Sky Light’s
unique JDM business model enable them to possess competitive advantage over
industry peers, hence enjoying a higher GPM than peers.
Exhibit 7: Sky Light operates under two business model : JDM and ODM
Exhibit 1:
Pork
products
sold in
supermarket
counters
Source: Company
R&D capabilities to keep up pace with new innovations
As of end December 2014, Sky Light had a total of 349 product planning and R&D
staff dedicated to designing and developing innovative products and
techonologies. Sky Light currently had 36 registered patents and 44 copyrights
and applied for an additional 19 patents and 2 copyrights.
Strong R&D capabilities are required during the manufacturing process, such as
moulding, imaging as well as software & hardware testing. R&D is also needed to
keep pace with new innovations and upgrades in key components such as DSPs
and sensors. Software development capabilities also create an entry barrier as
products require more sophisticated software applications. Sky Light’s R&D
expense rose from 2.7% of total revenue in FY12 to 4.0% in FY14. Though we
forecast R&D expense will still account for 4.0% of Sky Light’s yearly revenue in
FY15E-17E, its absolute amonut will post 23.6% CAGR which grows along with
Sky Light’s revenue.
Page 9 / 36
Action camera market to soar, well-established partnership with GoPro
According to Frost & Sullivan, worldwide action camera is expected to grow at
18.4% CAGR from now to 20.3mn pieces by 2019 (account for 76% of total
shipment c.f. 49.4% in 2014), driven by largest player GoPro (18.2% CAGR). Sky
Light has been working with GoPro since 2003, and accounted for 42% of
GoPro’s total shipment in FY14. While GoPro also accounted for >70% and
>90% of Sky Light’s revenue and action camera shipment respectively.
Sky Light has just renewed their sales agreement with GoPro for 2015-2017,
given their well-established relationship for over 9 years and would not easily
change their respective suppliers to ensure product quality, we believe Sky Light
would continue to benefit from GoPro’s product upgrades as well as increased
demand for action camera accessories going forward.
The key drivers for the steady growth are:
Easy-to-carry: The size of action cameras can be as small as that of a
matchbox and weigh <200g. These make them more convenient to carry
than traditional camera. Despite being small, action cameras do not
compromise on functionality and most of them can shoot 1080p HD video
and some are even capable of 4K video. New generations of action
cameras often equip with Wi-Fi and other functions that can link up the
action camera to users’ other devices.
First-person imaging experience: Action cameras are designed to shoot
videos with first-person perspective, which gives viewers a personal
perspective into activities like surfing, rocking climbing, skiing and cycling.
Hands-free operation: Shooting videos with an action camera is more user
friendly than with traditional cameras which require a person to hold and
operate, or fix it to a particular camera mount or tripods. An action camera is
designed to enable users to have hands-free operation and can manage
HD continuous captures and self-shoots even in fast action situations,
which enhances user experience.
Surging social networking demand: Social networking has become
indispensable in people’s daily life and people tend to share their lives
through social media platforms such as Facebook, Twitter, Instagram &
SINA Weibo etc. The development of social media allows people to post
short videos/ clips which provide motivation for users to create and share
engaging videos.
Page 10 / 36
Exhibit 8: Action camera is expected to continue lead the worldwide digital camcorder market to grow
Exhibit 1:
Pork
products
sold in
supermarket
counters
Source: Frost & Sullivan, CIRL
Exhibit 9: Action camera is expected to grow at 18.2% CAGR in 2015-2019
Exhibit 1:
Pork
products
sold in
supermarket
counters
Source: Frost & Sullivan, CIRL
GoPro delivers solid results since IPO, robust 2H15 outlook
Since its NASDAQ listing in November 2014, GoPro’s (GPRO US) revenue and
EPS earnings beat market consensus every quarter. Its 2Q15 revenue rose 72 %
Yoy to US$419.9 million and while EPS came in at US$0.24 helped by strong
sales in markets outside North America. GoPro, whose helmet- and
body-mounted cameras are popular with surfers, skydivers and other adventure
sports enthusiasts, has benefit from a focus on Asian markets such as China,
Japan and South Korea. GoPro currently derive >50% of its revenue outside the
United States.
0.4 1.43.1
6.0 7.7
10.4 12.4
14.8 17.8
20.3 22.7 19.7
12.9 8.1 7.9
8.0
7.5
7.3
6.7
6.4
1.7%6.6%
19.4%
42.6%
49.4%
56.5%
62.3%67.0%
72.7%76.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Action camera Other digital camcorders Action camera %
Mn UnitsMn Units
0.4 1.1
2.3
3.8
5.2
7.1
8.4
10.1
12.1
13.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Volume
Mn Units
2015E-2019E CAGR 18.2%
Page 11 / 36
Exhibit 10: GoPro has been delivering solid results since its IPO in Nov 2014
Exhibit 1:
Pork
products
sold in
supermarket
counters
Source: Bloomberg, CIRL (*Note 3Q15 EPS estimate before the release of 2Q15 results)
Creating a unique ecosystem similar to Apple, hardware & software
innovation (Drones, VR software & cloud platform)
GoPro expects to release a quadcopter (drones) in 1H16, GoPro Licensing was
also unveiled recently, and a virtual reality (VR) partnership with Google could all
yield new revenue streams or lead to additional camera sales. GoPro's GPM
surged by 830 bps to 45.0% in FY14, and market expects GPM to rise further to
46.1% in FY15E. Just as Apple (APPL US) has managed to maintain a corporate
GPM at ~40% despite ample competition, GoPro's rivals (Sony and iON) haven't
caused any noticeable impact thus far.
We believe GoPro may be able to emulate many of Apple's most desirable
characteristics. This includes i) developing a massively powerful brand, ii) focusing
on design and iii) building a unique ecosystem, and through all of these pathways
achieving strong sales and earnings growth.
Developing a massively powerful brand: GoPro has built an incredibly
powerful brand. With a devoted, satisfied user base, GoPro benefits from lots of
positive feedbacks/comments that foster brand awareness. At least in the U.S.,
consumers looking for an action camera tend to ask specifically for a GoPro. It
doesn't matter if competitors have "good-enough" products for half the price if
consumers never consider another brand.
Focusing on product design and increase offerings: GoPro is increasingly
trying to differentiate itself through product design. It recently introduced the
GoPro HERO4 Session, which is significantly smaller and lighter than previous
GoPro cameras, and is waterproof out of the box. Even though HERO4 Session
isn't as capable as the HERO4 Silver, the 2nd
tier camera in GoPro's lineup, but
GoPro HERO4 is marketed at 20% lower than HERO4 BLACK, which allows
consumers to have a lower entry point to try out GoPro products.
238.1 264.2
581.9
341.1
395.2
244.6 280.0
633.9
363.1
419.9
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
2Q14 3Q14 4Q14 1Q15 2Q15
Bloomberg Consensus Actual
(Sales, US$ Mn)
0.07
0.67
0.16
0.250.305
0.07 0.08
0.70
0.18
0.26 0.24
0.08 0.12
0.99
0.24
0.35
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E*
Guidance Bloomberg Consensus Actual
(EPS, US$)
Page 12 / 36
With the introduction of HERO4 Session and HERO+ LCD, GoPro has already
launched 5 new cameras in the past 10 months, it is still expected that GoPro will
likely introduce a new flagship camera before the holiday season in October. We
believe GoPro’s continuous product innovation (1-1.5 years for each product
cycle) in action cameras is expected to continue in the coming 2-3 years.
Exhibit 11: GoPro’s HERO 3 & HERO 4 series action cameras
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: GoPRo, CIRL
Page 13 / 36
Exhibit 12: GoPro’s mounts & accessories for action cameras
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: GoPRo, CIRL
In 1Q15, GoPro has also announced plans to release a consumer drone in 1H16.
The action camera pioneer upon its entry into the drone space will face
competition mainly from Dajiang Innovation Technology (DJI at 70% market
share) coupled with certain small sized competitors including 3D Robotics, Inc.,
Parrot SA, AeroVironment, and Precision Hawk.
DJI’s Phantom line of drones was initially marketed in such a way that it
complimented sales of GoPro’s Hero action cameras. However, DJI recently
began to adopt built-in camera on its drones, which we believe that DJI is well
aware of the threat it might face when GoPro official launch their consumer
drone. As a result, DJI is already distancing its self from GoPro in an attempt to
differentiate its offering from GoPro. On the other hand, 3D Robotics has
maintained its relationship with GoPro as a supplier of cameras for its drones.
Page 14 / 36
Exhibit 13: GoPro’s partnership with 3D Robotics
Source: 3D Robotics
Exhibit 14: Huge potential for global drone market
15.0 37.8 57.0
434.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
2013 2014 2015E 2020E
k units
2015-2020 expected to grow at 50.0% CAGR
15.0 37.8
57.0
434.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
2013 2014 2015E 2020E
(sales volume, k units)
2015-2020 expected to grow at 50.0% CAGR
Source: EV Tanks, CIRL
Building a unique ecosystem: GoPro is investing a lot of effort in creating a
unique ecosystem to ensure that customers stay loyal to the brand. It has
created a massively popular YouTube channel that allows GoPro users to share
their videos.
Page 15 / 36
Starting with its YouTube channel, GoPro has expanded content partnerships
across multiple channels – including LG smart TVs, Microsoft's Xbox, Vessel
and in-flight entertainment for Virgin America. For each channel, there is an
opportunity to tailor content for audience interest. They actively looking for
licensing deals with partners who are willing pay, which helps GoPro monetize
its athletes and sponsored events, including the August 2015 Ironman World
Championship.
GoPro has plans to build a user-friendly, cloud-based platform that enables
easier access and video sharing. The vision is to create a stickier platform that
let GoPro customers seamlessly go from buying a camera, to filming, to editing,
and then finally to publishing high-impact visuals. According to media reports in
the US, in the recent beta test, the cloud platform will include a mobile editing
engine and, more importantly, customer registration of which they will gain
enhanced support, tips and video editing capability.
Exhibit 15: GoPro tends to establish its own ecosystem to distinguish themselves from competitors
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: GoPRo, CIRL
GoPro has been unable to offer its customers the opportunity to create
interactive content, but they announced in end April 2015 that they will purchase
a French company Kolor, which specializes in virtual reality (VR)
software. Software developed by Kolor allows users to join multiple photographs
or videos in order to make 360-degree panoramas and videos, which is called
‘spherical content’.
The acquisition marks GoPro's own advance into the VR market, in which many
content creators have already been using the company's cameras. GoPro also
announced the release of a 4K, 360-degree video to show off the capabilities of
Kolor's software.
Page 16 / 36
GoPro has promised that more spherical content will soon be available on
various platforms such as Oculus VR and Samsung Electronics Co., Ltd.
(005930 KS) Gear VR. In June 2015, GoPro and Google Inc introduced a VR
system using 16 cameras and Google software that would help create a
360-degree view. GoPro’s foray into VR looks set to be an exciting one.
All in all, GoPro’s plans to generate revenue by expanding beyond selling
cameras are focused on a theme: enable storytellers to create compelling,
unique content and provide the channels (figuratively and literally) where this
content will be viewed, envied and duplicated.
Since GoPro is increasingly trying to differentiate itself through product design,
and we believe GoPro’s ongoing product innovation (1-1.5 years for each
product cycle) in action cameras and launch of drones is expected to continue in
the coming 2-3 years which we believe Sky Light will continue to play a vital role
as GoPro continues to march on .
As Sky Light has already engaged in joint product design and development with
GoPro.Through JDM business model, Sky Light has not only built up more intact
strategic relationship with clients, but also able to stay ahead of the market in the
light of the rapid development of consumer electronics’ market. We believe Sky
Light’s JDM business model enable them not only to grow along with their clients,
but also to possess competitive advantage over industry peers.
Page 17 / 36
Home imaging products, a new growth engine
Higher definition, better storage and connectivity have contributed to the market
growth of IP cameras. In particular, the smart home IP camera market boomed
from 2010 to 2014. Users are buying smart home IP cameras for home
surveillance, as well as child care and elderly care. With higher definition and
interaction with smart devices, smart home IP cameras are expected to enjoy
strong growth in the near future.
According to Frost & Sullivan, global IP camera shipment is expected to grow at
73.0% CAGR to 25.1mn pieces by 2019. Since Sky Light has only begun to ship
IP camera products in 3Q14 and established business relationship with new
clients (such as NETGEAR, iON and Canary), we see Sky Light’s home imaging
segment will achieve a growth rate at least higher than industry average.
Exhibit 16: IP camera is expected to grow at 73.0% CAGR in 2015-2019
Source: Frost & Sullivan, CIRL
Sky Light’s management expressed a strong order flow for the home imaging
segment, driven by robust demand for NETGEAR’s home imaging products, as
well as new clients’ contribution (iON and Canary) (HK$161mn order book and
HK$96mn revenue already recognized in 4M15). With a rosy industry outlook
accompanied by a low base, order ramp up for new clients, we believe Sky
Light’s home imaging segment can achieve a higher than industry growth rate in
FY15E-FY17E and account for low-mid teens of Sky Light’s revenue in FY15E
and ~20% in FY16E.
1.32.8
5.4
9.7
16.5
25.1225.0%
115.4%
92.9%
79.6%70.1%
52.1%
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2014 2015E 2016E 2017E 2018E 2019EUnits Growth (Yoy)
Mn Units
2015E-2019E CAGR 73.0%
Page 18 / 36
The key drivers for the market growth are:
Increased demand from safety-conscious consumers: Consumers are
increasingly paying more attention to home surveillance and frequent home
monitoring. Smart home IP cameras enable users to directly view and
monitor their family and homes.
Technology maturity: Major players in the IP camera industry are
investing IP cameras. Furthermore related technologies such as signal
transmission and data storage are sufficiently mature to support smart
home devices.
Affordable price: The cost of components for smart home IP cameras is
expected to continue to decrease, thus allowing for potential ASP reduction
of smart home IP cameras, hence making the product more affordable and
enable to reach a wider potential customer base .
The key entry barriers for the smart home IP camera market are:
Technology requirements: Manufacturing smart home IP cameras
requires extensive technological expertise and research and development
capabilities. Moreover, smart home IP cameras require more stability and
greater safety measures than those used for general commercial buildings.
Well-established sales channels: The smart home IP camera market
relies heavily on channel operation since the end consumers are generally
individuals buying through retailers or e-commerce establishments.
Furthermore, equipment maintenance also requires further channeling. As
such, entrants need to build a number of key relationships to form the
required channels.
Talent: The smart home IP camera industry is knowledge-intensive requiring
considerable research and development and design capabilities. New
entrants need to cultivate a talent pool that is experienced in a wide range of
technical abilities.
Algorithm and cloud service: Smart home IP cameras are increasingly
developed to be used as a part of an ecosystem with systematic service. A
highly professional algorithm for analyzing images will be the foundation of
future service, commanding greater programming and infrastructure
requirements which would take time to build up. Furthermore, the cloud
computing technology will be increasingly deployed for uploading of data.
Page 19 / 36
For smart home IP camera manufacturers, their customers involve renowned
players in the industry such as NETGEAR and iON etc, and we believe Sky Light
share the same characteristics as that of action camera manufacturers, which
include i) proven track record and existing customer loyalty, ii) capital intensive
investment, iii) strong R&D capabilities and iv) flexibility and ability to meet the
production schedule of the downstream customers
Sky Light also adopts the JDM business model for NETGEAR which involves in
product design and development, hence having established advanced product
planning, as well as R&D capabilities. Through JDM+ODM business model, Sky
Light has not only built up more intact strategic relationship with clients, but also
able to stay ahead of the market in the light of the rapid development of consumer
electronics’ market. We believe Sky Light’s unique JDM business model enable
them to possess competitive advantage over industry peers, hence enjoying a
higher GPM than peers.
Exhibit 17: Arlo Security Camera is part of NETGEAR’s Smart Home Solution
Source: NETGEAR
Page 20 / 36
Exhibit 18: NETGEAR’s Arlo Security System
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: NETGEAR, CIRL
Page 21 / 36
Exhibit 19: iON’s The Home Smart IP Camera
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: iON, CIRL
Page 22 / 36
Exhibit 20: Lower average initial cost for home smart IP cameras
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Canary, CIRL
Page 23 / 36
Financial analysis and valuation
Double engines drive revenue growth: action cameras & home imaging
Sky Light achieved 19.0% CAGR in action camera and accessories segment
during 2012-2014. In FY14, action camera revenue rose 43.9% Yoy to
HK$1,164mn in FY14. It exceeds the growth rates for both GoPro’s revenue
(+41.4% Yoy) and total sales volume (+35.9% Yoy ), which demonstrate Sky
Light’s ability in gaining market share.
In addition, revenue from action camera accessories is also expected to grow at
20% CAGR from FY15E-17E, mainly driven by >70% CAGR in volume and a
stable ASP.
Exhibit 21: Sky Light’s action camera allocation from GoPro
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
Exhibit 22: GoPro is still in drivers’ seat in action camera market
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company prospectus, CIRL
2.3
3.8
5.2 68.8%
37.4%42.0%
0.0%
20.0%
40.0%
60.0%
80.0%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY12 FY13 FY14
GoPro total shipment (Mn Units) Sky Light's allocation (%)
100.0%
78.6%74.7%
64.2%67.9%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2010 2011 2012 2013 2014
Page 24 / 36
For home imaging segment, Sky Light has only begun to ship IP camera products
in 3Q14 and established business relationship with new clients (such as
NETGEAR, iON and Canary). Sky Light’s management expressed a strong order
flow for the home imaging segment, driven by robust demand for NETGEAR’s
home imaging products, as well as new clients’ contribution (iON and Canary)
(HK$161mn order book and HK$96mn revenue already recognized in 4M15).
With a rosy industry outlook accompanied by a low base (accounted for 2.4% of
FY14 revenue) , order ramp up for new clients, we believe Sky Light’s home
imaging segment will account for low-mid teens of Sky Light’s revenue in FY15E
and ~20% in FY16E, mainly driven by >70% CAGR in volume and a stable ASP.
Our current revenue forecasts for FY16E and FY17E are conservative (shipment
volume grows in tandem with industry) , however, we see Sky Light’s home
imaging segment can achieve a growth rate at least higher than industry average
in FY15E-17E, which is an upside catalyst.
A medium term GPM of 21-22% for action cameras & accessories and home
imaging segment
Sky Light’s GPM increased gradually from 19.8% in FY12 to 21.3% in FY14 due
to greater sales of accessories which had generally higher margins than action
cameras.
Sky Light adopts a cost-plus model for JDM clients (GoPro and NETGEAR) and
targets to achieve ~20% GPM. For digital imaging products, due to the smaller
purchase quantity than JDM clients, Sky Light generally asks for a higher GPM.
Though we believe the digital imaging products’ GPM would be higher than
company’s average, it will have minimal impact on company’s overall GPM due to
its declining revenue contribution. (FY14: 9.5% of total revenue vs. FY12: 22.7%).
By leveraging on its technical capabilities and expertise in fabricating high-quality
plastic injection molds, we believe a GPM of 21-22% is sustainable in medium
term action cameras and home imaging segment.
Stable SG&A and R&D ratios; lower effective tax rate expected in FY16E
Sky Light’s SG&A ratio maintained stable at 5.2% in FY13 & FY14, though we
expect a higher admin ratio in FY15E (~5.0%) and hence a higher SG&A to sales
ratio at 5.7% due to non-recurring listing expenses (~HK$24mn), we expect the
admin ratio will lower to 4.8% and 4.6% of revenue in FY16E and FY17E, thanks
to economic of scale. We expect a relatively stable SG&A to sales ratio for Sky
Light going forward.
Page 25 / 36
Sky Light’s R&D expense ratio rose from 2.7% of total revenue in FY12 to 4.0% in
FY14. Though we forecast R&D expense will still account for 4.0% of Sky Light’s
yearly revenue in FY15E-17E, its absolute amount will post 23.6% CAGR which
grows along with Sky Light’s revenue.
Regarding effective tax rate, Sky Light’s PRC subsidiaries are subject to a 25%
statutory tax rate on their taxable income, but during FY12-1FY4, preferential
tax treatment was available to Sky Light’s two principal PRC operating
subsidiaries namely, Sky Light Shenzhen and Sky Light Technology (HY). The
former was recognized as a “High and New Technology Enterprise” and was
entitled to a preferential tax rate of 15% in FY12-FY14, while Sky Light
Technology (HY) also enjoying similar tax benefits in FY13 and FY14. Going
forward, we believe the two subsidiaries may continue to enjoy preferential tax
rate under “High and New Technology Enterprise” and hence Sky Light may
also enjoy a lower effective tax rate at ~18.0% in FY16E and FY17E.
Exhibit 23: Key assumptions
Ratio
Year to Dec FY12A FY13A FY14A FY15E FY16E
Growth rate
Action camera & accessories - 3.6% 36.7% 34.5% 17.1%
Digital Imaging - -40.1% -11.3% -11.1% -11.5%
Home Imaging - - - 695.1% 66.7%
Others - 292.4% -36.6% 12.0% 10.0%
Total Revenue - -2.2% 29.0% 45.4% 21.8%
Gross profit - 2.1% 32.9% 45.4% 22.9%
Net profit - 10.3% 32.4% 58.0% 22.8%
Margins
Gross margin 19.8% 20.7% 21.3% 21.3% 21.5%
EBIT margin 13.0% 12.6% 11.9% 11.5% 11.6%
Effective tax rate 19.7% 18.1% 18.1% 19.0% 18.1%
Net margin 7.4% 9.1% 9.6% 9.2% 9.4% Source: Company Prospectus, CIRL estimates
Page 26 / 36
FY16E 6.0x PE, initiate with BUY to ride on booming action camera and
home imaging market
On the grounds of early mover advantage into action camera and IP camera
supply chain, matured relationship with leaders in renowned action camera
brands together with unique business model, we believe Sky Light will enjoy a
promising outlook.
We expect Sky Light’s revenue and net profit attributable to shareholders to grow
at 32.5% and 30.7% CAGR from FY14-16E, led by rapid order growth from action
cameras & accessories, and swift ramp up of home imaging segment. Sky Light
is trading at FY16E 6.0x PE (~42% discount to Taiwan listed Chicony’s 3-year
historical average). Due to its unique business model, superior gross margin and
promising outlook for clients’ products, we believe SL deserves a re-rating. We
arrive SL’s TP at HK$4.33, which translates into 9.9x FY16E PE (~15% discount
to Chicony’s 3-year historical average, due to its smaller scale, short listing
history and market’s lower risk appetite for mid-small caps). We initiate Sky Light
with BUY rating. Our current forecasts for Sky Light are conservative, as we Sky
Light’s action cameras’ revenue growth rate to grow in tandem with market
consensus on Gopro’s shipment/sales volume at
Given the fundamentals remain intact, we believe the recent sell-off do provide a
sweet entry point for investors to accumulate, and to ride on the booming action
camera and home imaging market
Page 27 / 36
Exhibit 24: Peers comparison
bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%)
code (HKD mn) (HKD) 1M YTD FY13A FY14A FY15E FY16E FY13 FY14A FY15E FY16E
HK Listed Peers
LENOVO GROUP 992 HK 70,651 6.36 (30.6) (37.6) 13.3 10.4 9.9 54.8 2.5% 4.2% 3.7% 1.7%
AAC TECHNOLOGIES 2018 HK 49,181 40.05 (7.0) (3.6) 15.1 16.8 14.2 12.3 2.3% 2.4% 2.5% 2.9%
FIH MOBILE LTD 2038 HK 26,681 3.38 (22.3) 0.0 41.9 19.5 12.3 10.4 0.0% 1.2% 1.9% 2.0%
BYD ELECTRONIC 285 HK 10,027 4.45 (46.0) (40.7) 12.2 8.8 5.6 4.6 0.6% 0.0% 1.6% 1.7%
SUNNY OPTICAL 2382 HK 13,515 12.32 (29.7) (7.9) 22.0 18.5 14.0 11.3 1.2% 1.6% 2.0% 2.6%
TCL COMM TECH HL 2618 HK 6,259 4.97 (18.0) (31.1) 18.1 5.4 5.5 5.2 0.9% 7.8% 6.6% 6.9%
TRULY INTL HLDGS 732 HK 5,494 1.89 (30.3) (39.2) 3.3 4.9 4.9 4.3 11.6% 7.9% 6.9% 6.2%
COOLPAD 2369 HK 5,789 1.33 (34.2) (13.1) 16.0 11.1 12.1 9.9 1.4% 0.8% 1.6% 1.4%
TONGDA GROUP HLD 698 HK 6,622 1.17 (24.0) 27.2 15.7 12.4 9.1 7.3 2.0% 2.6% 3.4% 4.4%
JU TENG INTL HDG 3336 HK 3,065 2.63 (28.5) (31.2) 4.0 4.0 3.7 3.3 5.2% 5.7% 6.2% 6.8%
Q TECHNOLOGY GRO 1478 HK 1,584 1.55 (29.5) (29.5) - 3.9 5.4 5.0 0.0% 3.3% 3.6% 4.1%
VITAL MOBILE HOL 6133 HK 1,046 1.23 (39.7) N/A 7.5 4.1 - - 0.0% 0.0% 0.0% 0.0%
COWELL 1415 HK 2,827 3.40 (44.0) N/A 6.5 6.2 5.0 4.1 0.0% 0.0% 1.8% 2.4%
WAI CHI HOLD 1305 HK 382 1.91 (34.8) (11.6) - 4.9 - - 0.0% 0.0% 0.0% 0.0%
TK GROUP HOLDING 2283 HK 1,736 2.10 (7.9) 29.6 9.5 11.1 8.6 6.8 1.4% 3.3% 3.9% 4.7%
KA SHUI INTL HLD 822 HK 661 0.74 (14.9) (32.7) 10.9 8.6 - - 14.9% 2.2% 0.0% 0.0%
SAS DRAGON HLDG 1184 HK 862 1.38 (19.3) (18.8) 4.2 5.7 - - 0.0% 8.7% 0.0% 0.0%
PANASIALUM HOLDI 2078 HK 1,032 0.86 0.0 0.0 4.5 - - - 5.5% 23.3% 0.0% 0.0%
SCUD GROUP LTD 1399 HK 1,134 1.04 0.0 18.2 22.2 - - - 0.0% 1.0% 0.0% 0.0%
SIM TECH GROUP 2000 HK 946 0.37 (23.7) 2.8 -3.9 39.4 - - 0.0% 0.0% 0.0% 0.0%
WILLAS-ARRAY ELE 2954 HK 275 3.64 (30.0) (13.3) 5.9 9.4 - - 8.0% 8.7% 0.0% 0.0%
Average 9,989 (24.5) (12.2) 12.9 10.8 8.5 10.7 4.4% 5.3% 3.5% 3.7%
SKY LIGHT HOLDIN 3882 HK 2,081 2.60 (24.9) N/A 14.1 10.3 7.5 6.0 - - 4.0% 5.0%
Wearable and security solution peers
GOPRO INC-CL A GPRO US 49,286 370.96 (23.0) (24.3) 88.6 44.7 25.9 22.3 0.0% 0.0% 0.0% 0.0%
FITBIT INC - A FIT US 59,907 289.57 (18.0) N/A - 30.9 50.6 39.2 0.0% 0.0% 0.0% 0.0%
GARMIN LTD GRMN US 54,772 286.86 (12.9) (29.9) 11.8 19.6 14.1 13.3 4.9% 5.1% 5.4% 5.6%
NETGEAR INC NTGR US 7,228 224.85 (14.2) (18.5) 20.1 116.0 15.6 13.1 0.0% 0.0% 0.0% 0.0%
ALARM.COM HOLDIN ALRM US 5,655 124.09 (9.2) N/A - - 92.3 98.0 0.0% 0.0% 0.1% 0.0%
CASIO COMPUTER 6952 JP 38,132 141.74 (12.7) 17.8 34.2 20.0 22.1 17.4 1.0% 1.1% 1.6% 1.8%
Average 33,139 (13.4) (10.2) 38.7 46.2 36.8 33.9 2.9% 3.1% 2.3% 3.7%
Camera manufactuers
FUJITSU LTD 6702 JP 72,195 34.88 (21.1) (16.3) -10.5 7.3 8.4 10.3 1.4% 1.0% 1.6% 1.5%
TOSHIBA CORP 6502 JP 94,959 22.41 (10.5) (32.3) 13.1 24.1 -120.5 7.8 2.8% 2.7% 1.1% 2.3%
CANON INC 7751 JP 306,119 229.52 (9.9) (7.5) 14.4 13.6 16.1 14.7 4.3% 4.0% 4.3% 4.4%
NIKON CORP 7731 JP 38,425 95.85 1.2 (7.5) 9.5 29.2 28.1 22.2 2.7% 2.5% 2.2% 1.1%
SONY CORP 6758 JP 231,234 183.20 (23.3) 14.6 45.6 -22.9 -22.2 19.1 1.1% 1.0% 0.0% 0.8%
PANASONIC CORP 6752 JP 192,682 78.24 (22.1) (15.2) -2.6 14.2 14.8 14.1 0.0% 1.0% 1.4% 1.7%
OLYMPUS CORP 7733 JP 91,361 266.61 (14.7) (3.4) 98.1 -147.3 32.4 23.3 0.0% 0.0% 0.2% 0.4%
Average 159,130 (13.2) (8.6) 36.1 17.7 20.0 15.9 2.7% 2.3% 1.8% 1.8%
GoPro supply chain
CHICONY ELECT 2385 TT 12,552 17.97 (8.3) (14.9) 11.9 11.4 11.5 10.0 6.4% 6.2% 6.2% 7.4%
HON HAI PRECISIO 2317 TT 309,003 20.40 (6.1) (3.3) 10.7 9.0 9.3 9.0 1.8% 2.3% 4.1% 4.4%
AMBARELLA INC AMBA US 21,275 678.83 (29.5) 72.7 136.8 51.5 48.8 28.7 0.0% 0.0% 0.0% 0.0%
TK GROUP HOLDING 2283 HK 1,736 2.10 (7.9) 29.6 9.5 11.1 8.6 6.8 1.4% 2.6% 3.9% 4.7%
Average 1,736 (7.9) 29.6 42.2 20.7 19.5 13.6 1.4% 2.6% 3.9% 4.7%
SKY LIGHT HOLDIN 3882 HK 2,081 2.60 (24.9) N/A 14.1 10.3 7.5 6.0 - - 4.0% 5.0%
Source: Bloomberg, CIRL
Page 28 / 36
Exhibit 25: Financial forecast
Income statement Cash flow
Year to Dec (HKD mn) FY12A FY13A FY14A FY15E FY16E Year to Dec (HKD mn) FY12A FY13A FY14A FY15E FY16E
Revenue 1,659 1,623 2,092 3,042 3,674 Pre-tax profit 214 201 246 344 422
Gross profit (reported) 328 335 446 648 790 Taxes paid 42 36 45 65 76
EBITDA 230 221 270 373 455 Depreciation 15 19 22 24 28
Depreciation -15 -19 -22 -24 -28 Associates 0 0 0 0 0
EBIT 215 202 247 348 426 CFO bef. WC change 271 256 313 434 526
Net interest income (exp.) -1 -1 -1 -4 -5 Change in working cap -79 -143 36 -38 -51
Associates 0 0 0 0 0 Cashflow from operation 192 113 350 396 475
Exceptionals/others 0 0 0 0 0 CAPEX -32 -28 -46 -40 -31
Profit before tax 214 201 246 344 422 Free cash flow 160 85 304 355 444
Tax expenses 42 36 45 65 76 Dividends 0 -236 -284 -84 -104
Minority interest 0 0 0 1 2 Balance sheet adj. -169 -41 34 479 -151
Net profit 123 147 202 279 345 Shares issued 0 0 0 0 0
Dividends 0 -236 -284 -84 -104 Others 0 0 0 0 0
Net cash flow -9 -192 54 751 190
Balance sheet Net cash (debt) start 170 161 -31 23 774
Year to Dec (HKD mn) FY12A FY13A FY14A FY15E FY16E Net cash (debt) at year-end 161 -31 23 774 964
Cash & equiv 244 141 194 801 991
Trade receivables 87 331 269 392 473 Ratios
Other receivables 0 0 0 0 0 Year to Dec FY12A FY13A FY14A FY15E FY16E
Inventories 149 163 193 287 350 Growth rate (%)
Other current assets 103 130 140 145 145 Revenue - (2.2) 29.0 45.4 20.8
Fixed assets 76 87 101 115 116 EBITDA - (3.9) 22.1 38.3 22.0
Intangible assets 0 1 6 6 6 EBIT - (5.9) 22.3 40.9 22.4
Investment, associates etc 12 8 17 17 17 Net profit - 20.2 36.9 38.2 23.8
Total assets 670 862 921 1,763 2,098 Fully diluted EPS - 20.2% 36.9% 38.2% 23.8%
Margins (%)
Account payables 157 272 277 455 548 Gross margin (reported) 19.8 20.7 21.3 21.3 21.5
Other payables 63 168 231 220 220 EBITDA 13.8 13.6 12.9 12.3 12.4
Short-term debt 82 172 171 27 27 EBIT 13.0 12.5 11.8 11.5 11.6
Other current liabs 19 3 22 22 22 Net margin 7.4 9.1 9.6 9.2 9.4
Long-term debts 0 0 0 0 0 Other ratios
Deferred tax and others 5 5 1 1 1 ROE (%) 35.7 61.0 92.2 26.9 27.0
Other long-term liabs 0 0 0 0 0 ROA (%) 18.3 17.1 21.9 15.8 16.5
Total liabilities 326 621 702 725 818 Net gearing (%) (46.8) 12.8 (10.6) (74.5) (75.3)
Interest coverage (x) 173.7 256.3 340.0 87.9 89.0
Share capital 0 0 0 0 0 Receivables days 19.2 74.4 47.0 47.0 47.0
Reserves 255 242 219 1,038 1,280 Payables days 43.0 77.2 61.3 69.4 69.4
Shareholders' equity 255 242 219 1,038 1,280 Inventory days 40.7 46.3 42.8 43.8 44.3
Minorities 89 0 0 0 0 Effective tax rate (%) (19.7) (18.1) (18.1) (19.0) (18.1)
Total equity 344 242 219 1,038 1,280
Net cash (debt) 161 -31 23 774 964
Source: Company data, CIRL
Risk Factors
Downside risks include: 1) Revenue is highly dependent on a relatively small
number of customers; 2) Lack of choice in raw material supply; 3) Competition
from oversea players; 4) more-than-expected competition; 5) rapidly changing
technology trends, customers no longer lead in their respective industry; and 6)
stock liquidity risk
Page 29 / 36
Company background
Founded in 2000 and listed in HKEX in July 2015, Sky Light (‘SL”) initially
engaged in the business of disposable single use camera and digital camera.
Through continuous growth and progressive product development, SL has
extended the breadth and depth of its product lines, transforming successfully into
one of the leading digital device and solution providers. Its own brand “SKYPIX”
products, as well as other design-driven JDM and ODM products have been
offered to world renowned brands such as GoPro, NETGEAR, Canary and Ion etc.
Sky Light is the world’s 2nd
largest action camera manufacturer with 31% market
share in 2014.
Exhibit 26: Sky Light is the world’s 2nd
largest action camera manufacturer
Exhibit 1:
Pork
products
sold in
supermarket
counters
Source: Source: Frost & Sullivan, CIRL
The major manufacturers for the global action camera industry include JDM/ODM
manufacturers (e.g. Sky Light), OEM and own brand manufacturers from China,
Taiwan (e.g. Chicony, Hon Hai Precision) and Japan. Sky Light differentiates
themselves from other manufactueres by currently offering design-driven JDM
(Joint Design Manufacturing) and ODM (Original Design Manufacturing) solutions
to customers (such as GoPro, NETGEAR etc). This involves in product design and
development, hence having established advanced product planning, as well as
R&D capabilities.
For JDM, Sky Light engage in joint product design and development with their
customers for products that Sky Light manufacture on a JDM basis. Once they win
a customer project, they will collaborate with the customer with Sky Light’s design
quality assurance team to jointly design and develop a product. After the customer
confirms the specification, they will place a purchase order and Sky Light will
begin to procure materials and manufacture the product. The customer is typically
entitled to any IP tights relating to the product design and development.
53.0%
26.0% 31.0%
23.0%
41.0%39.0%
4.0%10.0%
10.0%
20.0% 23.0% 20.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2012 2013 2014
Sky Light Company A Company B Others
Page 30 / 36
Through JDM+ODM business model, Sky Light has not only built up more intact
strategic relationship with clients, but also able to stay ahead of the market in the
light of the rapid development of consumer electronics’ market. We believe Sky
Light’s unique JDM business model enable them to possess competitive
advantage over industry peers, hence enjoying a high GPM.
Exhibit 27: Sky Light’s business model
Source: Company Prospectus
Page 31 / 36
Exhibit 28: SL Group’s revenue breakdown FY 2010-2012
Source: Company Prospectus, CIRL
Concentrated customer base with diversification strategy underway
During the track record period, GoPro accounted for >70% and >90% of Sky
Light’s revenue and action camera shipment respectively. To lower customer
concentration risk, Sky Light has begun to adopt a diversification strategy, and
expand their product offerings to develop the home imaging and smart wearable
businesses.
Sky Light began commercial production and shipment of homing imaging products
in 3Q14 and expects to begin shipment of smart wearable products by June 2015.
Sky Light seeks to capitalize on the fast-growing market demand for these
consumer electronic products, thereby creating new sources of revenue and
diversify Sky Light’s customer base. Sky Light currently sells the majority of their
products directly to brand customers including camera brands such as GoPro
(GPRO US) and iON, established technology equipment brands such as
NETGEAR (NTGR US), as well as high-potential start-up companies such as
Canary.
Page 32 / 36
In addition, Sky Light currently sells a small amount of digital imaging products
domestically through online channels under their own brand “SKYPIX”. Sky Light
plans to use ~19% of the IPO net proceeds for the development of new house
brands (SKYPIX) for home imaging and smart wearable products.
Exhibit 29: Key milestones for Sky Light
Exhibit 1:
Pork
products
sold in
supermark
et counters
Source: Company
Capacity expansion on the way
To sustain a continuous growth, Sky Light’s CAPEX rose from HK$37.2mn in FY12 to HK$
HK$55.8mn in FY14. In FY14, the utilization rate for both facilities in has reached 86% and
92.2% respectively. This reflected the strong order flow from Sky Light’s existing clients.
SL plans to construct new facility and purchase new equipments starting from 2015, they
plan to use ~37% of the IPO net proceeds for the purchase of production facilities as well
as machinery and equipment to fulfill clients’ strong order book. Sky Light expects a
CAPEX of HK$41.2mn in FY15E, which will be used mainly for purchases of
production equipment to expand their production capacity and upgrade their
production facilities in Shenzhen and Heyuan. Management sees the total capacity will
increase by 50% by FY15E vs. FY14.
Page 33 / 36
Exhibit 30: Production Capacity and Utilisation Rate
FY12 FY13 FY14
Shenzhen Production Facility
Designed capacity ('000 pieces) 2,656 2,709 3,293
Actual production volume 2,123 2,204 2,831
Average utilisation rate 79.9% 81.4% 86.0%
Heyuan Production Facility
Designed capacity ('000 pieces) 42,426 86,342 119,960
Actual production volume 33,059 52,589 110,551
Average utilisation rate 77.9% 60.9% 92.2%
Source: Company Prospectus, CIRL
Exhibit 31: Sky Light’s current production facilities
Source: Company data, CIRL
Page 34 / 36
Exhibit 32: Sky Light’s use of proceeds allocation
37.0%
19.0%
19.0%
15.0%
10.0%
Purchase of PP&E Marketing expenditure M&As
R&D related expenditure Working capital & others
Source: Company Prospectus, CIRL
Industry overview
Concentrated industry with high entry barriers
According to Frost & Sullivan, the top 3 action camera manufacturer already
accounted for 80% of the total revenue generated. Since the industry is highly
concentrated, we believe the industry possesses factors that may restrict from
potential new comers.
Capital intensive investment: A large amount of capital investment is
required to purchase a large amount of machineries, equipment and
apparatus. The recruitment of professionals and technical staffs is also
required. Additionally, manufactuerers often serve as part of the supply
chain for multinational companies, therefore large-scale production
capability is also crucial for OEMs to achieve economy of scale.
R&D capabilities: Strong R&D capabilities are required during the
manufacturing process, such as moulding, imaging as well as software &
hardware testing. R&D is also needed to keep pace with new innovations
and upgrades in key components such as DSPs and sensors. Software
development capabilities also create an entry barrier as products require
more sophisticated software applications.
As of December 31 2014, Sky Light had a total of 349 product planning and
R&D staff dedicated to designing and developing innovative products and
techonologies. Sky Light currently had 36 registered patents and 44
copyrights and applied for an additional 19 patents and 2 copyrights.
Page 35 / 36
Flexibility and ability to meet the production schedule of the
downstream customers: At the early stages of product life cycle,
customers may make changes to their design delivery schedule. They
expect manufacturers to be flexible and responsive to their changes. In
addition, the ability to deliver according to schedule is important to ensuring
regular order placing.
Multinational companies impose stringent requirements on product quality
and look for business partnerships that can maintain consistent product
quality. Therefore, manufacturers with advance technology have a clear
advantage because multinational companies are willing to offer a higher
price for better and stable product quality. Given the capacity and
technology constraints, small-scaled manufacturers may be less flexible or
adaptive to customers’ changes in design and delivery schedule.
Proven track record and existing customer loyalty: To ensure product
quality, multinational companies and their suppliers normally maintain an
approved supplier list, and would not easily change their respective mold
suppliers. Therefore, new entrants without a proven track record would find
it difficult to enter into the market or even be included in the supplier list.
Securing orders from multinational companies or their suppliers are
important for OEM manufacturers. In order to be included in the supplier list,
manufacturers normally need to meet the qualification and quality control
standards set by the relevant companies
Management Profile
Exhibit 33: Management with >10 years of industry experience
Source: Company Prospectus, CIRL
Name Age Position Year of Joining Sky Light Principal Responsibilty
Mr. Tang Wing Fong Terry 56 Chairman, Executive Director & CEO 2005
- Over 20 years of experience in consumer
- Responsible for the overall strategic planning & overseeing the general management of the
Group
Mr. Wu Yongmou 37 Executive Director 2010- Over 10 years of experience in the digital imaging industry and production
- ManagementResponsible for the overall operations of Sky Light Technology (HY)
Mr. Lu Yongbin 42 Executive Director & CFO 2005- Approximately 22 years of accounting and financial management experience
- Responisbile for the management of overall financial and accounting affairs of the Group
Mr. Gan Weijun 47 Head of Research and Development 2002- Approximately 12 years of experience in the digital imaging industry
- Overall research and development of the Group
Mr. Tsui Chiu 36 Head of Product Planning 2011
- Approximate 10 years of experience in product planning and management in the consumer
electronics industry
- Overall product management of the Group
Ms. Tse Pik Har 40 Head of Sales and Marketing 2000- Approximately 14 years of experience in sales and marketing matters
- Overall sales and marketing of products of the Group
Page 36 / 36
Rating Policy
Rating Definition
Stock Rating Buy Outperform HSI by 15%
Neutral Between -15% ~ 15% of the HSI
Sell Underperform HSI by -15%
Sector Rating Accumulate Outperform HSI by 10%
Neutral Between -10% ~ 10% of the HSI
Reduce Underperform HSI by -10%
Analysts List
Antony Cheng Head of Research (852) 2235 7127 [email protected]
Hayman Chiu Associate Director (852) 2235 7677 [email protected]
Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]
Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]
Johnny Yum Research Assistant (852) 2235 7617 [email protected]
Analyst Certification
I, Hayman Chiu, Associate Director of Cinda International Research Limited., hereby certify that all of the views
expressed in this report accurately reflect my personal views about the subject company or companies and its or their
securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the
specific recommendations or views expressed in this report / note.
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