GoPro forecasts a 31% year-on-year decline in revenue in the fourth quarter of 15, below the guidance given earlier. Weak sales will be a drag on Tiancai's performance as GoPro still contributes 66 per cent of Tiancai's revenue. In view of the slowdown in GoPro sales, we cut our 2015-17 revenue forecasts for the motion camera business by 1%, 40% and 61%, respectively, while maintaining our growth forecasts for home imaging and digital imaging revenue. Maintain the buy rating on the stock and lower the target price to HK $2.20.
Support the main points of rating
Sales of GoPro15 in the fourth quarter of the year were below the company's guidance. According to GoPro15's fourth-quarter results, KuaiBao, the company's revenue for the quarter was $435 million, down 31% from a year earlier and 17% lower than the previous guidance (sales of $500 million to $550 million in the fourth quarter of 15).
Downgrade the revenue contribution forecast of GoPro to Tiancai Holdings. Against the backdrop of weak GoPro performance, we adjusted our forecast for year-on-year growth of sports camera shipments in 2016-17 to-37 per cent and-30 per cent respectively. We currently forecast that Tiancai Holdings will ship 1.65 million and 1.15 million sports cameras in 2016 and 17, respectively. We still expect revenue from home imaging and digital imaging to grow by 40% and 60% respectively in 2016.
Tiancai Holdings has the opportunity to develop other businesses. The exclusive supply agreement between GoPro and Skycolor Holdings will be cancelled. Therefore, we expect Tiancai Holdings to expand its customer base more actively to make up for the decline in sales to GoPro.
Main risks faced by rating
GoPro sales fell short of expectations.
Valuation
Maintain the buy rating and lower the target price to HK $2.20. Based on a 10 times 2016 forward price-to-earnings ratio, we lowered the target price to HK $2.20, which corresponds to a price-to-earnings ratio of 6.6 times net cash of HK $0.75 per share.
Weak sales of GoPro will drag down the performance of Tiancai Holdings
GoPro (GPRO US/ $14.59, unrated) released results for the fourth quarter of 15, KuaiBao, which expects revenue of $435 million in the fourth quarter of 15, down 31% from a year earlier and 9% from a month earlier, and 17% below the median of the previous guidance (sales of $500 million to $550 million in the fourth quarter of 15). Full-year revenue is expected to reach $1.6 billion, up 16% from a year earlier. The repricing of HERO4 Session in December resulted in charges related to price protection, resulting in a loss of $21 million in sales revenue in the fourth quarter of 15 years.
We believe that GoPro's performance is due to the following reasons: 1) the increase in the choice of products in the motion camera market, especially low-priced products; 2) the lack of an attractive product upgrade and replacement cycle, especially in the case of the delayed release of GoPro Hero 5; and 3) the unsatisfactory user experience of download and software editing functions.
As more than 60 per cent of Tiancai's revenue still comes from GoPro,GoPro sales, weak sales will affect Tiancai's outlook and share price performance. However, as GoPro fails to meet its promised orders, the exclusive supply agreement between the two parties will be cancelled. Therefore, we predict that Tiancai Holdings will be more active in expanding its customer base to make up for the decline in GoPro sales. However, the process will depend on the execution of the company and the state of the consumer electronics market.
Profit adjustment and recommendation
We expect Tiancai Holdings to ship 2.62 million GoPro sports cameras in 2015, accounting for 42% of GoPro sales. Given weak GoPro sales, we reduced year-on-year growth in 2016 and 17 sports camera shipments from 4 per cent and 4 per cent to-37 and-30 per cent, respectively. We currently forecast that Tiancai Holdings will ship 1.65 million and 1.15 million sports cameras in 2016 and 17, respectively. As a result, we expect Tiancai Holdings to generate HK $1.2 billion in sales of sports cameras and accessories in 2016, down 38 per cent from a year earlier.
At the same time, we maintain our forecast of 40% growth in home video revenue, mainly due to the NetGear (NTGR US/ $36.66, unrated) and new webcam models for new customers. As traffic recorders, law enforcement recorders and other products begin to ship, we expect digital imaging revenue to grow 60 per cent year-on-year to HK $304 million.
After the adjustment, we lowered our 2015-17 sports camera-related revenue forecasts by 1%, 40% and 61%, respectively. In the second half of 15 years, we estimate that about 66 per cent of Skycolor Holdings' income comes from GoPro,25% from home images and 7 per cent from digital images (including waterproof cameras, driving recorders, law enforcement recorders, etc.). GoPro still contributes more than 60 per cent of the company's revenue. As a result, we lowered our profit forecasts for 2015-17 by 1 per cent, 37 per cent and 45 per cent, respectively, with the reduction in GoPro shipments.
After adjustment, we lower the target price to HK $2.20 based on 10 times expected 2016 earnings, which corresponds to 6.6 times earnings after excluding net cash of HK $0.75 per share. The current share price is equivalent to 8 times 2016 forward earnings or 4.6 times 2016 forward earnings, and the current dividend yield is 7.4% (2015 final dividend and 2016 interim dividend).