1H20 performance is higher than we expected.
The company announced 1H20 results: operating income was 15.98 billion yuan, down 7.3% from the same period last year, and net profit was 391 million yuan, up 116% from the same period last year. Corresponding to 2Q20's operating income of 9.23 billion yuan, an increase of 14.4% over the same period last year, and a net profit of 188 million yuan, an increase of 151% over the same period last year. Due to the one-time gains from the sale of subsidiaries and the rapid growth of the Internet business, the company's performance was higher than the previous forecast and exceeded our expectations.
Overseas business performance is stable: 1) affected by the domestic epidemic, China's TV revenue is-20% to 5.16 billion yuan, and shipments are-16% to 3.42 million units. 2) overseas TV revenue was + 3.5% to 2.83 billion yuan compared with the same period last year, and shipments were + 7.1% to 3.61 million units compared with the same period last year, with growth accelerating in the second quarter. 3) during the epidemic, China showed that the global competitiveness of the industry was highlighted, and the global share increased. In addition to Skyworth, overseas business of TCL Electronics and Hisense Video also increased significantly in the second quarter. 4) the revenue of 1H20 set-top box business was-11% to 3.81 billion yuan compared with the same period last year, of which the domestic business declined and the overseas business remained flat.
The profitability of the Internet business is beautiful: 1) under the epidemic, the Internet operation business (Cookai) benefited from the increase in consumer TV viewing time, and the 1H20 revenue was + 35% to 506 million yuan compared with the same period last year. At the end of 1H20, a total of 50.15 million intelligent terminals were activated, and the number of daily active users was 17.65 million, an increase of 14% compared with 2019. 2) 1H20, the operating profit of the multimedia (color TV, Internet) division was 259 million yuan, compared with a small loss in the same period last year. The main reason is the improvement of the profitability of the Internet business. 3) 1H20, subsidiary Skyworth Digital (set-top box) home net profit decreased by 30% compared with the same period last year. Smart small home appliance business makes a small profit. Modern service industry (property rental) has been affected by the epidemic, and the operating profit of the branch has decreased significantly.
Trend of development
The company plans to break up Kukai and go public separately. 1) Kukai was set up by Skyworth in 2016 and successively accepted the investment of iQIYI, Inc., Tencent and Baidu, Inc. in 2006-18. The annual valuation of the company in 2016-17-18 is 3 billion yuan / 4 billion yuan / 9.6 billion yuan respectively. 2) Skyworth currently holds a 56.79% stake in Shenzhen Cookai. In 2019, Shenzhen Cookai has an income of 948 million yuan and a net profit of 148 million yuan. 3) the company is currently undervalued by the market, with a total market capitalization of only HK $8.2 billion and a net book asset of RMB 16 billion (about HK $17.9 billion) at the end of 2019. We expect that the split will help it get a higher valuation.
Profit forecast and valuation
Due to the good growth of Internet operation business, we raised the net profit of 2020 Universe by 15.6% to 981 million yuan / 998 million yuan in 2021. The current share price corresponds to a price-to-earnings ratio of 7.5 times 2021 / 7.3 times earnings in 2020. To maintain a neutral rating, due to the increase in earnings forecasts, we raise our target price by 10.0% to HK $3.08, corresponding to 8.5 times 2020 price-to-earnings ratio and 8.4 times 2021 price-to-earnings ratio, which is 14.5% upside from the current share price.
Risk
Market competition risk; global trade friction risk.