Skyworth recorded a net shareholder profit of RMB 391 million in the first half of 2020, up 116.0% year on year. The growth was mainly contributed by a one-time VAT refund and sale of a subsidiary company. Total revenue fell 7.3% year over year to RMB 15,979 million, domestic TV sales fell 22.3% year over year, and overseas TV sales rose 3.5% year over year. Gross margin fell 0.4 percentage points to 19.3% year over year, mainly due to price wars and an increase in the share of online sales.

The TV market is expected to remain challenging in the second half of 2020. With the COVID-19 pandemic under control, the company's production and sales network in China has been fully restored. However, market competition has not abated as new players continue to enter the industry.

We expect the company's domestic TV sales to recover in the second half of 2020, but operating profits will be meager. Overseas TV sales are expected to be stable and profit margins steady. However, services based on smart TV systems are expected to grow rapidly and record rapid profit growth.

The investment rating was maintained at “Collection” and the target price was raised to HK$3.00. The new target price corresponds to 8.7 times the 2020 price-earnings ratio and 11.9 times the 2021 price-earnings ratio, respectively. The company has made a share repurchase offer, and the outraged spin-off has been approved by the Hong Kong Stock Exchange. We expect the company's high quality assets to support its valuation. The main downside risks include a weak TV consumer market and the spread of COVID-19 overseas.