GoPro expectation reset to stable growth

We believe hyper-growth stage of action camera market has passed (50% FY12-14 shipment CAGR) and the market is resetting expectation on GoPro (CMS est.17% FY15E-17E shipment CAGR). As the sole manufacturer of GoPro consumergrade cameras since 2005, we expect Sky Light to benefit from GoPro’saccelerating mass market penetration (> 50% of 9M15 shipments are consumergrade models). We estimate Sky Light’s action camera shipment/revenue to growat 16%/12% CAGR during FY15E-17E and our sensitivity test suggested 6%downside to our conservative FY16E EPS estimate if GoPro makes a mere7%YoY shipment growth (vs. our base case of +19%YoY).

Dual growth engines in FY16E: Smart home, specialty cameraWith continued R&D investment and leading-edge imaging technology, SkyLight’s recent order wins in IP cameras (Netgear/Canary/iON), car camcorders(Chinese internet), police cameras (US) emerge as new growth engines, in ourview. We expect home imaging and digital imaging revenue to grow at 35%/37%CAGR during FY15E-17E, and we believe the newly set-up Xian R&D centerfocusing on 4K/LTE/cloud/image analysis as well as the US subsidiary willstrengthen product development and accelerate overseas expansion.Trading at deep discount but with high ROE and div. yield

Trading at 5.5x FY16E P/E, 35% discount to its peers, Sky Light is undervaluedconsidering its 30% ROE and 9% dividend yield. We initiate coverage on SkyLight with BUY rating and TP of HK$3.36 (46% upside), based on 8.0x FY16EP/E, 6% discount to HK-listed camera component makers. We believe marketconcerns on GoPro slowdown is overdone, given Sky Light unjustified valuationafter 39% share price correction from peak in Aug. Near-term catalysts include 3new products (Netgear new IP cam/car camcorder/police cam) launch in Dec.