Sky Light Holdings Limited (3882 HK) An undervalued play ... · 31% market share in 2014. Price Chart Sources: ... Sky Light’s early mover advantage in action camera and IP camera

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26 August 2015

Hayman Chiu

[email protected]

(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


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


Exhibit 5: Sky Light’s planned use of IPO proceeds

Exhibit 1:

Pork

products

sold in

supermark

et counters


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




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


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$)

http://www.benzinga.com/analyst-ratings/analyst-color/15/04/5432132/cleveland-research-gopro-undervalued-in-near-term-by-20

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


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


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


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


Exhibit 22: GoPro is still in drivers’ seat in action camera market

Exhibit 1:

Pork

products

sold in

supermark

et counters


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




Heyuan Production Facility





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


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


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.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential

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