4 august 2015 buy 39 side sky light holdings -...

BOCI research is available electronically on www.bociresearch.com.

Initiating Coverage 4 August 2015

BUY 39% side Target Price: HK$4.60

3882 HK

Price: HK$3.30

TP Basis: P/E

Sector Rating: NEUTRAL

Key Highlights of this Report

Annual and semi-annual earnings estimates

Analysis of key value-added to GoPro

Home imaging and smart wearable device product illustrations

Key Catalysts/Events

Announcement of strong 1H15 results

Strong sales of home imaging products

Launch of smart wearable and other new products

Trading Summary

(%) YTD 1M 3M 12M

Absolute NA NA NA NA

Relative to HSCEI NA NA NA NA

Shares outstanding (m) 800

Free float (%) 25

Market cap. (HK$ m) 2,641

3M avg. daily turnover (HK$ m) 60

Net debt/equity (%) (2015E) Net cash

Major shareholder (%)

Tang’s Family Trust 52

Source: Company data, Bloomberg, BOCI Research

Closing prices are as of 31 July 2015

BOCI Research Limited

Technology: Hardware & Equipment

Tony Zhang, CFA

(852) 3988 6417 [email protected]

Michael Meng

(852) 3988 6433 [email protected]

Sky Light Holdings Surging with GoPro and home imaging Sky Light Holdings (Sky Light) is a leading digital imaging device and solution provider. It is one of the two manufacturers for the top action camera brand GoPro. It also provides home imaging products for several brands. We estimate the company will deliver 32% YoY earnings growth in 2015, driven by both the surging growth in shipments to GoPro and the full-year revenue contribution from home imaging products. We initiate with a BUY rating and target price of HK$4.60.

Key Factors for Rating

Leading player in action camera manufacturing industry. Sky Light is a principal manufacturer for the world’s largest action camera maker GoPro Inc (GPRO US) and also provides products to another brand iON. In 2014, Sky Light was the second-largest action camera manufacturer worldwide with a 31% market share in terms of global shipments.

Shipments to GoPro to extend fast growth. Action camera shipments are expected to extend its fast growth driven by its easy operation and social networking demand. GoPro has built up the barrier in this market with its brand image and established ecosystem. GoPro will also break into the drone and virtual reality fields, which should fuel its future growth.

Close connection with GoPro thanks to R&D and manufacturing capability. Sky Light has been cooperating with GoPro for nearly a decade. Its R&D capability and expertise in certain essential areas, such as image fine-tuning, high-reliability manufacturing, wireless communication and waterproofing, have helped to build a strong relationship with GoPro.

Home imaging and smart wearable rising as new growth drivers. The IP camera Sky Light provides to its major customer NETGEAR Inc (NTGR US) topped sales in the North American, European and Australian markets within six months after official launch and the company continues to broaden its distribution channels. We expect this segment to surge thanks to full-year revenue contribution in 2015. The smart wearable device it supplies to iON are now available in the US.

Key Risks to Rating

Weak sales of GoPro action camera, poor market reception for GoPro’s particular models supplied by Sky Light.

Valuation

We initiate with a BUY rating and target price of HK$4.60. Our target is derived using 12x forward P/E based on average EPS for 2015E and 2016E.

Investment Summary

Year ended 31 Dec 2013 2014 2015E 2016E 2017E Revenue (HK$ m) 1,623 2,092 3,059 3,629 4,380 Change (%) (2) 29 46 19 21 Net profit (HK$ m) 147 202 267 351 432 Fully diluted EPS (HK$) 0.184 0.252 0.334 0.438 0.540 Change (%) 20.2 36.9 32.3 31.3 23.3 Consensus EPS (HK$) - - 0.344 0.435 0.536 Core EPS (HK$) 0.184 0.258 0.371 0.449 0.545 Change (%) 20.2 40.1 43.9 21.0 21.3 Fully diluted P/E (x) 17.9 13.1 9.9 7.5 6.1 Core P/E (x) 17.9 12.8 8.9 7.3 6.1 CFPS (HK$) 0.03 0.37 0.33 0.45 0.55 P/CF (x) 122.0 9.0 10.0 7.3 6.0 EV/EBITDA (x) 12.8 10.0 5.7 4.0 2.8 DPS (HK$) 0.263 0.355 0.100 0.131 0.162 Yield (%) 8.0 10.7 3.0 4.0 4.9

Source: Company data, BOCI Research estimates

4 August 2015 Sky Light Holdings Limited 2

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Table of Contents

INVESTMENT SUMMARY ...................................................................... 3

VALUATION........................................................................................ 5

FINANCIAL FORECASTS ...................................................................... 6

COMPANY OVERVIEW ....................................................................... 14

GOPRO: LEADING ACTION CAMERA BRAND WITH ESTABLISHED ECOSYSTEM ............................................................... 26

HOME IMAGING: NEW GROWTH ENGINE WITH HUGE UPSIDE POTENTIAL ................................................................ 37

INDUSTRY OVERVIEW ....................................................................... 41

INVESTMENT RISKS .......................................................................... 47

MANAGEMENT PROFILES ................................................................. 48

LISTED COMPANIES IN THIS REPORT ................................................. 52

4 August 2015 Sky Light Holdings 3


INVESTMENT SUMMARY

Riding on Action Camera Boom with GoPro

Sky Light is a principal manufacturer for the world’s largest action camera brand GoPro. Along with GoPro’s shipment surge over the past several years, Sky Light has shown robust growth and established itself as a leading action camera manufacturer on the global stage. The company has been supplying action cameras to GoPro since 2006. According to Frost & Sullivan, from 2010 to 2014, Sky Light’s aggregate shipments of action cameras totalled approximately 7.1m units, ranking first among action camera manufacturers worldwide in terms of units shipped during the said period. In 2014, Sky Light was the second-largest action camera manufacturer worldwide with a 31% market share in terms of global shipments.

During 2012-14, Sky Light’s action camera shipments came to approximately 1.6m, 1.5m and 2.4 m units, respectively, implying a 22.5% CAGR for the period. During the same period, the company’s revenue from action cameras and accessories increased from HK$1,259m to HK$1,784m, delivering a 19.0% CAGR.

Advanced R&D and Manufacturing Capabilities to Provide Value-added to GoPro

With more than 10 years of experience in digital imaging products and nearly 10 years of cooperation with GoPro, Sky Light has built up its expertise in some essential areas in digital imaging, such as wireless communication and waterproof technology.

The key value-added that Sky Light provides to GoPro includes the following; (i) Waterproof technics: every GoPro action camera package (except for GoPro4 Session) includes waterproof housing. According to our channel check, Sky Light is the sole waterproof housing supplier for GoPro. The waterproof housing, which passes the highest IPX8 waterproof standard testing, enables GoPro’s products to work in depths of up to 40 metres, (ii) High reliability manufacturing: action cameras can be installed in some extreme environments, such as on motorbikes or aircraft wings. Therefore, action cameras need to be highly reliable. The GoPro action camera manufactured by Sky Light needed to pass some very harsh tests, such as 5-2000Hz vibration on X, Y, Z axis, each for two hours, and a 7.7g acceleration test, (iii) Image fine-tuning: GoPro cameras can automatically adjust their settings to provide the best quality videos and pictures. Besides using a very powerful processing chipset, Sky Light has performed many tests to fine-tune the sensor and processing chip so that the cameras can automatically find the best setting in various environments, and (iv) Wireless communication: GoPro has Wi-Fi and Bluetooth functions for remote control and data exporting. Sky Light helps GoPro to design and fine-tune the wireless function.

Recurring Net Profit to Double in 1H15E

Sky Light issued a positive profit alert for 1H15, announcing that both its revenue and recurring net profit will increase more than 80% YoY in the period. The company’s major businesses all saw strong growth in the half. GoPro’s total revenue increased 63% YoY in 1H15 and we estimate the home image business will bring in revenue of around HK$200m. Therefore, despite some margin deterioration, we forecast the company's revenue to increase 85.4% YoY and net income to rise 54.1% YoY for 1H15. If we strip off the IPO expense (HK$24m in 1H15) and share option expense, the recurring net income would have increased 104.4% YoY in 1H15.

Cementing Ties with Customers

The company cooperates with clients closely for both the JDM and ODM models. For the products on a JDM basis, Sky Light engages in joint product design and development with customers. Once the company wins a project, it will collaborate with the customer to jointly design and develop the product.

Its product design capability and the stringent quality control process help Sky Light to put up entry barriers to the business and ensure close relationships with its major customers, including GoPro.



Among its top-five customers in 2014, three had had cooperation relationships with Sky Light for over five years. In order to strengthen its relationships with key customers, the company implements a client-based team model. For each of its key customers, it sets up a dedicated team with staff from the product planning, research & development, and sales & marketing departments for service quality assurance.

Home Imaging and Smart Device Serve As New Growth Drivers

Recently, Sky Light has been actively expanding its product offerings to new categories, such as home imaging and smart wearable devices. In 3Q14, the company started the commercial production, shipment and sales of home imaging products. Its home imaging clients include iON, NETGEAR and Canary. According to NETGEAR data, its Arlo brand IP camera has become the No.1 (or close tie for No.1) brand in North American and one of the top three brands in the Australian and European markets. Home imaging products made around one quarter of revenue contribution at HK$50.3m, or 2.4% of its full-year 2014 revenue. We forecast home imaging revenue to surge 9.7x YoY and contribute 17.5% of total revenue in 2015.

Sky Light started to ship its smart device from June 2015, which include iON SnapCam and wearable cameras for US fire departments.



VALUATION

Initiate with a BUY rating and target price of HK$4.60. We set our target price at HK$4.60, which is derived using 12x forward P/E based on average EPS for 2015E and 2016E. We benchmark the company to global electronic device and digital camera manufacturers and 12x is the average trading P/E for Hong Kong-listed electronic device manufacturers.

We reckon 12x forward P/E is fair as (i) its major customer GoPro should maintain leadership in the action camera market and continue to deliver fast growth, (ii) the surging growth in the home imaging business due to full-year revenue contribution in 2015 should drive Sky Light’s fast growth and provide a more balanced revenue mix, (iii) the action camera market and IP camera market are still growing quickly and the competition in the high-end market is still manageable, where the competitive environment and growth potential are favourable for Sky Light, unlike that faced by smartphone component and assembly companies listed in Hong Kong, where there is cut-throat competition among handset makers and a slowdown in smartphone market growth.

Figure 1. Valuation Comparison

Code Company Price Market cap P/E (x) P/B (x) ROE (%) Yield (%)

(31 July 2015) (US$ m) 2014 2015E 2016E 2014 2015E 2014 2015E 2015E

Local ccy

Hong Kong

3882 HK Sky Light 3.30 341 13.1 9.9 7.5 NA 2.5 41.3 29.3 3.0

1415 HK Cowell e Holdings 5.22 560 10.8 6.7 5.0 3.0 2.3 32.0 38.7 4.5

698 HK Tongda Group 1.31 956 14.0 10.3 8.3 2.1 1.8 16.9 18.6 3.0

2018 HK AAC Technologies 44.00 6,969 18.5 14.6 13.1 4.7 4.0 27.5 29.5 2.8

285 HK BYD Electronic Intl 6.45 1,875 12.9 7.7 6.3 1.2 1.1 9.7 13.9 1.1

2038 HK FIH Mobile 4.05 4,069 23.3 14.5 12.1 1.0 1.0 4.4 6.8 1.5

2382 HK Sunny Optical 14.96 2,117 22.8 17.0 14.4 4.0 3.4 18.6 21.6 1.8

Average 16.5 11.5 9.5 2.7 2.3 21.5 22.6 2.5

Taiwan

4915 TT Primax Electronics Ltd 34.75 483 9.8 8.2 7.2 1.7 1.4 18.5 19.8 5.9

2317 TT Hon Hai Precision Industry 90.70 43,411 9.6 9.7 9.4 1.4 1.3 16.3 14.4 3.7

4938 TT Pegatron Corp 88.80 7,193 11.8 10.3 9.2 1.6 1.5 14.3 15.0 5.6

2301 TT Lite-On Technology 34.70 2,569 12.0 10.1 9.3 1.6 1.0 8.9 10.2 6.7

2385 TT Chicony Electronics 82.10 1,802 13.5 12.1 10.3 1.6 2.4 18.3 19.4 5.8

Average 11.4 10.1 9.1 1.6 1.5 15.3 15.8 5.5

Japan

6702 JP Fujitsu Ltd 650.6 10,839 11.8 11.8 9.6 1.8 1.6 17.0 13.9 1.3

6502 JP Toshiba Corp 380.0 12,960 16.2 12.5 8.6 1.1 1.2 6.3 9.3 2.2

7751 JP Canon Inc 3,972.0 42,637 19.1 17.4 16.0 1.4 1.5 7.8 8.5 3.9

7731 JP Nikon Corp 1,474.0 4,756 31.8 22.6 20.2 1.0 1.0 3.3 4.2 1.2

6752 JP Panasonic Corp 1,457.0 28,765 16.7 16.5 13.3 1.7 1.6 11.5 10.4 1.5

7733 JP Olympus Corp 4,750.0 13,100 N/A 26.0 22.9 4.6 4.1 (2.5) 16.1 0.4

6758 JP Sony Corp 3,533.0 35,752 N/A 23.7 17.6 1.7 1.6 (3.0) 7.4 0.7

Average 19.1 18.7 15.4 1.9 1.8 5.8 10.0 1.6

Overall average 15.8 13.8 11.6 2.1 1.9 14.1 16.1 3.0

Source: Bloomberg, BOCI Research estimates



FINANCIAL FORECASTS

Total revenue. We expect the company’s revenue growth to accelerate to 46.2% YoY in 2015. The rapid growth should be mainly be because: (i) the action camera and accessories business is expected to maintain high growth of 27.8% YoY; and (ii) after commencing volume shipments for home imaging products in 3Q14, this business should rise as a potent new growth driver as it makes a full-year revenue contribution. We estimate the revenue contribution from home imaging will increase to 17.5% in 2015 from 2.4% in 2014.

Figure 2. Revenue Growth


Figure 3. Revenue Mix


Action Cameras and Accessories: Maintaining Fast Growth

Action cameras and accessories contributed 75.9%, 80.4% and 85.2% of the company’s total revenue in 2012, 2013 and 2014 respectively. 75.1%, 79.9% and 82.7% of total revenue came from GoPro. Over the past three years, Sky Light shipped approximately 1.6m, 1.4m and 2.2m action cameras to GoPro, accounting for 69%, 37% and 42% of GoPro’s total shipments.

-2.2%

29.0%

46.2%

18.6% 20.7%

-20%

0%

20%

40%

60%

0

2,000

4,000

6,000

2012 2013 2014 2015E 2016E 2017E

Others (LHS) Home imaging (LHS)

Digital imaging (LHS) Action cameras and accessories (LHS)

YoY change (RHS)

(HK$ m)

76% 80% 85%75% 75% 74%

23% 14% 10%

5% 4% 2%

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18% 20% 21%

1% 6% 3% 3% 2% 2%

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2012 2013 2014 2015E 2016E 2017E

Action cameras and accessories Digital imaging Home imaging Others



In 2014, the company’s revenue from the sales of action cameras and accessories increased 36.7% YoY to HK$1.78bn. This increase was mainly fuelled by an expansion in action camera sales, as such shipments jumped from approximately 1.5m units in 2013 to approximately 2.4m units in 2014. This increase in shipments was primarily due to the launch of HERO3+ Silver in 4Q13 and launch of new entry-level GoPro HERO in 3Q14. We estimate that the company recorded a 6.9% YoY ASP decline for action cameras in 2014, primarily because of the lower price of the new entry-level GoPro HERO launched in 3Q14. Revenue from the sales of accessories also increased as a result of higher shipments, which was partially offset by a lower ASP for accessories primarily due to more purchase orders for simple accessory parts of lower prices.

We forecast the total action camera shipment volume will increase 35% YoY in 2015. Along with the decent growth of accessories, we estimate the revenue from action cameras and accessories will increase 27.8% YoY and contribute 74.5% of total revenue this year.

Figure 4. Action Camera Shipment Volume Growth


Figure 5. Action Camera Shipments to GoPro and Share Allocation


1,6351,539

2,3803,213

3,856

4,781

0.0% -5.9%

54.6%

35.0%

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2012 2013 2014 2015E 2016E 2017E

Shipment volume ( LHS) YoY change (RHS)

('000 units)

1.61.4

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2012 2013 2014

Action camera shipment to GoPro (LHS) Share allocation from GoPro (RHS)

(m units)



Figure 6. Sky Light’s Action Camera ASP Trend


Figure 7. Action Camera and Accessories Revenue


Figure 8. Action Camera and Accessories Revenue Breakdown


574 526

489 465 451 437

-8.5% -6.9%

-5.0%

-3.0% -3.0%

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2012 2013 2014 2015E 2016E 2017E

Action camera ASP (LHS) YoY change (RHS)

(HK$)

1,259 1,304

1,784 2,280

2,705

3,251

3.6%

36.7%

27.8%

18.7%20.2%

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2012 2013 2014 2015E 2016E 2017E

Revenue (LHS) YoY change (RHS)

(HK$ m)

939 809

1,164

1,493

1,738

2,090

320 496

619 787

968 1,161

0

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2012 2013 2014 2015E 2016E 2017E

Action camera Accessories

(HK$ m)



Home Imaging: Surging Revenue on Full-year Contribution

We forecast the home imaging business to soar 965.6% YoY as the products will see full-year shipments since it commenced volume shipments in 3Q14. We expect the segment to contribute 17.5% of total revenue in 2015, a sharp increase from 2.4% in 2014.

Figure 9. Home Imaging Revenue Growth


Digital Imaging: Revenue Down but Contribution Minimal

Digital imaging products include digital cameras, scanners, etc. This segment is seeing a gradual decrease due to weakening demand, while revenue contribution was already below 10% in 2014. We expect the segment to post another 17% YoY decline in revenue this year, with its revenue contribution shrinking further to 5.4%.

Gross Profit: Strong Growth and Stable Gross Margin

We estimate the 2014 gross margin for action cameras and accessories at 20.0%, with a wider margin for accessories than action cameras. Digital imaging products have a better margin of 26%, according to our estimation, as they are mostly mature products. Home imaging products’ margin is lower than the company’s average as volume production just began last year.

We expect the company’s gross margin to be largely stable YoY. A potential slight margin shrinkage would be due to higher labour cost and dilution from the mildly lower margin for home imaging products. We forecast the gross margin to edge down 0.7ppt YoY to 20.6% in 2015. Thanks to the surging top line and stable gross margin, we expect gross profit to jump 41.3% YoY this year.

0 50

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966%

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2013 2014 2015E 2016E 2017E


(HK$ m)



Figure 10. Gross Profit Growth

Source: BOCI Research estimates

Figure 11. Gross Profit Breakdown


Figure 12. Gross Margin by Segment

Source: BOCI Research estimates

224 237 358

450 537

646 94 56

52 43

34

28

9

101 141

188

11 42

26

35

35

37

2.1%

32.9%

41.3%

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2012 2013 2014 2015E 2016E 2017E

Others (LHS) Home imaging (LHS)

Digital imaging (LHS) Action cameras and accessories (LHS)

YoY growth (RHS)

(HK$ m)

224 237

358

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537

646

94 56 52 43 34 28

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2012 2013 2014 2015E 2016E 2017E

Action cameras and accessories (LHS) Digital imaging (LHS)

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(HK$ m)

15%

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27%

2012 2013 2014 2015E 2016E 2017E

Blended Action cameras and accessories

Digital imaging Home imaging



Net Income

We expect net income to increase 32.4% YoY to HK$267.2m in 2015, implying 8.7% net margin. The slight margin deterioration is mainly due to IPO expenses (HK$24m) and share option expenses (HK$6m) this year. Excluding these extraordinary expenses in 2015, we expect the company’s recurring net income to be HK$297.2m, implying 43.9% YoY growth and 9.7% net margin.

More than 100% YoY recurring net profit growth in 1H15. Sky Light issued a positive profit alert for 1H15, announcing that both its revenue and recurring net profit will increase more than 80% YoY in 1H15. The company’s major businesses are all seeing strong growth in 1H15. GoPro’s total revenue increased 63% YoY in 1H15 and we estimate the home image business will bring in revenue of around HK$200m. Therefore, despite some margin deterioration, we forecast the company's revenue to increase 85.4% YoY and net income to rise 54.1% YoY in 1H15. If we strip off the IPO expenses (HK$24m in 1H15) and share option expenses, the recurring net income would have increased 104.4% YoY in 1H15.

Figure 13. Net Profit Trend


Capex

The company’s capex usually accounts for less than 2% of total revenue and the majority is for the addition of property, plants and equipment. We expect the company’s capex to decrease this year and the focus is still on capacity expansion.

Figure 14. Capital Expenditure


123 147202

267351

432

20.2%

36.9%

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2012 2013 2014 2015E 2016E 2017E

Net profit (LHS) YoY change (RHS)

(HK$ m)

36 28 46 41 4035

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Figure 15. Income Statement Forecasts

(HK$ m) 2012 2013 2014 2015E 2016E 2017E

Revenue 1,659 1,623 2,092 3,059 3,629 4,380

Action camera and accessories 1,259 1,304 1,784 2,280 2,705 3,251

Digital imaging 376 225 200 166 133 106

Home imaging 0 50 536 713 941

Others 24 93 59 78 78 81

Cost of sales (1,330) (1,287) (1,647) (2,429) (2,881) (3,482)

Gross profit 328 335 446 630 748 898

Selling and distribution expenses (15) (14) (16) (16) (17) (18)

Administrative expenses (60) (69) (95) (149) (150) (166)

Research and development costs (44) (58) (83) (128) (145) (175)

Other expenses (5) (2) (11) (11) (13) (15)

Operating expense (125) (143) (205) (305) (325) (374)

Operating profit 203 192 241 325 423 524

Finance costs (2) (3) (3) (3) (4) (4)

Other income and gains 12 12 8 8 8 8

Profit before tax 214 201 246 330 428 527

Income tax expense (42) (36) (45) (63) (77) (95)

Profit for the year 172 165 202 267 351 432

Profit attributable to:

Non-controlling interests 49 18 - - - -

Owners of the company 123 147 202 267 351 432

Recurring net profit 123 147 207 297 360 436

YoY change (%)

Revenue (2.2) 29.0 46.2 18.6 20.7

Gross profit 2.1 32.9 41.3 18.8 20.0

Operating profit (5.2) 25.4 34.7 30.3 23.7

PBT (5.7) 22.4 33.8 29.7 23.3

Net income 20.2 36.9 32.3 31.3 23.3

Recurring net income 20.2 40.1 43.9 21.0 21.3

Margin (%)

Gross profit 19.8 20.7 21.3 20.6 20.6 20.5

Operating profit 12.2 11.9 11.5 10.6 11.7 12.0

PBT 12.9 12.4 11.8 10.8 11.8 12.0

Net income 7.4 9.1 9.6 8.7 9.7 9.9

Recurring net income 7.4 9.1 9.9 9.7 9.9 10.0


Note: Recurring net profit is defined as reported net profit excluding the impact of one-off IPO expenses and share

option expenses



Figure 16. Semi- annual Income Statement Forecast

(HK$ m) 1H14E 2H14E 1H15E 2H15E

Revenue 690 1,402 1,280 1,779

Cost of sales (554) (1,092) (1,037) (1,392)

Gross profit 136 310 243 387

Selling and distribution expenses (7) (9) (7) (9)

Administrative expenses (36) (59) (77) (72)

Research and development costs (32) (52) (60) (68)

Other expenses (4) (6) (4) (6)

Operating expense (79) (125) (149) (156)

Operating profit 57 184 94 231

Finance costs (1) (1) (1) (2)

Other income and gains 4 4 4 4

Profit before tax 59 187 97 233

Income tax expense (11) (34) (22) (41)

Profit for the year 49 153 75 192

Profit attributable to:

Non-controlling interests (0) (0) - -

Owners of the company 49 153 75 192

Recurring net profit 49 158 100 198

YoY change (%)

Revenue

85.4 26.9

Gross profit

78.8 24.8

Operating profit

65.4 25.2

PBT

62.6 24.7

Net income

54.1 25.4

Recurring net income

104.4 25.3

Margin (%)

Gross profit 19.7 22.1 19.0 21.7

Operating profit 8.3 13.1 7.4 3.3

PBT 8.6 13.3 7.5 13.1

Net income 7.1 10.9 5.9 10.8

Recurring net income 7.1 11.3 7.8 11.1


Note: Recurring net profit is defined as reported net profit excluding the impact of one-off IPO expenses and share

option expenses. 1H14 and 2H14 numbers are BOCI Research estimations



COMPANY OVERVIEW

Riding on Trend of Action Cameras with GoPro

Sky Light is the principal manufacturer for the world’s largest action camera brand GoPro. It manufactures action cameras and accessories for GoPro and for another action camera brand iON.

GoPro, as the dominant action camera brand, has experienced fast growth in the past few years since its launch. Its capture device shipments increased from 1.1m in 2011 to 5.2m in 2014, implying a 65.4% CAGR.

Sky Light, as one of the principal manufacturers for GoPro, has also shown remarkable growth, and established itself as a leading action camera manufacturer in the world. The company has been supplying action cameras to GoPro since 2006 and has assisted GoPro with firmware and design support for some models, including the first-generation GoPro HERO. According to Frost & Sullivan, from 2010 to 2014, Sky Light’s aggregate shipments of action cameras totalled approximately 7.1m units, ranking first among action camera manufacturers worldwide in terms of shipments during the period. In 2014, the company was the second-largest action camera manufacturer worldwide with a market share of 31% in terms of shipments.

In 2012-14, Sky Light’s shipments of action cameras were approximately 1.6m, 1.5m and 2.4m units, respectively, implying a 22.5% CAGR for the period. During this period, its revenue from action cameras and accessories increased from HK$1,259m to HK$1,784m, translating into a 19.0% CAGR. In 2014, 85.2% of Sky Light’s revenue came from action cameras and accessories, within which sales to GoPro made up 82.7%.

Figure 20. Sky Light’s Action Camera Shipments

Source: Company data, BOCI Research

1.6 1.5

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014

(m units)

CAGR 22.5%



Figure 21. Action Camera and Accessories Revenue


Advanced R&D and Manufacturing Capabilities

With more than 10 years of experience in digital imaging products and nearly 10 years of cooperation with GoPro, Sky Light has garnered expertise in certain essential areas for digital imaging, such as wireless communication and waterproof technology.

The key value-add that Sky Light provides to GoPro includes the following; (i) Waterproof technics: every GoPro action camera package (except for GoPro4 Session) includes waterproof housing. According to our channel check, Sky Light is the sole waterproof housing supplier for GoPro. The waterproof housing, which passes the highest IPX8 waterproof standard testing, enables GoPro’s products to work in depts. of up to 40 metres, (ii) High reliability manufacturing: action cameras can be installed in some extreme environments, such as on motorbikes or aircraft wings. Therefore, action cameras need to be highly reliable. The GoPro action camera manufactured by Sky Light must pass some very harsh tests, such as 5-2000Hz vibration on X, Y, Z axis, each for two hours, and a 7.7g acceleration test, (iii) Image fine-tuning: GoPro cameras can automatically adjust their settings to provide the best quality videos and pictures. Besides using very powerful processing chipset, Sky Light has performed many tests to fine-tune the sensor and processing chip so that the cameras can automatically find the best setting in various environments, and (iv) Wireless communication: GoPro has Wi-Fi and Bluetooth functions for remote control and exporting data. Sky Light helps GoPro to design and fine-tune the wireless function.

The design and production of action cameras require very stringent quality control over the production process. Sky Light inspects and tests products at each important stage of production through visual inspections, function testing and random sampling to ensure the final products meet its quality control requirements. Prior to mass production, each of the company’s new products will undergo a series of rigorous tests, which typically include eight primary tests and 68 secondary tests covering quality, functionality and reliability.

Sky Light actively engages in the product design and development and has established advanced product planning and R&D capabilities. By end-2014, the company had a total of 349 product planning and R&D staff. Sky Light has registered 36 patents and 44 copyrights and applied for an additional 19 patents and two copyrights. In 2012, 2013 and 2014, R&D expenses accounted for 2.7%, 3.6% and 4.0% of the company’s revenue, respectively. In addition, it has established an R&D centre in the Shenzhen Hi-Tech Industrial Park. The company is planning to set up a new R&D centre in Xi’an, Shaanxi Province, in 2H15.

1,259 1,304

1,784

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2012 2013 2014

(HK$ m)

CAGR 19.0%



Cementing Ties with Customers

Sky Light cooperates with clients closely through both the JDM and ODM models. For the products on a JDM basis, the company engages in joint product design and development with customers. Once it wins a customer project, Sky Light will collaborate with the customer to jointly design and develop a product.

Its product design capability and stringent quality control process help Sky Light to put up entry barriers to this business and ensure close ties with its major customers including GoPro.

For Sky Light’s top-5 customers in 2014, three of them had had a cooperation relationship with the company for over five years. In order to strengthen its ties with key customers, it has implemented a client-based team model. For each of the key customers, the company forms a dedicated team with staff from the product planning, research & development, and sales & marketing departments in order to provide good services to customers.

Expanding Product Range to Nurture New Growth Drivers

Recently, Sky Light has been actively expanding its product offerings into new areas, such as home imaging and smart wearable devices. In 3Q14, the company started the commercial production, shipments and sales of home imaging products. Its home imaging clients include iON, NETGEAR and Canary. In terms of revenue, home imaging products made contributions for merely about one quarter in 2014, kicking in HK$50m or about 2.4% of the company’s full-year revenue. We expect home imaging revenue to surge 9.7x YoY and contribute 17.5% of total revenue in 2015. Sky Light started shipment of its smart device from June 2015, which include iON SnapCam and wearable cameras for US fire service departments. iON SnapCam Lite is currently available in the US with retail price of US$79.99. iON SnapCam, which has retail price of US$149.99, is at pre-ordering stage.

Figure 22. iON Webpage for SnapCam Lite

Source: iON



Figure 23. SnapCam Lite

Source: iON

Figure 24. SnapCam Lite is Available on BestBuy with Retail Price of US$79.99

Source: BestBuy.com



Figure 25. iON Webpage for SnapCam

Source: iON

Figure 26. SnapCam Pre-ordering is Available on BestBuy

Source: BestBuy.com

Own Brands to Gain Pricing Power

Sky Light is planning to step up the promotion of its own-brand products. The company aims to set up new house brands to market its home imaging and smart wearable products, which should help it to tap a wider addressable market and gain larger pricing power. Under the company’s plan, brand development and related marketing activities are due to start in 2H15.

Shareholding Structure

Sky Light was incorporated in the Cayman Islands on 18 December 2013 and is the holding company of its subsidiaries. After its IPO in Hong Kong and partially exercising the over-allotment option, all issued shares of Sky Light were held as follows: 52.19% by Fortune Six, 8.14% by Fortune Sky, 7.86% by Yongweida, 4.90% by Uphigh Global, 4.87% by Sure Top and 25.03% by public shareholders.

Tang Wing Fong Terry, Wu Yongmou and Tang Kam Sau are subjected to a six-month lock-up after the listing. Tang Wing Fong Terry undertook to maintain his controlling shareholding with twelve months after the listing.

Tang’s Family Trust is a discretionary trust set up by Tang Wing Fong Terry and its discretionary objects are himself and several of his family members.

Wu’s Family Trust is a discretionary trust set up by Wu Yongmou and its discretionary objects are his children.



Fortune Sky is beneficially owned by the Fortune Sky shareholders, who consist of Tang Wing Fong Terry, Lu Yongbin and 41 other employees who are not connected persons of Sky Light Group.

Sure Top is beneficially owned by the Sure Top shareholders, who are five employees and are not connected persons of Sky Light Group.

Tang Kam Sau is a non-executive director of Sky Light.

Figure 27. Shareholding Structure

Source: Company data

Business Model: Combined JDM and ODM

Sky Light operates under two business models: JDM and ODM.

JDM. It engages in joint product design and development with its customers for products manufactured on a JDM basis. Once the company wins a customer project, it will collaborate with the customer to jointly design and develop a product. After confirming the specifications of product design, the customer will place a purchase order and Sky Light will begin procuring materials and manufacturing. The customer is typically entitled to any intellectual property rights relating to the design and development of the product.

ODM. ODM business begins either with winning a customer project or with the company’s own internal design project. In situations where a customer project is won first, the customer provides the company with a general concept about the type of product it wants, and Sky Light will proceed to design and develop a custom-made product based on the concept. Alternatively, Sky Light can complete the design and development first, and then market the fully-developed off-the-shelf product to potential customers. In either case, the customer is able to test the prototype of a developed product before placing a purchase order. Sky Light is typically entitled to any intellectual property rights relating to the design and development of the product.

Sky Light Holdings

(Cayman)

Sky Light HK

(Hong Kong)

Sky Light Imaging

(Hong Kong)

Sky Light Shenzhen

(PRC)

Creative Applications

(Hong Kong)

Sky Light Technology

(HY)

Sky Light Software

(PRC)

Sky Light Digital

(Hong Kong)

Tang’s Family

Trust

Fortune Six

(BVI)

Sky Light

Employees’

Trust

Fortune Sky

(BVI)

Wu’s Family

Trust

Yongweida

(BVI)

Sure Top

Shareholders

Sure Top

(Hong Kong)

Ms Tang Kam

Sau

Uphigh Global

(BVI)

100% 100% 100% 100% 100%

1.87%4.90%7.86%8.14%52.19%

100%

100%

100% 100%

100%100%100%

Public

25.03%



Figure 28. JDM and ODM Models


Products

Action cameras and accessories

Sky Light manufactures action cameras on both JDM and ODM bases. Most of its action camera models are equipped with mobile technology, and Sky Light has jointly developed apps and other software tools with customers to enhance user experience.

In addition to action cameras, the company manufactures a variety of action camera accessories, such as waterproof housings, wearable and equipment-based mounts, batteries, removable touch displays and remote controls.

Its action camera products are mainly manufactured for and sold to GoPro as well as other brand companies such as iON and other accessory suppliers.

Figure 29. Action Camera and Accessory Products

Product Description Business model Product status

Action camera

High-definition video camera with wide- angle field of view (FOV)

Often used for extreme sports or other action video photography

Compact, rugged, easily-worn or mounted

JDM, ODM Shipment since 2006

Accessories

Include: waterproof housings, mounts, batteries, removable touch displays and remote controls

Sold separately or as part of a package with action cameras to customers

JDM, ODM Shipment since 2007


JDM

ODM

Win customer

project

Win customer

project

Inhouse design and

development

Joint design

and

development

with customer

Inhouse design and

development

Market product

Purchase

ordersProcurement Manufacture Delivery

Custom-made products

Off-the-shelf products

JDM

ODM

Win customer

project

Win customer

project

Inhouse design and

development

Joint design

and

development

with customer

Inhouse design and

development

Market product

Purchase

ordersProcurement Manufacture Delivery

Custom-made products

Off-the-shelf products



Digital Imaging

Sky Light’s digital imaging products include digital cameras and scanners, as well as other products such as digital camcorders, car camcorders and specialty cameras. It designs and manufactures these products predominantly for brand customers, importers and retailers on an ODM basis.

In addition, the company has its own brand SKYPIX, which is a scanner product with a small sales amount in the domestic market.

Figure 30. Digital Imaging Products


Digital camera Range of digital cameras ODM Shipment since 2003

Includes high-resolution models

Recent models integrate its waterproofing technology to allow use during water activities

Scanner Portable scanners used for high-definition scanning ODM, own brand Shipment since 2010

Others Includes: digital camcorders, police cameras, car camcorders, shooting cameras for hunting or firearms training

ODM Shipment since 2007


Home Imaging

Home imaging products are mainly cloud cameras at present. Cloud technology- based IP cameras produced by Sky Light typically have a wireless design for home surveillance use. All of its cloud camera products are capable of sending and receiving data to and from mobile devices and of providing storage and other functions through the cloud platform. The company designs and manufactures both custom-made and off-the-shelf cloud camera models for brand customers on a JDM or ODM basis. Key customers include NETGEAR, Canary and iON.

Besides manufacturing cloud cameras and other imaging equipment, Sky Light seeks to develop a comprehensive system which will allow end users to fully connect with their family and home. The company is developing cloud technology, software and mobile applications that are used with its imaging equipment.

Figure 31. Home Imaging Products


Wi-Fi-enabled video-streaming cameras

Allows users to view live video feeds and receive event notifications through mobile or computer devices

Utilises cloud platform

JDM, ODM, own brand Commercial shipment since 3Q14




Smart Wearable Devices

Sky Light’s smart wearable products consist of electronic devices with specific focuses, such as social networking and sports & athletics. The products include lifestyle wearable cameras, designed to be lightweight and worn unobtrusively, with wireless connection to allow easy sharing of videos and photos for social networking. Some sports wearable devices have also been developed based on sports algorithms that allow users to track and monitor their athletic performances. The company has begun shipments of smart wearable devices in 2Q15.

Figure 32. Smart Wearable Products


Smart wearable

Smart, wearable devices that focus on social networking or athletic performance

ODM, own brand At product development stage; prototypes have been created and tested; shipments started in June 2015


Production Process

Sky Light generally manufactures products only after receiving a purchase order from a customer and after procuring all the raw materials, components and parts required to fulfill the purchase order, which may take up to four months. The production process for action cameras typically takes up to three weeks from the start of manufacturing to the delivery of products to the customer. The company conducts essentially all of the production process internally at its production facilities and does not outsource any work to subcontractors, except for electroplating and a small amount of spray painting.



Figure 33. Production Process


Production Facilities and Capacity

The company has two production facilities in China. The one located in Shenzhen occupies a gross floor area (GFA) of approximately 11,934sqm, and includes predominantly PCB (printed circuit board) and final product assembly lines. At present, the plant mainly conducts PCB assembly, product assembly and packaging for action cameras and cloud cameras. The other plant located in Heyuan, Guangdong, and occupies a GFA of approximately 21,334 sqm. The Heyuan facility includes production lines for injection moulding and spray painting, in addition to PCB and final product assembly, and conducts mainly injection moulding and spray painting for all of the company’s products, as well as the PCB assembly and product assembly and packaging for action camera accessories and various digital imaging products.

By end-2015, Sky Light intends to increase production capability by approximately 0.5m units of action cameras, home imaging products by approximately 2.1m units and smart wearable products by approximately 0.8m units. The company plans to add five SMT production lines, of which four will be dedicated to home imaging and smart wearable products and one to action cameras.

PCBA Assembly

SMT mounting

Reflow soldering

AOI inspection

PCB depanelling

Firmware burn-in

PCBA function testing

Injection Moulding and Spray

Painting (for non-electronic parts)

Injection moulding

Spray painting

Printing

Final inspection

Raw Materials, Components and Parts

Finished Products for Delivery

Product Assembly and Packaging

Lens assembly and focus adjustment

Assembly of semi-product

Assembly of finished product

Finished product testing, waterproof testing and repair

Visual inspection

OQC inspection

Packaging

PCBA Assembly

SMT mounting

Reflow soldering

AOI inspection

PCB depanelling

Firmware burn-in


PCBA Assembly

SMT mounting

Reflow soldering

AOI inspection

PCB depanelling

Firmware burn-in




Injection moulding

Spray painting

Printing

Final inspection



Injection moulding

Spray painting

Printing

Final inspection

Raw Materials, Components and Parts

Finished Products for Delivery






Visual inspection

OQC inspection

Packaging






Visual inspection

OQC inspection

Packaging



Figure 34. Production Facilities and Capacity

Shenzhen plant 2012 2013 2014

Designed production capacity (’000 units) 2,656 2,709 3,293

Output (’000 units) 2,123 2,204 2,831

Utilisation rate (%) 80.00 81.40 86.00

Heyuan plant

Designed production capacity (’000 units) 42,426 86,342 119,960

Output (’000 units) 33,059 52,589 110,551

Utilisation rate (%) 77.90 60.90 92.20


Relationship with GoPro

Sky Light has had a strong, long-running relationship with GoPro since 2006, having entered into a global supply agreement (the Global Supply Agreement) and a master product development agreement (the Master Product Development Agreement) with the latter. These agreements provide the framework for their ongoing relationship.

Global Supply Agreement

The Global Supply Agreement sets out the terms under which Sky Light manufactures, packages and sells products to GoPro. This agreement provides that Sky Light agrees to supply digital video camera products and accessories in accordance with the purchase orders from GoPro.

Under the terms of the Global Supply Agreement, GoPro will provide Sky Light with a 12-month rolling forecast on a monthly basis so that Sky Light may purchase materials in preparation for the estimated quantity requirements. Sky Light agrees to provide written capacity plans with material inventory reports following the forecasts. If GoPro reduces its forecast, it will be liable for the cost of excess materials purchased under certain circumstances detailed in the Global Supply Agreement.

This agreement will remain in force until 31 December 2017, unless terminated earlier, and will automatically renew for successive one-year terms until termination or by agreement between GoPro and Sky Light. The Global Supply Agreement may be terminated by either party as a result of certain material breach by or insolvency situations of the other party, or by a 180-day written notice to the other party.

Sky Light has also agreed that in order to protect GoPro’s intellectual property rights, the company will not design or manufacture certain similar camera products, which comprise action sports cameras marketed primarily as such that meet certain exterior design or technical specifications, during the term of the Global Supply Agreement or for a period of three months after the termination of the agreement. However, Sky Light will not be subject to the foregoing restriction if GoPro’s purchase orders in any three-month period fall below a certain minimum fixed amount as is specified in the Global Supply Agreement.

Master Product Development Agreement

Sky Light and GoPro have also entered into the Master Product Development Agreement, which sets forth the terms under which Sky Light provides design, development and testing services to GoPro and the terms of the intellectual property rights between the parties.

Under the terms of this agreement, any intellectual property that Sky Light has separately developed or acquired will not be incorporated into any deliverable or product for GoPro without its prior written consent. Sky Light will transfer and assign to GoPro intellectual property rights that Sky Light has or acquires in the products or deliverables created for or furnished under the Master Product Development Agreement or any statement of work. GoPro grants Sky Light a non-exclusive, royalty- free licence to use GoPro’s intellectual property solely in connection with the development, modification, support and manufacture of the products for GoPro.



Sky Light agrees to grant GoPro a non-exclusive, worldwide, royalty-free, perpetual and irrevocable licence to use, reproduce, distribute, make derivative works of and sub-license Sky Light’s intellectual property for the development, modification, support, manufacture, distribution or sale of products manufactured by Sky Light under the statements of work. Sky Light also agrees to grant GoPro other non-exclusive, worldwide and irrevocable royalty-bearing, perpetual licences to use, reproduce, distribute, make derivative works of and sub-license Sky Light’s intellectual property either existing at or created after the time of the Master Product Development Agreement for the development, modification, support, manufacture, distribution or sale of its products.

Key Milestones and Achievements

Figure 35. Key Milestones and Achievements

Year

2000 First production facility was established in Shenzhen, Guangdong

2003 It commenced shipments of traditional digital cameras

2005 Sky Light Group was founded with the incorporation of Sky Light Digital in Hong Kong

2006 It commenced shipments of cameras to GoPro

2010 Second production facility was established in Heyuan, Guangdong

It commenced shipments of portable scanners

2013 Sky Light was incorporated in the Cayman Islands

It established a R&D centre in the Shenzhen Hi-Tech Industrial Park

It was accredited as a “Guangdong Province Top 500 Manufacturing Enterprise” and “Guangdong Province Manufacturing Enterprise with Outstanding Contribution” by the Guangdong Manufacturers Association

2014 It commenced shipments of home imaging products

It received an award from GoPro in recognition of our significant achievements as a principal manufacturer

2015 Sky Light produced prototypes and began marketing for smart wearable products

Listed in Hong Kong Stock Exchange




GOPRO: LEADING ACTION CAMERA BRAND WITH

ESTABLISHED ECOSYSTEM

Category-defining Brand for High-quality Action Cameras

Founded in 2004 by Nicolas Woodman, GoPro has transformed the way consumers capture, manage, share and enjoy meaningful life experiences.

In 2004, GoPro shipped its first product, a wrist-mounted, waterproof, film-based capture device. It then introduced its first HD capture device in 2009, the HD HERO, and introduced the HERO3+ family of capture devices in late 2013, according to GoPro’s company data. In 2H14, GoPro launched its high-end product HERO4 and an entry-level product HERO, according to the GoPro website. The company also sells mountable and wearable accessories that enable professional quality capture in various environments.

GoPro’s shipments have been growing swiftly over the past few years. In 2014, the company’s total capture device shipments increased 34.6% YoY to 5.2m units and revenue jumped 41.4% YoY. In 1H15, its revenue further climbed 62.3% YoY and shipments for capture devices increased 75.2% YoY to 3.0m units.

Figure 36. GoPro’s Annual Revenue

Source: GoPro, BOCI Research

Figure 37. GoPro’s Annual Capture Device Shipments


234

526

986

1,394124.6%

87.4%

41.4%

0

200

400

600

800

1,000

1,200

1,400

1,600

2011 2012 2013 20140%

20%

40%

60%

80%

100%

120%

140%


(US$ m)

1,145

2,316

3,849

5,180102.3%

66.2%

34.6%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 20140%

20%

40%

60%

80%

100%

120%

Capture devices (LHS) YoY change (RHS)

('000 units)



Figure 38. GoPro’s Quarterly Revenue


Note: 1Q15 & 2Q15 results are unaudited

Figure 39. GoPro’s Quarterly Capture Device Shipments


Note: 1Q15 & 2Q15 results are unaudited

Products

GoPro offers five different cameras, namely HERO4 Black, HERO4 Silver, HERO4 Session, HERO+LCD and HERO. The prices of different products range from US$129.99 to US$499.99 in order to capture a wider addressable market. HERO+LCD was launched in the US in June 2015 and HERO4 Session was introduced to the market in July 2015.

The components of the camera are sourced from several suppliers. The video processing and compression chip is supplied by Ambarella. The image sensor in high- end products is supplied by Sony, while that in lower-end products is from Aptina, according to the iFixit teardown report.

362

236 245 280

634

363

419

75.4%

54.1%

71.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

600

700

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15


(US$ m)

823

1,420

852 854

1,089

2,385

1,342 1,647

32.3%

68.0%

57.5%

92.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

500

1,000

1,500

2,000

2,500

3,000

3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Capture devices (LHS) YoY change (RHS)

('000 units)



Figure 40. Current GoPro Model Portfolio




Figure 41. GoPro Products Specification

HERO4 Black HERO4 Silver HERO4 Session HERO+ LCD HERO

Price US$499.99 US$399.99 US$399.99 US$299.99 US$129.99

Image quality

Field of view (FOV) Ultra wide, medium, narrow

Ultra wide, medium, narrow

Ultra wide, medium Ultra wide Ultra wide

Optics + lens Ultra-sharp image quality/ultra-wide angle all-glass lens with reduced distortion

Ultra-sharp image quality/ultra-wide angle all-glass lens with reduced distortion

Ultra-wide angle glass lens with reduced distortion



Low-light performance Professional grade Professional grade Consumer grade Consumer grade Consumer grade

Video features

4K 30, 25, 24 fps 15, 12.5 fps N/A N/A N/A

Ultra Wide FOV Ultra Wide FOV

2.7K 60, 50, 48, 30, 25, 24 fps 30, 25, 24 fps N/A N/A N/A

Ultra wide, medium FOV Ultra wide, medium FOV

1440P 80, 60, 50, 48, 30, 25, 24 fps

48, 30, 25, 24 fps 30, 25 fps N/A N/A

Ultra wide FOV Ultra wide FOV Ultra wide FOV

1080P 120, 90, 60, 50, 48, 30, 25, 24 fps

60, 50, 48, 30, 25, 24 fps

60, 50, 30, 25 fps 60, 50, 30, 25 fps 30, 25 fps

Ultra wide, medium (excludes 120 and 90 fps), Narrow FOV

Ultra wide, medium, narrow FOV

Ultra wide, medium FOV

Ultra wide FOV Ultra wide FOV

Photo features

Megapixels 12MP 12MP 8MP 8MP 5MP

Time lapse intervals 0.5, 1, 2, 5, 10, 30, 60 seconds

0.5, 1, 2, 5, 10, 30, 60 seconds

0.5, 1, 2, 5, 10, 30, 60 seconds

0.5, 1, 2, 5, 10, 30 and 60 seconds

0.5 second

Continuous photo rates 10/1, 5/1, 3/1 10/1, 5/1, 3/1 N/A N/A N/A

Advanced features

Built-in wireless Wi-Fi + Bluetooth® Wi-Fi + Bluetooth® Wi-Fi + Bluetooth® Wi-Fi + Bluetooth® No

Protune™ (photo + video) Yes Yes Yes, Video only No No

Auto low light Yes Yes Yes Yes Yes

Night photo + night lapse Yes Yes No No No

Highlight tag Yes Yes Yes Yes No

Time lapse video Yes Yes No No No

Simultaneous video + photo Photo every 5, 10, 30, 60 seconds/manual

Photo every 5, 10, 30, 60 seconds/manual

No No No

Usability features

GoPro app compatibility Yes Yes Yes Yes No




Mount Accessories

Mount accessories are typically made out of plastic with studs and screws. Their prices range from US$9.99 to US$69.99. The margins for mount accessories are typically higher than camcorders.

Figure 42. GoPro Mount Accessories

Source: GoPro.com



Accessories

The prices of premium accessories typically range from US$4.99 to US$199.99. Products include attachment rings, various cables and MicroSD cards, housings, etc.

Figure 43. Selected GoPro Accessories

Source: GoPro.com

Product bundles for 21 different activities are offered to enhance customers’ buying experience. These bundles include auto, aviation, biking, etc. Each bundle includes a camera and other recommended accessories.

Figure 44. Product Bundles

Source: GoPro.com

Figure 45. Aviation Bundle

Source: GoPro.com



Breaking into Virtual Reality and Drone Markets

Drone: GoPro plans to release the GoPro drone in 1H16, and it will target consumers. This could represent a lucrative new market for GoPro.

Virtual reality: GoPro unveiled a prototype mount that can hold six of his firm’s HERO4 cameras, each pointing in a different direction. This could then be used with virtual-reality helmets, allowing a user to change his perspective by turning his head left and right and looking up and down, both of which add support for interactive spherical videos. The Six-Camera Spherical Array add-on will go on sale later in 2015.

Figure 46. GoPro’s Ball-shaped Mount Designed for Virtual Reality Video

Source: theverge.com

GoPro is also building a 360° camera array for stereoscopic, spherical content capture. Available to a small group starting soon, the new 360° array will have 16 cameras that work together as one. The rig includes features such as camera syncing, multi-camera control and extended battery life that help to eliminate some challenges for spherical content capture. GoPro is creating an integrated solution with Google’s Jump platform that enables the ultimate immersive experience.

Figure 47. GoPro’s Jump Camera Array

Source: GoPro.com



Channel: Both Direct and Distribution Channels

GoPro now sells products both directly and through distributors. In the US, GoPro primarily sells its products directly through a mix of retail channels, including big-box, mid-market and specialty retailers, and reaches certain US markets through distributors. In international markets, GoPro primarily engages distributors who in turn sell to local retailers.

Figure 48. Sales Breakdown by Channel

Source: GoPro

Geographical Breakdown

GoPro’s products are sold in over 25,000 stores in around 100 countries. With the North American market for its products generally saturated, the company sees international expansion as pivotal to its revenue growth strategy going forward.

Figure 49. Sales Breakdown by Geography

Source: GoPro

Direct, 58.7%

Distribution,

41.3%

59.7% 56.5%63.9%

30.6% 32.7%26.6%

9.6% 10.8% 9.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014

Americas Europe, Middle East and Africa Asia and Pacific area countries



Manufacturing

GoPro outsources to two manufacturers in China: Chicony and Sky Light. It designs products and develops the test processes and firmware in San Mateo to exert greater control over quality. The firm has third-party fulfillment centres in California, Singapore, Hong Kong, and the Netherlands. In short, GoPro has plenty of room to scale up thanks to outsourced manufacturing and well-established global distribution capabilities.

Figure 50. GoPro’s Manufacturer Breakdown by Shipment (2014)

Source: Frost& Sullivan

Competition: GoPro Rules Action Camera Market with 2/3 Share

Several consumer electronics companies have introduced point-of-view action camera products that compete directly with GoPro’s, including Sony, iON, and Panasonic. These competitors have so far seen little success, which we attribute to the lack of brand recognition and scale. According to Frost & Sullivan, GoPro led the global action camera market in 2014 with a 67% market share. Sony and iON ranked the second and the third with 10% and 3%, respectively.

Figure 51. Action Camera Brand Market Share (2014)

Source: Frost & Sullivan

Sky Light, 42%

Chicony, 58%

GoPro67%

Sony10%

iON3%

Others20%



GoPro Studio/App: Improving User-friendliness

GoPro Studio software is a free desktop platform that enables customers to easily import GoPro media, play back videos and Time Lapse photo sequences, view photos, and create professional-quality videos.

In addition, the GoPro App makes it easy to control GoPro cameras remotely, and gives users instant access to the GoPro Channel to watch the best GoPro videos from across the globe. Users can use HiLight Tag to mark key moments while recording. With this app, users can view photos, play back videos and share them via email, text, Facebook, Twitter, etc.

GoPro App cumulative downloads reached 16m in 1Q15.

Installations of GoPro Studio exceeded 1.5m in 4Q14 and daily average exports exceeded 40,000 in 1Q15.

Figure 52. GoPro Studio Downloading Interface

Source: GoPro.com

Figure 53. GoPro App Downloading Interface

Source: GoPro.com

Media Strategy: Fosters Fan Community to Retain Users

Besides providing hardware, GoPro is also expanding in the media space, which uses essentially no-cost user-generated content. GoPro content is frequently shared on social media channels including YouTube, Facebook, Instagram and Twitter. The high-quality videos that GoPro cameras capture have created a viral brand, and users frequently add “GoPro” to the title of shared content. The company’s’ successful media strategy helps it to build up a fan community and improve the brand image at minimal cost. In 2014, 3.9 years of content was uploaded to YouTube with GoPro in the title.



Figure 54. GoPro Channels

Source: GoPro



HOME IMAGING: NEW GROWTH ENGINE WITH

HUGE UPSIDE POTENTIAL

Home Imaging Products to Rise as New Growth Engine

Sky Light commenced the volume shipment for IP camera products in 4Q14, and its home imaging business revenue reached HK$50.3m in 2014. In 4M15, Sky Light already recorded revenue of HK$96m from home imaging products.

Currently, the three major customers of Sky Light’s IP camera products are US network equipment company NETGEAR, US wireless security system company Canary and consumer electronic device company iON. We estimate sales to NETGEAR contribute over 60% of revenue in the home imaging segment, sales to Canary accounts for around 30% and the contribution from iON remains minimal. The ASP of home imaging products is approximately HK$410.

Supplies Premium IP Cameras with Technological Edge

In 1Q15, the internet device provider NETGEAR launched its IP camera Arlo, which is the world’s first 100% wire-free, indoor and outdoor high-definition day and night vision IP camera for home monitoring. With its patent technology, NETGEAR designed Arlo to be operated by battery without a power wire. In addition, the Arlo camera is waterproof. These features make it easy to install and suitable for both indoor and outdoor use. This product also has other features such as night vision and motion detection.

Thanks to Sky Light’s technological capability in wireless connection and expertise in manufacturing waterproof devices, it was selected by NETGEAR to manufacture Arlo IP camera products.

Arlo No.1 in the North American Market with Strong Sales Outlook

Six months after product launch, Arlo has taken the leadership position in the consumer IP camera markets in North America, Europe and Australia. According to NETGEAR’s data, Arlo has become the No.1 (or close tie for No.1) brand in North America and one of the top three brands in the Australian and European markets.

NETGEAR is expanding the distribution channels and regional reach of Arlo and expects to reach full-channel and worldwide distribution of Arlo cameras in 3Q15. The company plans to expand the distribution to fully cover retail channels, namely the 44,000 retail outlets around the world, and forecasts the sales to be “very exciting”. With the broadening of distribution channels and regional reach, NETGEAR anticipates the sales this year to be back-end loaded.

With full-year sales contribution from and expanding distribution channels for NETGEAR, we expect Sky Light’s home imaging product revenue to rocket 965.6% YoY to HK$536m. Home image products are estimated to contribute 17.5% of the company’s total revenue in 2015. After NETGEAR broadens its product distribution channels by 2H15, we expect the products to continue to see fast growth in coming years. Its home imaging business should become a new growth engine for Sky Light, driving the company’s earnings growth and diversifying its customer exposure.



Figure 55. NETGEAR’s Home Security Camera Specifications

Video resolution Configurable up to 1,280 x 720

Video format H.264

Imaging Full colour

CMOS

Auto-adaptive white/black balance and exposure

Motion detection Adjustable sensitivity

Automatic email alerts and push notifications

Digital pan and zoom Yes

Night vision 850 nm LEDs: illuminates up to 25ft

IR cut-off filter

Battery Four lithium CR123 photo batteries

Battery level indication Yes

Battery life 4-6 months

Field of view (FOV) 110°

Focus range (ST) Fixed focus (2ft to infinity)

Operating temperature 14° to 122° F (-10° C to 50° C)

Dimension 2.8 x 1.6 x 2.5 inches

Weight 0.25lb

Source: NETGEAR

Figure 56. NETGEAR’s Home Security System (4 Camera Package at US$499)

Source: NETGEAR

Figure 57. Arlo Products Installed Indoors and Outdoors with Different Mounting Devices

Source: NETGEAR



Figure 58. Arlo Smart Home Security Camera Control Interface

Source: NETGEAR

Figure 59. Arlo Security Camera is part of NETGEAR’s Smart Home Solution

Source: NETGEAR



Figure 60. Canary All-in-one Security IP Camera (Retail Price of US$249)

Source: Canary

Figure 61. Canary IP Camera Specifications

Source: Canary

Figure 62. Canary IP Camera Specifications

Camera 1080p HD Camera

147° wide-angle lens

Automatic night vision

Motion detection

Sensors 3-axis accelerometer

Ambient light

Capacitive touch

HomeHealth TechnologyTM Temperature

Humidity

Air quality

Audio and siren High-quality microphone

Built-in speaker

90+ dB siren

Source: Canary



INDUSTRY OVERVIEW

Action Camera Market

With the birth of the new market, the demand for action cameras throve during 2010-14. According to Frost & Sullivan, the global shipments of action cameras surged at a CAGR of 104.2% from 2010 to 2014 to approximately 7.7m units globally in 2014; global action camera shipments are forecast to increase further at a 2015-19 CAGR of 18.3% to approximately 20.3m units in 2019.

Geographically, the majority of global action camera shipments are to the US. However, Frost & Sullivan forecasts a CAGR of 19.4% for the regional Asia-Pacific market from 2015 to 2019 as key players expand there. Going forward, sales in the US market should be driven by replacement demand, while those in Europe, the Middle East and Africa should maintain fast growth fuelled by further popularisation of action cameras.

Figure 63. Global Action Cameras vs. Other Digital Camcorder Shipments (2010-19E)


Figure 64. Geographical Distribution of Global Action Camera Shipments (2011-19E)


0.4 1.4 3.16.0 7.7

10.4 12.4 14.817.8 20.3

22.7 19.712.9 8.1

7.98.0

7.57.3

6.76.4

1.9%6.8%

19.3%

42.2%49.6%

56.4%62.4%

66.8%72.5%

76.1%

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E0%

10%

20%

30%

40%

50%

60%

70%

80%

Other digital camcorders (LHS)Action cameras (LHS)Percentage of global action camera shipments (RHS)

(m units)

72.0%60.0% 55.0% 52.8% 52.2% 50.4% 50.0% 49.6% 48.9%

22.0%

30.0%32.0% 32.6% 33.0% 34.5% 34.8% 35.1% 35.5%

6.0% 10.0% 13.0% 14.6% 14.8% 15.1% 15.2% 15.3% 15.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

America Europe, Middle East and Africa Asia Pacific



Key drivers of action camera market

According to Frost & Sullivan’s forecasts, the global market size for action cameras will continue to grow steadily from 2015 to 2019. The key drivers are:

Easy-to-carry, high image quality. Action cameras are very easy to carry given its small size and light weight; yet, they can still shoot high-definition videos. Most action cameras on the market can shoot 1,080p videos and some are even capable of 4K videos. Several new-generation cameras have additional functions such as Wi-Fi connections with other devices for users to easily transfer video content.

First-person imaging. Action cameras are designed to shoot videos with first-person perspectives. This gives viewers a different experience compared to traditional cameras. The videos shot by action cameras have special visual impact for some activities such as surfing, rock climbing and skiing.

User-friendly operation. Action cameras are more user-friendly, as they are meant to be operated hands-free and can take high-definition continuous captures and self-shots even in fast action situations.

Satisfying social networking demand. People tend to share their lives via social media platforms nowadays, and the development of social media allows users to easily post short videos. This drives the demand for creating and sharing engaging videos.

Key entry barriers to action camera market

Key barriers to action camera market entry in favour of brand owners are:

Brand image. GoPro, as the leading brand in this market, has created the culture surrounding action cameras and established a large, loyal customer base over the years. New entrants would only be able to break into this market by offering either higher grades of hardware or lower prices.

Complete manufacturing and distribution network. New entrants face the difficulty of establishing a distribution network, cultivating relationships with quality suppliers and other problems associated with network creation.

Media functions and cloud service. Brand owners are expanding the media functions of their action cameras through cloud services to increase the end customers’ brand loyalty. The additional investment in infrastructure and professional personnel for these services may deter entrants.

Competitive landscape

GoPro is a NASDAQ-listed US company engaging in developing and selling action cameras. It launched its first high-definition camera in 2009 and became the top camera brand in terms of 2014 shipments. According to Frost & Sullivan, GoPro led the global action camera market in 2014 with a 67% market share; Sony and iON ranked second and third with 10% and 3%, respectively. In 2014, GoPro shipped approximately 5.2m camera units sold together with a combination of accessories, which could include waterproof housings, batteries, and selected mounts, depending on the model. GoPro’s revenue increased at a CAGR of 62.8% from US$526.0m in 2012 to US$1,394.2m in 2014, and its cost of revenue rose at a CAGR of 60.3% from US$298.5m in 2012 to US$767.0m in 2014.

In recent years, more consumer electronics companies, including major established brands, have entered the market. In particular, iON, a US-based action camera company, and Sony have introduced a variety of point of view (PoV) camcorders. According to Frost & Sullivan, iON and Sony have become two well-established action camera brands, having shipped approximately 0.2m and 0.8m units of action cameras in 2014. Market competition is likely to increase, as more international and regional brands enter or are expected to enter this market.



Figure 65. Action Camera Brand Market Share (2014)


Figure 66. Action Camera Brand: GoPro

Source: GoPro.com

Figure 67. Action Camera Brand: iON

Source: ioncamera.com

iON, 3% Others, 20%

Sony, 10%

GoPro, 67%



Figure 68. Action Camera Brand: Sony

Source: Sony.com

Action Camera Manufacturers

The major manufacturers for the global action camera industry include JDM/ODM manufacturers, such as Sky Light, and OEM and own-brand manufacturers from China, Taiwan and Japan.

According to Frost & Sullivan, among action camera manufacturers, Sky Light ranked first in 2012 and second in 2013-14 by market share. Sky Light also ranked first in terms of aggregate shipments of action cameras from 2010 to 2014 among peers worldwide. The top-3 players combined for more than 75% of global action camera shipments in 2012, 2013 and 2014.

Figure 69. Action Camera Manufacturers’ Global Market Shares (2012-14)

2012 2013 2014

Source: Frost & Sullivan, BOCI Research

Sky Light, 53%Chicony,

23%

Sony, 4%

Others, 20% Sky

Light, 26%

Chicony, 41%

Sony, 10%

Others, 23%

Sky Light, 31%

Chicony, 39%

Sony, 10%

Others, 20%



Figure 70. GoPro’s Manufacturer Breakdown by Shipments (2014)


Figure 71. Global Shipments of Major Action Camera Manufacturers (2010-14)

(m units) 2010 2011 2012 2013 2014 Aggregate

2010-14

Sky Light 0.4 1.1 1.6 1.5 2.4 7.1

Chicony – – 0.7 2.4 3.0 6.1

Sony – – 0.1 0.6 0.8 1.5

Others – 0.3 0.6 1.4 1.6 3.9

0.4 1.4 3.1 6 7.7 18.6


Material cost for action cameras. For mid-range to high-end action cameras priced over US$250 each, the majority of the cost of raw materials, components and parts is attributable to processors and sensors.

Figure 72. Price Ranges of Certain Components and Parts for Mid-range and High-end Action Cameras

(US$) 2012 2013 2014 2015E 2016E 2017E

Processor 6.0–12.0 5.4–11.8 6.4–12.5 7.0–13.0 6.8–13.0 6.7–13.2

Sensor 5.5–10.0 5.0–9.7 5.2–10.0 5.4–10.8 5.3–10.6 5.3–10.5

Lens 4.0–5.0 3.9–5.0 3.8–5.0 3.8–5.0 3.6–4.8 3.6–4.9


Key barriers to entry into the market for action camera manufacturers are:

High capital requirement. The equipment used in the manufacturing processes, such as modelling, surface-mounting and testing, are precise instruments which require considerable capital investment.

Manufacturing and software R&D capabilities. Strong R&D capabilities are required during the manufacturing process, such as moulding, imaging and software and hardware testing. R&D is also needed to keep pace with innovations and upgrades in key components such as digital signal processing (DSP) units and sensors. Software development capabilities also serve as an entry barrier as products require more sophisticated software applications.

Customer relationships. Brand owners in the market are mostly global companies with strict partner selection processes. New entrants need to achieve breakthrough in an existing relationship before becoming a qualified partner.

Sky Light, 42%

Chicony, 58%



Global IP Camera Market

The growth of IP cameras is driven by higher definition, better storage and improved connectivity. With higher definition and interactivity with smart devices, smart home IP cameras are expected to show strong growth in the near future.

Figure 73. Global Smart Home IP Camera Shipments (2010-19E)


Key drivers for smart home IP camera market

Frost & Sullivan projects the global smart home IP camera shipments to increase at a CAGR of 72.4% from 2015 to 2019, and such shipments to reach 25.1m units in 2019. The key drivers for the market growth are:

Technological development. The developments of wireless transmission technology and data storage improve the user-friendliness of IP cameras and increase the number of functions, which in turn fuel the demand growth.

Demand increase. Customers are paying more attention to home security. The development of smart home IP cameras effectively enables users to directly monitor their homes.

Price decline. The cost of components for smart home IP cameras is expected to continue to decrease. The declining selling prices of these cameras should make them more affordable to a wider market.

Key entry barriers in smart home IP camera market

Key barriers to entry into the smart home IP camera market are:

R&D capabilities. Smart home IP cameras require more stability and greater safety measures than those used for general commercial buildings. Higher levels of R&D capabilities are needed.

Algorithms and cloud service. Smart home IP cameras are increasingly developed to be used as part of an ecosystem with systematic services. Professional algorithms for analysing images will be the foundation for future services, commanding greater programming and infrastructure requirements, which take time to build up. Furthermore, cloud computing technology will be increasingly deployed for uploading data.

0.0 0.0 0.1 0.4

5.4

9.7

16.5

25.1

1.32.8

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

(m units)

2015-19E

CAGR: 72.4 %



INVESTMENT RISKS

Heavy Reliance on GoPro

Sky Light is a principal manufacturer for GoPro and therefore its business and results of operations rely substantially on GoPro. Revenue from GoPro accounted for 75.1%, 79.9% and 82.7% of Sky Light’s total revenue in 2012, 2013 and 2014, respectively.

The company has entered into a global supply agreement with GoPro, which provides that Sky Light will not design or manufacture certain similar camera products for other customers subject to certain minimum purchase commitments from GoPro. If for any reason GoPro discontinues or significantly reduces its purchase orders and Sky Light is unable to find new customers or expand into other product categories, Sky Light may have difficulties in maintaining its utilisation rate and profitability at current levels, and its business and results of operations could be materially and adversely affected.

Margin Pressure from Clients

Sky Light sets prices for its JDM and ODM products primarily based on the estimated costs incurred in the production of a product plus a profit margin that varies depending on the type of product and the model. Sky Light periodically reviews its costs of production, and negotiates and agrees with its customer on prices for each purchase order placed.

In the event that Sky Light sees higher pricing pressure due to intensified competition from other manufacturers, weaker demand for its customers’ end products, lower bargaining power or other reasons, the company may need to reduce the prices and lower the margin of its products. Moreover, Sky Light may not be able to accurately estimate costs or pass on all or part of any hikes in its costs of production, in particular the costs of raw materials, components and parts. Consequently, its results of operations could be materially and adversely affected.

Competition in Action Camera and Action Camera Manufacturer Markets

New market entrants, including international and regional mobile phone or consumer electronics brands, may introduce new products with competitive proprietary technologies into the action camera market, which could dampen the product demand for Sky Light’s customers and thus Sky Light’s business. In addition, the company competes against many established manufacturers, some of which may enjoy substantial competitive advantages, including those in economies of scale, operating history, financial resources, R&D capabilities and customer reach. Failure to compete effectively could result in the loss of market share and decreases in revenue and profitability.

Model Preference of GoPro’s End Customers

Sky Light only produces certain models for GoPro, and other models are produced by Taiwanese OEM manufacturer Chicony. As such, if GoPro’s customers prefer the GoPro models that are supplied by Chicony, Sky Light’s action camera shipment growth may not be as high as GoPro’s overall shipment growth.

Challenges in New Home Imaging and Smart Wearable Businesses

In order to grow and diversify its business, Sky Light has expanded its product offerings by developing and manufacturing home imaging and smart wearable products. It has a limited operating history in developing and manufacturing these new products, which may not provide a meaningful basis on which to evaluate these businesses.



MANAGEMENT PROFILES

Tang Wing Fong Terry (鄧榮芳 ), aged 56, Chairman,

Executive Director & CEO of Sky Light; Founder of Sky Light Group

Mr Tang was appointed as chairman and executive director of the company with effect from 18 December 2013. He had been the general manager of the group and is a director of each of the subsidiaries of the company. Mr Tang is primarily responsible for overall strategic planning and overseeing the general management of the group. Mr Tang has more than 20 years of experience in the digital imaging, computer peripherals and consumer electronics industry.

Prior to establishing the company’s predecessor business in 2000, Mr Tang co-founded Peer Industries Ltd, a company engaged in the trading of materials and production equipment for manufacturing computer diskettes, in 1992.

Mr Tang received a part-time higher certificate of mechanical engineering from the Hong Kong Polytechnic University in 1982. Mr Tang is the settlor of the Tang’s Family Trust, whose discretionary objects are Mr Tang and certain of his family members. Mr Tang is deemed to be interested in the shares held by Fortune Six and 5,214,000 shares held by Fortune Sky by virtue of his beneficial interest in the Sky Light Employees’ Trust.

Wu Yongmou (吳勇謀), aged 37, Executive Director

Mr Wu joined the group in 2010 and was appointed as an executive director with effect from 25 March 2015. He is the general manager for Sky Light Technology (HY) and primarily responsible for its overall management. Mr Wu has more than 10 years of experience in the digital imaging industry and in production management. He is also a director of Sky Light Shenzhen.

Mr Wu founded Shenzhen Yongyida Electronics Co, Ltd (深圳市勇藝達電子有限公司),

a company engaged in the manufacturing of mobile phone and other communication products, in 2003. In 2007, Mr Wu established Xinyongyi, a company engaged in the development and operation of a science park in Heyuan.

Mr Wu graduated from the China University of Petroleum, Beijing with an associate degree in business administration through distance learning in 2006. He is also a standing member of the Sixth Heyuan City Committee of the Chinese People’s Political Consultative Conference (第六屆中國人民政治協商會議河源市委員會). Mr Wu is the

settlor of the Wu’s Family Trust, whose discretionary objects are Mr Wu’s children, and Mr Wu is deemed to be interested in the shares held by Yongweida.

Lu Yongbin (盧勇斌), aged 42, Executive Director, CFO and

Joint Company Secretary

Mr Lu joined the group in 2005 and was appointed as an executive director with effect from 25 March 2015. He is currently the head of the finance department and is primarily responsible for the management of overall financial and accounting affairs of the group. Mr Lu has approximately 22 years of experience in accounting and related financial management and 10 years of experience in the digital imaging industry.

Mr Lu graduated from the Hubei Normal University with an associate degree in accounting and finance in 1998. Mr Lu became a certified public accountant in the PRC in 2004 and is a fellow member of the Chinese Institute of Certified Public Accountants and the China Certified Tax Agents Association. Mr Lu is beneficially interested in 3,595,800 shares held by Fortune Sky by virtue of Mr Lu being a beneficiary of the Sky Light Employees’ Trust.



Huang Erwin Steve (黃岳永 ), aged 49, Non-executive

Director

Mr Huang joined the group on 25 March 2015 and was appointed as a non-executive director with effect from 25 March 2015.

Mr Huang is the deputy chairman and a non-executive director of Tse Sui Luen Jewellery (International) Limited (417 HK), a company listed on the Hong Kong Stock Exchange.

Mr Huang is actively engaged in social entrepreneurship with a view to bridging social needs through innovation and information technology. He is currently the president of Hong Kong Information Technology Federation (HKITF) and the founding chief executive officer of WebOrganic, a social enterprise under HK Council of Social Services. Mr Huang co-founded and currently serves as the vice chair of “Senior Citizen Home Safety Association”, a United Nations award-winning non-governmental organisation in Asia, to provide safety bell emergency call service for the elderly in the community through the use of technology, people-oriented services and innovative methods. Mr Huang also chairs the eLearning Consortium, which is instrumental in driving Hong Kong’s eLearning initiative in education reform. In 2011, he was elected as a member of the election committee (information technology) for the legislative council and chief executive of Hong Kong. Mr Huang holds double degrees in business administration and business administration & management from Boston University, the United States.

Tang Kam Sau (鄧錦繡), aged 52, Non-executive Director

Ms Tang joined the group in 2005 and was appointed as a non-executive director with effect from 25 March 2015. Ms Tang has approximately 10 years of experience in the digital imaging industry. Ms Tang is a director of a company which is principally engaged in manufacturing multimedia product packaging materials since 2009. Ms Tang is also a director of Sky Light Imaging, Sky Light Shenzhen and Sky Light Digital. Ms Tang is the sole shareholder of Uphigh Global which holds 39,192,000 shares, and is deemed to be interested in the shares held by Uphigh Global.

Chan Tsu Ming Louis (陳祖明), aged 56, Independent Non-

executive Director

Mr Chan has more than 30 years of experience in finance and banking. Between 1982 and 1983, he served as a credit analyst of Banque Nationale de Paris. Between 1983 and 1986, he worked at The Industrial Bank of Japan, Ltd as a senior marketing officer. He worked at Bankers Trust Company between 1986 and 1995 with his last position as a vice president (capital markets). Mr Chan joined Standard Chartered Bank in 1995 as a senior manager. Between 2000 and 2001, he was the head of corporate development of Willas-Array Electronics Management Limited. He worked at Standard Bank Asia Limited in 2005 as a director (equity Asia) until 2009. Between 2009 and 2012, he was a senior director (finance and accounting) of Wuhan Admiral Technology Limited, a wholly-owned subsidiary TPV Technology Limited (903 HK), a company listed on the Hong Kong Stock Exchange which is engaged in the manufacturing, sales and distribution of televisions and computer monitors.

Mr Chan obtained a master’s degree in business administration from the University of Hong Kong in November 1995 and a higher diploma in business studies (banking) from the Hong Kong Polytechnic University in November 1982.



Wong Kee Fung Kenneth (黃繼鋒), aged 50, Independent

Non-executive Director

Mr Wong has more than 20 years of experience in financial management and advisory services. He has been the executive director of Joymaster (Beijing) Consulting Co. Ltd, a company engaged in the provision of financial advisory services to Chinese information technology and manufacturing companies on fundraising and corporate restructuring. He was the chief executive officer of Scitus Cement (China) Holdings Company Ltd. Mr Wong served as financial controller at Valeo SA and its subsidiaries in China between 1995 and 1997 after his employment with Schlumberger Ltd between 1993 and 1995.

Mr Wong obtained a bachelor’s degree in social sciences from the Chinese University of Hong Kong in 1987 and a diploma from HEC Paris (École des Hautes Etudes Commerciales) in 1993. He is also a fellow member of the Hong Kong Institute of Chartered Public Accountants and the Association of Chartered Certified Accountants, the United Kingdom.

Cheung Wah Keung (張華強), aged 54, Independent Non-

executive Director

Dr Cheung has more than 30 years of experience in trading and manufacturing of consumer electronic products.

Dr Cheung was the chairman and an executive director of Shinhint Acoustic Link Holdings Limited (2728 HK) from May 2005 to November 2014. Dr Cheung is the non-executive chairman and an independent non-executive director of Harmonic Strait Financial Holdings Limited (33 HK) since June 2007. Both of these companies are listed on the Main Board of the Hong Kong Stock Exchange.



Income Statement (HK$ m)

Year ended 31 Dec 2013 2014 2015E 2016E 2017E

Revenue 1,623 2,092 3,059 3,629 4,380

Cost of sales (1,287) (1,647) (2,429) (2,881) (3,482)

Operating expenses (exclude depreciation & amortisation)

(124) (182) (279) (296) (344)

EBITDA 211 264 351 452 554

Depreciation & amortisation (19) (23) (26) (29) (30)

Operating profit (EBIT) 192 241 325 423 524

Net interest income/(expenses) (1) 0 0 (1) (1)

Other gains/(losses) 10 5 5 5 5

Pre-tax profit 201 246 330 428 527

Tax on profit (36) (45) (63) (77) (95)

Minority interests (18) 0 0 0 0

Net profit 147 202 267 351 432

Core net profit 147 207 297 360 436

EPS (HK$) 0.184 0.252 0.334 0.438 0.540

Core EPS (HK$) 0.184 0.258 0.371 0.449 0.545

DPS (HK$) 0.263 0.355 0.100 0.131 0.162

Revenue growth (%) (2) 29 46 19 21

EBIT growth (%) (5) 25 35 30 24

EBITDA growth (%) (3) 25 33 29 23

EPS growth (%) 20 37 32 31 23

Core EPS growth (%) 20 40 44 21 21


Balance Sheet (HK$ m)

As at 31 Dec 2013 2014 2015E 2016E 2017E

Cash & cash equivalents 141 194 828 1,040 1,309

Receivables 320 251 367 436 526

Inventories 163 193 282 335 404

Other current assets 142 158 198 221 252

Total current assets 766 796 1,675 2,032 2,491

Fixed assets 87 101 116 126 130

Intangible assets 1 6 7 7 7

Other long-term assets 8 17 17 17 17

Total long-term assets 96 125 139 150 154

Total assets 862 921 1,814 2,182 2,645

Creditors 271 275 406 482 582

Short-term debt 172 165 165 165 165

Other current liabilities 173 261 168 215 275

Total current liabilities 616 701 739 861 1,022

Long-term borrowings 0 0 0 0 0

Other long-term liabilities 5 1 1 1 1

Share capital 0 0 8 8 8

Reserves 242 219 1,066 1,312 1,614

Shareholders' equity 242 219 1,074 1,320 1,622

Minority interests 0 0 0 0 0

Total liabilities & equity 862 921 1,814 2,182 2,645

Book value per share (HK$) 0.30 0.27 1.34 1.65 2.03

Tangible assets per share (HK$) 0.30 0.27 1.33 1.63 2.01

Net debt/(cash)per share (HK$) 0.09 0.00 (0.79) (1.06) (1.40)


Cash-flow Statement (HK$ m)


Pre-tax profit 201 246 330 428 527

Depreciation & amortisation 19 23 26 29 30

Net interest expenses 1 0 0 1 1

Change in working capital (155) 37 (76) (47) (61)

Tax paid (51) (29) (41) (50) (61)

Other operating cash flows 7 16 24 0 0

Cash flow from operations 22 293 263 360 437

Net purchase of fixed assets (27) (56) (41) (40) (35)

Decrease/(increase) in invest. (14) 12 1 1 1

Other investing cash flows (10) 13 0 0 0

Cash flow from investing (51) (31) (40) (39) (34)

Net increase in equity 0 59 668 0 0

Net increase in debt 90 (8) 0 0 0

Dividends paid (163) (182) (230) (105) (130)

Other financing cash flows (12) (68) (27) (4) (4)

Cash flow from financing (85) (199) 411 (109) (134)

Change in cash (115) 63 633 212 269

Cash at beginning of year 219 104 167 801 1,013

Free cash flow to firm (30) 262 223 321 403

Free cash flow to equity 58 251 220 317 398


Key Ratios


Profitability (%)

EBITDA margin 13.0 12.6 11.5 12.5 12.6

EBIT margin 11.9 11.5 10.6 11.7 12.0

Pre-tax margin 12.4 11.8 10.8 11.8 12.0

Net profit margin 9.1 9.6 8.7 9.7 9.9

Liquidity (x)

Current ratio 1.2 1.1 2.3 2.4 2.4

Interest coverage 74.3 88.5 106.2 116.7 119.6

Net debt to equity (%) 28.2 Net cash Net cash Net cash Net cash

Quick ratio 1.0 0.9 1.9 2.0 2.0

Valuation (x)

P/E 17.9 13.1 9.9 7.5 6.1

Core P/E 17.9 12.8 8.9 7.3 6.1

Core P/E @ target price 25.0 17.8 12.4 10.2 8.4

P/B 10.9 12.1 2.5 2.0 1.6

P/CF 122.0 9.0 10.0 7.3 6.0

EV/EBITDA 12.8 10.0 5.7 4.0 2.8

Activity ratios

Inventory days 44.2 39.5 35.7 39.1 38.7

Accounts receivables days 44.1 49.8 36.9 40.4 40.1

Accounts payables days 46.7 47.6 40.6 44.6 44.3

Returns (%)

Dividend payout ratio 142.9 140.5 30.0 30.0 30.0

Return on equity 59.4 87.7 41.3 29.3 29.4

Return on assets 20.6 22.2 19.2 17.4 17.8

Return on capital employed 46.3 61.2 40.4 31.3 32.2




LISTED COMPANIES IN THIS REPORT

AAC Technologies (2018 HK/HK$44.00, HOLD)

Ambarella Inc (AMBA US/US$115.87, NR)

BYD Electronic Intl (285 HK/HK$6.45, NR)

Canon Inc (7751 JP/¥3,972, NR)

Chicony Electronics (2385 TT/NT$82.10, NR)

Cowell e Holdings (1415 HK/HK$5.22, BUY)

FIH Mobile (2038 HK/HK$4.05, NR)

Fujitsu Ltd (6702 JP/¥650.60, NR)

GoPro Inc (GPRO US/US$62.10, NR)

Harmonic Strait Financial Holdings (33 HK/HK$0.148, NR)

Hon Hai Precision Industry (2317 TT/NT$90.70, NR)

Lite-On Technology (2301 TT/NT$34.70, NR)

NETGEAR Inc (NTGR US/US$33.49, NR)

Nikon Corp (7731 JP/¥1,474.0, NR)

Olympus Corp (7733 JP/¥4,750.0, NR)

Panasonic Corp (6752 JP/¥1,457.0, NR)

Pegatron Corp (4938 TT/NT$88.80, NR)

Primax Electronics Ltd (4915 TT/NT$34.75, NR)

Schlumberger Ltd (SLB US/US$82.82, NR)

Shinhint Acoustic Link Holdings Limited (2728 HK/HK$2.00, NR)

Sky Light Holdings (3882 HK/HK$3.30, BUY)

Sony Corp (6758 JP/¥3,533, NR)

Standard Chartered Plc (2888 HK/HK$118.00, NR)

Sunny Optical (2382 HK/HK$14.96, HOLD)

Tongda Group (698 HK/HK$1.31, NR)

Toshiba Corp (6502 JP/¥380, NR)

TPV Technology Limited (903 HK/HK$1.32, NR)

Tse Sui Luen Jewellery (417 HK/HK$2.83, NR)

Valeo SA (FR FP/€121.50, NR)

Prices as of 31 July 2015 All figures subject to rounding



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This research report is prepared by BOCI Research Limited, a company incorporated in Hong Kong and regulated by the Securities and Futures Commission in Hong Kong. The views expressed in this report accurately reflect the personal views of the analysts concerned. Save as disclosed herein, (i) each analyst declares that neither he/she nor his/her associate serves as an officer of the listed corporation reviewed by the analyst; (ii) each analyst declares that neither he/she nor his/her associate has any financial interests in relation to the listed corporation reviewed by the analyst.

None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analysts, BOCI Research Limited and BOCI Group. Analysts receive compensation based upon the overall revenue and profitability of BOCI Group, including revenues derived from its investment banking business.

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4 august 2015 buy 39 side sky light holdings -...

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