All eyes are on the TV maker, as fund managers seek out H-share laggards In a year tinged with geopolitical uncertainties, fund managers have made the most of small-caps and mainland plays, looking to them to boost their portfolio performances. Some of these managers had the foresight to begin accumulating shares at the beginning of the year, when stocks were weak due to worries over the Iraq war and Sars. Others are now playing catch-up with their peers, looking for untouched small-caps that have yet to make a move. One potential performer is mainland television maker Skyworth Digital Holdings. According to data from the Hong Kong Exchanges and Clearing, Value Partners has bought 4.45 million Skyworth shares on the open market at an average price of 73 cents apiece. Its stake in the manufacturer is now 8.08 per cent, up from 7.87 per cent. This comes as no surprise to ABN Amro analyst Eddie Lau. 'The stock is a laggard compared with other H shares.' While the H-share Index has surged more than 40 per cent to 2,983.66 points since the beginning of the year, Skyworth shares have climbed only about 5 per cent to close at 89 cents on Friday. Skyworth is trading at about 11 times forward earnings, which, according to analysts, is not pricey given the shares' high-dividend yield of 4 per cent. More importantly, analysts like the company's promising prospects, saying strong export growth should boost its earnings. Brokers polled by Thomson First Call forecast Skyworth's net profit rose 160 per cent to $161.7 million for the year to March. Skyworth will report results tomorrow. Earnings next year are forecast to rise 21 per cent to $196.29 million. 'We expect Skyworth's export business to be its key earnings driver for the foreseeable future,' said Cheryl Tang, analyst at BOC International. She forecasts TV exports will grow 35 per cent annually over the next three years. In the six months to September last year, only 19 per cent of Skyworth's sales came from TV exports, as 65 per cent of its TVs were sold on the domestic market. Domestic sales and exports of other audio-visual products made up the rest of its sales. Skyworth is the largest original equipment manufacturer of TVs in China. Last year, its TV exports almost doubled to 1.7 million units, representing 10 per cent of the mainland's TV exports. The company expects export revenue to account for 50 per cent of revenue in five years. As Eastern Europe and Asia are Skyworth's two main export destinations, United States hostility towards cheap TVs from China has had no material impact on the company as the US accounts for only 1 per cent of sales. In May, US TV manufacturers accused Chinese and Malaysian makers of colour TVs of dumping and sought 84 per cent punitive duties against Chinese-made TVs. The US International Trade Commission has accepted the case and the Commerce Department is expected to deliver a preliminary ruling in October. Although some analysts have tuned into the company's export potential, others view stiff competition as the cause for pricing and margin pressure. 'Competition remains strong in the industry and we do not expect significant growth in the top line in future years,' Mr Lau said. 'However, we believe the firm will be able to maintain its margin, as it is moving into the higher-end products.' Ms Tang said: 'We believe Skyworth's increasingly well-established brands and rising sales of value-added, high-end products should enhance profitability.' Last year, the company devoted more resources to the manufacture of higher-end TVs, which accounted for 16 per cent of output, up from 12 per cent in 2001. Skyworth is also establishing a new plant to crank out high-end products such as rear-projection sets, liquid crystal display (LCD) and plasma display panels (PDP). Slated for completion next year, the new factory will increase Skyworth's capacity from 6.5 million units to 16.5 million. Of the new plant's 20 lines, six to eight will be used for high-end TVs. Sales of rear-projection, LCD or PDP TVs are expected to reach 300,000 units next year. Market researcher iSuppli said: 'North America, Europe and Japan are going through a replacement cycle in which consumers are looking for TVs that can support digital signals and machines that have resolutions that match the requirements of peripherals like DVD players and video-game consoles.' CRT sets accounted for 96 per cent of worldwide unit sales last year. But by 2007, the share of the market held by CRT sets is expected to fall to 82 per cent, with LCD TVs taking up 12 per cent and PDP and rear-projection sets grabbing 3 per cent each, according to iSuppli. Still, while Skyworth has bet part of its future on new technologies, it remains uncertain which will become the consumer favourite: rear-projection, LCD or PDP sets. ISuppli said: 'It should be noted that not all of these various technologies will win in the market and there is much work to be done in terms of educating retailers on the benefits of the different display technologies.'