Investment Highlights:

A dominant cable TV operator transitioning into convergencemedia. Apart from being the only cable TV operator in Shaanxiprovince, the Company is also the “backbone” to the province'se-government network. The Company stated its “full industry chain,convergence media operator” development strategy in 2015, which willenable it to expand from a pure cable TV services provider to anintegrated player encompassing audio/video services, internet accessand information services. Its earnings are already on the up aftermaking continued inroads into a convergence media platform. TheCompany posted revenue and net profit of Rmb2,387mn （+3.92% YoY）and Rmb133mn （+13.68% YoY） respectively for 2015.

ARPU rising continually as reform of the cable network industryspeeds up. Cable network is a key infrastructure to lift the level ofinformatization. As of end-2015, subscribers to cable TV broadcastingservices has reached 239mn, as the service now covers 98.80% ofChina's population. Driver of the cable network industry is shifting fromuser coverage to average revenue per user （ARPU）， while the“cloud-channel-device” framework will help to reshape the value chainof the cable network industry. The proportion of basic service fee for theindustry has declined consistently from 68% in 2008 to 56% in 2014. Onthe other hand, income from value-added services and data businesshas risen continuously, driving rapid increases in ARPU.

Proactively turning to new media, building up presence in“cloud-channel-device”。 The Company's core business spans acrosscable TV, HD interactive TV and broadband internet services, with auser base of 6.29mn in Shaanxi province. As of end-2015, the numberof subscribers to its two-way network and personal broadband internetservices were 6.17mn and 750,000 respectively. On the other hand, theCompany is also proactively building up its presence in the“cloud-channel-device” fields:

Contents: establishing a key content production platformleveraging on one of its subsidiaries as the vehicle. Collaborationwith government and corporate clients on healthcare, educationand other fields.

Data: partnering with Beijing Sinnet Technology to build up a cloudcomputing platform as well as taking the lead in networkinterconnection in northwest China.

Devices: unveiling TVOS and mobile TV products.

Given the above, we believe the Company is progressively pushingforward with its strategy to becoming a “convergence media operator”。？ Private placement to boost its war-chest, unleashing potential for external collaboration. TheCompany's private placement proposal to raise up to Rmb955mn, announced in Jun 2015, receivedapproval from the CSRC in Jun 2016. Proceeds from this capital raising are intended to fund theconstruction of its next generation TV network as well as repay bank loans. Apart from boosting itsfinancial strength and opening up potential for profit growth, this private placement will also allow theCompany to gain support in the areas of network technology and content resources, from participants tothe capital raising （including Shanghai Oriental Pearl Media, Tsinghua Tongfang and Beijing JetsenTechnology）。 This bodes well for its transition towards a “convergence media operator”。

Risks: （i） data business falling short of expectations; （ii） disappointing reform of the cable TV industry; （iii）exacerbating market risks.

Earnings forecast, valuation and investment rating. Taking into account development of its variousbusiness segments, expectations of organic growth as well as its private placement, we forecast itsdiluted 2016-18E EPS to be Rmb0.29/0.41/0.52. Its current market price of Rmb15.23 implies 2016-18EP/E of 52/37/29x. Given the industry's nature and the Company's direction of transitioning into aconvergence media platform, we take Wasu Media Holding and Hunan TV & Broadcast Intermediary,which have both built up extensive presence in this field, as reference. Meanwhile, taking into accounteconomic development and consumer spending of Shaanxi, we estimate its market cap per user atRmb2,000. We forecast the Company will have a user base of 6.3mn by 2017E, translating into a marketcap of Rmb12.6bn or target price of Rmb20.45. Initiate coverage with BUY.