Event:

On 7 Aug 13, the Company inked an agreement for major assets swap and offering shares to finance the asset purchase with shareholders of the Great Wall Film & TV Co., Ltd (Great Wall); upon the completion of this major asset restructuring, Great Wall will likely go public via backdoor listing. We make comments as follows:

Comments:

Great Wall is a high-quality TV play producer with relatively high brand recognition. The overall plan involves two parts: major asset restructuring and seasoned financing to raising the deal funds; upon the completion of the deal, the Company will hold a 100% stake in Great Wall, and its core business will transform into TV plays investment, production, distribution and derivatives. On average, Great Wall produced six high-quality TV plays with 269 and 283 episodes in 2011 and 2012, representing 1.8% and 1.34% of the total episodes obtaining distribution licenses in China, and it has been ranking among the top 10 TV plays producers at home, Most of the TV plays produced by it were first broadcasted by key satellite TV stations, or CCTV; a number of its works have made debut on the Golden Eagle Theater of Hunan Satellite TV; and the Secret History of Princess Taiping gained strong support in distribution by iQiyi.com in 2012. Overall, Great Wall is a high-quality TV play producer with relatively high brand awareness in the sector.

Operation features in exclusive operation and full-process control. Great Wall adopts an exclusive operation model featuring in full-process market orientation and full-process integrated control. In full-process project control, it boasts higher independent control over script writing, shooting management and post-production than its peers. It has built up teams of professionals in all business links, and kept “long-term cooperation plus stock ownership” partnership with a number of outstanding screenwriters and creators to guarantee the efficient scheduling of screenwriters and creators resources, which underpin the efficient operation of “exclusive operation featuring in full-process market orientation and full-process integrated control”.

Earnings growth: capacity expansion will improve the market share of high-quality TV plays. In 2013, Great Wall plans to invest in shooting 10 TV plays with a total of 470 episodes and obtain licenses for their distribution. It strategically aims to expand its annual capacity to ~700 episodes during 2014-15. At present, TV plays put on file and those to be invested and shot over the coming two years are able to ensure the attainment of its strategic target for capacity expansion. Considering that production companies able to produce and distribute high-quality TV plays still see relatively huge potential of expansion on the satellite TV broadcasting market, we believe that as a high-quality TV play producer with high brand awareness and mature professional teams, Great Wall is able to achieve sustained earnings growth over the next three years through capacity expansion and increase of the market share of high-quality TV plays.

Potential risks: (i) Failure in TV distribution, (ii) recovery of receivables, and (iii) examination and approval of the major asset swap transaction.

Initiate coverage with “OVERWEIGHT” rating. With a reference to Great Wall’s 2013-15E earnings commitment outlined in the transaction plan, we forecast the Company’s 2013/14/15E EPS to be Rmb0.28/0.36/0.41 (diluted as per the share capital upon restructuring). Based on the average valuation of comparables, we apply 2014E PE of 29x to it, implying a target price of Rmb10.43 per share. Given the impact of restructuring on the actual allocation value, we initiate its coverage with “OVERWEIGHT” rating.