Investment positives

Initiate coverage on Oriental Times Media (002175) with a BUY rating and TP of Rmb22.95, implying 43.68x 2017e proforma EPS.

Why BUY rating?

Oriental’s business covers digital TV operations, internet TV & home entertainment, film & TV production/distribution,and theme parks. With further progress in the integration of telecoms, radio & TV and internet the market for paid usersis maturing. We expect the firm to grow into a new media & entertainment giant, driven by M&A and organic growth.

Focusing on home entertainment market; large client base. Oriental established partnerships with nationalcable TV, telecoms and internet operators; its core product “Sofa Movie” covers >20mn users. In cooperation withcable TV operators, the firm launched a home entertainment product (hardware bundled with content) to expandend-market user base. Moreover, it acquired a stake in an internet TV license holder Guoguang Dongfang toimprove its digital content distribution platform and strengthen its competitive edges.

Quality IP and content to boost growth. Oriental’s Shuimu Animation is one of China’s largest contractorsfocusing on animation outsourcing. Oriental also planned to acquire Jiabo Culture, Huahua Media and YuanchunMedia with rich experience and leading market positions in areas like film & TV production, investment anddistribution this would significantly enrich its IP reserves and improve its strength in content production.

Develop offline businesses to establish a solid presence along the entire industry value chain. With itsexisting IP resources and operating strength, the company acitively developed various offline businesses like themeparks, VR applications, etc.; projects have been secured in Sanya, Guizhou, etc. Its offline businesses adopted anasset-light business model with low risks and will likely become important revenue contributors in the future.

How do we differ from the market? We believe Orienta’s “film & TV content+channel operations+offline businesses” model has advantages & visible synergies, possibly replicating Netflix’s success,implying huge growth potential. Potential catalysts: Smooth progress in M&A; rapid expansion in user base.

Financials and valuation

Over 2016~2018, Oriental’s EPS should reach Rmb0.17, Rmb0.27 and Rmb0.36, with a 46% CAGR. We expect proforma EPS over 2016~18 at Rmb0.38, Rmb0.53 and Rmb0.60 if its acquisition proposals are approved. Assuming M&Atargets will be consolidated in 2017 and given the firm’s competitive edges, we believe it deserves a 20% valuationpremium and assign it with 43.68x 2017e P/E, implying target market cap at Rmb23.2bn and TP of Rmb22.95/sh;initiate coverage with a BUY rating. Risks: M&As disappoint; slowdown in channel construction; earnings promisescannot be kept.