What happened

Liaison announced it will: 1) acquire a 19% stake in a Tianjin-based internet company in Tianjin at a cost ofRmb13.40mn; 2) acquire a 21% stake in a Beijing-based advertising company at a cost of Rmb100mn; 3) acquire a48% stake in iSpace at a cost of Rmb90mn; 4) acquire a 40.9% stake in a Chongqing-based UAV manufacturer at a costof Rmb55mn; and, 5) invest another Rmb202mn into its financial service platform.

Comments

The Rmb4.8bn private placement has been completed; 2016 will be a crucial year for its capitaloperations; expansion of its intelligent hardware ecosystem likely to accelerate. Liaison kept enhancing itsintelligent hardware ecosystem and establishing a presence centered on sectors such as VR, smart heath care, smarthome and internet-based financial services to build a “Lianluo OS + hardware + content” ecosystem. Liaison’sinvestments will help enhance its ecosystem in terms of business expansion, distribution channels and client resources;this could also produce visible synergies with the businesses of the companies it invested in. Its external expansionaccelerated significantly thanks to the Rmb4.8bn proceeds from its previous private placement; we expect more capitaloperations in the future.

To see high organic growth; improving game business incubator platform to boost exponential earningsgrowth. Liaison has followed a platform-based development strategy; adopting a unique screening mechanism to findquality mobile games; this could help better grasp users’ preferences and significantly increase the likelihood of games’success after they come online. Since it adopted such a model in 2015, the company has successfully created severalquality games; it also carried out in-depth cooperation with excellent domestic & overseas platforms. In early 2016,Liaison signed an exclusive agent contract with Tencent for a game product, demonstrating its strength in gamedevelopment and operation. We expect the company to launch more quality games under such a mechanism onexcellent platforms such as WeChat, and improve its blended gross margin. Thanks to its maturing game business, themonetization efficiency of Lianluo OS will see an inflection point and its game business will likely become an importantgrowth driver for its earnings in 2016.

Its 2016/17e EPS will likely grow 83%/31% YoY to Rmb0.66/0.87. Given the huge growth potential in itsplatform-based deployment and intelligent hardware ecosystem, we maintain our BUY rating and TP of Rmb86.