Earnings in line

1Q16 operating revenue +81.9% YoY to Rmb223mn and net profit +62.8% YoY to Rmb97.272mn. Liaison plans toincrease stake in Cilu Game to 20.6% with Rmb6mn. Based on the agreement signed with Dehaier Medical Systems, itwill subscribe 11.1mn ordinary shares offered by Dehaier at US$1.80/share in cash, 64.2% of total equities in the targetcompany. Meanwhile, it will obtain a warrant for 100mn shares of Dehaier, with an exercise price of US$2.2/share.

Trends to watch

Net profit maintained 62.8% strong growth. Application distribution business saw rapid YoY growth in revenue,driving strong growth in operating revenue. Proceeds from private placement led to significant improvement inmonetary funds. As of 1Q, the company had Rmb3.5bn cash. It guides net profit growth of 31~43% YoY for 1H16.

Merchant cloud searching + joint game operation drives strong and sustainable organic growth. Thecompany started to carry out joint game operation business in 2015. It selects quality mobile games based on platformmindset and massive users. In October 2015, it launched Siben Dao Sanguo and Tiantian Dou Qunxiong on iOS Storeand Tencent Yingyongbao. In early 2016, it signed exclusive agency agreement with Tencent on Doraemon Big Race,demonstrating strong ability in game development and operation.

External expansion to consolidate smart hardware eco-landscape. In 2015, the company invested in Avegant（a VR company in the US）， eSmart Tech （IoT interactive technology provider）， Kuner Technology （mobile phoneaccessory provider） and Qufenqi.com （internet finance platform）。 Meanwhile, it acquired a 64% stake in Dehaier andmade deployment in smart wearable devices, smart home furnishing, internet of vehicles, smart health care, VR andinternet finance. This year the company may roll out several proprietary smart hardware products. Meanwhile, with theRmb4.8bn proceeds from private placement put in place, we expect major M&A in smart hardware.

Earnings forecast

Based on the platform type of business deployment and broad room of smart hardware eco-landscape, we expect2016/17e EPS of Rmb0.27/0.35 （after ex-rights）， up 83%/31% YoY.

Valuation and recommendation

The stock now trades at 74x 2016e P/E. Maintain BUY with TP of Rmb34 （Rmb86 before ex-rights, 126x2016e P/E）。 Risks: pace of hardware product rollout and game traffic miss expectation.