Results largely in line with expectation

Liaison Interactive announced 1H16 results: operating revenue grew 115.7% YoY to Rmb590mn; net profit attributableto shareholders grew 38.4% YoY to Rmb190mn, implying EPS of Rmb0.09.

Trends to watch

Overseas markets and intelligent hardware were major drivers. App distribution: operating revenue grew122.78% YoY to Rmb434mn. Cloud-based search for merchants: operating revenue fell 29.52% YoY to Rmb49.35mn.Recognition of operating revenue from cloud-based search business delayed due to partners’ changed settlementmethods. Intelligent hardware: operating revenue Rmb101mn. Blended gross margin fell 15.2ppt YoY to 56.9%, mainlybecause revenue from the low-gross-margin hardware sales business accounted for a larger share and recognition ofoperating revenue from merchant cloud search business missed expectations. Net margin fell 17.7ppt YoY to 34.2%.

Quality mobile games + excellent CPs to strengthen presence in content; game business to make visiblecontribution to earnings. Due to restrictions from new policies, launches of quality games were delayed in in 1H.Launches should accelerate in 2H; an excellent mobile game will likely be launched on the WeChat platform inSeptember and several quality games could also be launched within the year. Moreover, the company planned to acquire100% stakes in DroidHen and Mobile Fish to obtain popular mobile game CPs.

Continues to strengthen “Lianluo OS + hardware + content + services” ecosystem via M&A. The companyalready invested in companies like Avegant, eSmart Tech, Kunner Technology, Dehaier Medical and VR leader Razer. Itcontinues to gain strength in smart wearable devices, smart home, internet of vehicles, smart healthcare, VR, andinternet finance. Liaison plans to spend the Rmb4.8bn from its private placement on US e-commerce company Newegg.

Earnings forecast

Trim 2016 EPS forecast by 17.39% from Rmb0.27 to Rmb0.23 and 2017 by 9.38% from Rmb0.35 to Rmb0.32.Valuation and recommendationThe stock is trading at 86x 2016e P/E. Maintain BUY and trim TP by 13.33% to Rmb30, implying 52.21% upsidepotential.

Risks

Progress in game projects disappoints.