Investment Summary

The movie box office for 2020 was RMB 20.3 billion, which is in line with our previous expectation

Affected by the epidemic, all of the cinemas in China was temporarily suspended from January 24, 2020 to July 19, 2020, and only started gradually reopened on the 20th of July. According to the data from Maoyan Professional Edition, the total movie box office of China in 2020 was RMB 20.3 billion, down 68% yoy, which is in line with our previous expectations.

The total movie box office during 2021 Chinese New Year reached RMB 7.8 billion and hit a record high

The total movie box office during 2021 Chinese New Year was up by 32.47% yoy, reaching RMB 7.8 billion and hitting a record high. During the Chinese New Year holiday, the company has participated in 5 major films as either producer or distributor or both. These 5 films are Hi Mom (你好,李煥英), Detective ChinaTown 3 (唐人街探案3), A Writer's Odyssey (刺殺小說家), Boonie Bears: The Wild Life (熊出沒·狂野大陸) and The Yinyang Master (侍神令). As of 23rd February, the box office rankings of these 5 movies were 1st , 2nd , 4th , 7th and 11th respectively, with a total box office of RMB 9.93 billion. Hi Mom (你好,李煥英) directed by Jia Ling is one of the dark horses among all the high-quality movies during the Chinese New Year holiday. According to Maoyan Professional Edition, as of February 23, the total box office of Hi Mom (你好,李煥英) reached RMB 4.31billion, with a forecast box office is RMB 5.22 billion. Hi Mom (你好,李煥英) currently ranked fourth on the box office rankings of Chinese film history. Hi Mom (你好,李煥英) has a Maoyan rating of 9.5/10, and more than 88% of the audience have given a 5-star rating to the movie, both of which ranked 1st among all movies during the same period. As the lead publisher and one of the main producer of Hi Mom (你好,李煥英), the company is expected to receive a relative high box office share as revenue.

As of February 23, 2021, the total box office of Chinese films has reached RMB 14.4 billion, and the total box office has already reached 71% of that of 2020. It can be seen that even under the policy of restricting attendance in cinemas, the recovery of Chinese movie industry remains strong. We expect the total box office in 2021 to return to the level prior the pandemic. As the leading movie ticketing platform in China (According to the Maoyan Professional Edition, the movie tickets sold through Maoyan platform have accounted for about 60% of the total during the Chinese New Year holiday), the company's earnings in 2021 will be substantially restored.

Valuation and Investment Thesis

We continue to be optimistic about the company's strategies in different entertainment formats and the company's “TenMao Alliance” with Tencent. We believe that the main future growth driver of the company will come from the entertainment content sector, while the movie ticketing sector will provide the company with a stable cash flow for investment in different entertainment formats.

After considered that 1) the pandemic has a greater impact to the movie industry in China than we previously forecasted 2) the delay in production projects 3) the total impairment provision recognized by the company in FY2020 is expected to be ranged between RMB 350-420 million, we cut our 2020E/2021E/2022E revenue to RMB 1.39/4.46/5.20 billion from RMB 1.58/5.17/6.13 billion and cut our 2020E/2021E/2022E Non-GAAP net income to RMB -0.42/0.83/1.09 billion from RMB 0.08/0.98/1.30 billion. Since the sector is recovering in an orderly manner with a clearer prospect, we raise our 2021 target Non-GAAP PE to 22x and raise our TP to HKD 19.16, with respective 2020/2021/2022 Non-GAAP PE at NA/22.0x/16.8x. We upgrade to BUY rating. (Market closing price as of 3rd March) (exchange rate: RMB 0.85/HKD)

Risk

1) Pandemic broke out again in China

2) Business extension progress slower than expected

3) The film industry recovers slower than expected

4) The box office of company's productions is worse than expected

Financials

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