TIAN GE INTERACTIVE:Mobile live broadcasting saves the day

Solid 3Q16 results.Revenue grew 49%YoY to RMB236mon robust mobile live broadcasting sales. MAU and quarterly paying users(QPU) grew 16% and 63%YoY,respectively,to 20.7m and 1.22m,while quarterly ARPU grew 4.7%YoY to RMB180. Gross margin improved 106bpQoQ to 76.1% while the opex-to-sales ratio also increased,from 48.3% in 2Q16to 49.7%.Operating margin improved from 30.6% in 2Q16to 35.3% in 3Q16. Non-GAAP profit grew 78%YoY to RMB82m.

Reviving earnings momentum due to strongmobile live broadcastingperformance.The launchof three mobile live broadcasting platformsin 2Q16 and 3Q16heralded the revival of Tian Ge’score live broadcasting business. In 3Q16, mobile QPU grew 393%YoY or 46%QoQ to 778k. We expect online entertainment sales to grow 31%/35% in 2016F/2017F on the back of (1)increasing MAU and QPU atits mobile live broadcasting platforms, (2)further improvement in ARPU,and (3)overseas expansion into Southeast Asian marketssuch as Thailand and Taiwan.

Maintain Neutral and raise target price to HK$5.80.We raise our 2017F earnings forecast 31% to reflect better-than-expected mobile live broadcasting performance. We raise our target price from HK$2.80 to HK$5.80, basing iton 20x non-GAAP FY17F P/E (up from 12x non-GAAP FY16F P/E), in line with its historical average valuation since listing. We like the traction Tian Gehas gained in mobile live broadcasting yet given intense industry competitionwe believe the stock is fairly valued at 20x FY17F P/E.Maintain Neutral.