China Entertainment:Online becoming mainstream for TV dramas;updating estimates/TP

Online broadcast becomes mainstream for TV dramasIn 2016, the total click rate for top 10 TV dramas increased 78% yoy. Incontrast, audience ratings for TV dramas did not see any yoy improvement.

As online video platforms become increasingly influential, producers arechoosing to broadcast more TV dramas on online video platforms ahead ofsatellite TV. Moreover, online video companies are co-producing/producing more TV dramas and some have even received high audienceratings on TV. Last but not least, more TV dramas are exclusive tosubscribers of online video platforms. In conclusion, we believe that onlinevideo is becoming an important channel for TV dramas and that producerswill increasingly need to consider the preferences of online viewers.

In our long term market sizing, we forecast TV dramas to grow at a 19%CAGR from 2016-18, to Rmb39bn, with new media spending accounting fora 50% share in 2018 vs. 30% in 2015.

Huace: Strong revenue growth backed by strong productsWe believe the company has demonstrated a strong ability to produce highquality TV dramas, as several of Huace’s TV dramas rank high in terms ofonline click rates and TV audience ratings. We believe this ability isenhanced by the company’s Super IP strategy. For 2017, we forecast 22%revenue growth and 30% net profit growth, on the back of a slight yoyimprovement in margin. However, we have reduced our estimates for2016-2021 to reflect more conservative new business assumptions. Weretain our Neutral rating.

Hualubaina: Promising growth with expanding new business9M16 topline growth was 27.5% yoy, and we believe the private placementcompleted in Sept 2016 is constructive for future growth. Hualubaina’s newbusiness – e.g. sports and VR – also looks promising. We forecast 19%revenue growth for 2017, mainly on higher revenues from variety shows.

However, we lower our 2016-21 revenue/ margin estimates on a moreconservative outlook on revenue growth/rising costs. Stay Neutral.

Rolling over valuation to 2021EWe lower our target prices for both Huace and Hualubaina by about 10%,reflecting our reduced estimates and a rollover of our model to 2021E(unchanged 18X P/E) discounted back to 2017E using 8% sector COE.