Zhejiang Huace Film &TV:Preliminary net profit up 15-35%YoY with presold films &TV dramas reaching Rmb1.5bn

Preliminary net profit up 15-35% in H116, slightly lower than expected.

    Huace announced H116 preliminary results on 14 July: net profit increased 15-35%YoY to Rmb251-295m, 37-43% of our full-year forecast, slightly lower than ourexpectations. We estimate its net profit YoY growth was in the range of 2-36% inQ216.

    Slow revenue booking dragged results, presold dramas to drive H216 growth.

    We believe the company's slow results growth in Q216 could be attributable to: 1) "Lesinterprètes" was first aired in Q216 with a high audience rating of 2.05, but somerevenue was already booked in Q415; and 2) revenue cannot be booked for somedramas as per accounting principle, as the company has not obtained distributionlicenses for them yet. According to Huace's preliminary results, presold films & TVdramas reached cRmb1.5bn, or 58% of our full-year forecast for the company's TVdrama revenue (Rmb2.6bn). The company said that revenue booking after the grant ofdistribution licenses could become major drivers for revenue growth in H216.

    Remain positive on IP competition, TV drama ASP expected to surge.

    Video sites have bought more multi-channel dramas year to date due to tighteningregulation. They have also strengthened collaboration with traditional TV dramaproducers in the area of Internet dramas. In addition, tier-1 satellite TV stations remainstrong competitors, and we estimate per episode ASP for single channel dramas willincrease to Rmb2-4m. As such, we remain positive on Huace due to the competition forIP.

    Valuation: Maintain PT of Rmb19.77 and Buy rating.

    We maintain our EPS forecasts, PT and Buy rating. Our PT is based on DCF model(WACC=7.7%).