Beijing Gehua CATV Network:Earnings higher than expected,mainly thanks to lower costs

Higher-than-expected earnings mainly thanks to drop in depreciation

    In H116, Gehua recorded revenue of Rmb1.22bn (up 8% YoY), net profit of Rmb405m(up 35% YoY) and EPS growth of 7% YoY. Net profit growth was above our 2016Eestimate of 8% YoY; we mainly attribute this to costs savings instead of higher-thanexpectedrevenue growth as: 1) Gehua raised Rmb3.3bn in a follow-on offering at end-2015, its net financial income came in at Rmb69.73m in H116, up 317% YoY, in linewith our 2016 full year forecast of Rmb137m. Operating costs were Rmb877m inH116, down 6.6% YoY. Gross margin improved 11ppts, far above our estimate of2ppts improvement. This is mainly because depreciation dropped Rmb110m (or 22%YoY) to Rmb387m. We calculate the annualized depreciation life reached 14.2 years inH116, far above 10.8/12.2 years in 2014/15 and our 2016E estimate of 12.4 years; 2)revenue grew 8% YoY in H116, in line with our 2016E estimate of 7% YoY.

    Cable TV subscribers grew only 2.6% YoY in H116, in line with our estimate

    As of end-June 2016, Gehua had 5.75m cable TV subscribers, up 2.6% YoY, in linewith our estimate of 3% 2016E growth. High-definition TV subscribers came in at4.73m, up 9% YoY. Household broadband subscribers were 0.45m, up 29% YoY,above our estimate of 15%.

    Maintain our bullish view and expect impact from Internet video to show up

    Our pessimistic view on Gehua is mainly based on: we expect rapid growth in Internetvideo to curb cable operators' subscriber and revenue growth, and Gehua's capex onhigh-definition set top box may rebound. Growth in Gehua's cable TV subscribers inH116 conforms to this view. Internet video segment has been penetrating into tier-1content in recent years and competes fiercely with tier-1 satellite TVs. We expect thisimpact to spread to the cable network sector in the next 2-3 quarters.

    Valuation: price target of Rmb10.58

    We maintain our EPS estimate and derive our price target of Rmb10.58 based on a DCFmodel (WACC 9%).