Meisheng Cultural &Creative Corp:H116profit increased more than 70%

H116review: Profit increased more than 70%

    H116operating revenue/net profit attributable to the parent company increased32%/72% YoY to Rmb190m/45m, with EPS at Rmb0.1. In Q2, net profit attributable tothe parent company rose 76% YoY to Rmb32m.

    H116analysis: IP derivatives, animation and games boosted profit growth

    In H116, profit in the IP derivative segment, which accounted for 54% of Meisheng’sgross profit, increased 66% YoY; gross profit in the animation and game segment rosemore than 300% YoY and represented more than 30% of Meisheng’s gross profit. Thecompany’s gross margin increased 12.3ppts YoY to 48.9%.

    Outlook: Games and animation derivatives likely to lead to fast profit growth

    We think the JV with JAKKS, its status as the sole supplier of Warcraft toys, and thesecond (launched already) and third (to be rolled out in Q317) seasons of the selfproducedanimated series “Magic Star Academy” are likely to help Meisheng’sanimation derivative revenue grow more than 30% YoY in 2016-17. We expectrevenue in the game segment to increase more than 30% YoY in 2016-18, withMeisheng’s gross margin continuing to improve. The company guided for 60-90% YoYprofit growth in Q1-Q316.

    Valuation: Lowering price target to Rmb41.5; maintain Buy rating

    Based on H116results, we reduce our 2016E animation derivative revenue YoY growthbut raise gross margin and administrative expense ratio. As a result, we lower our2016-18E EPS to Rmb0.48/0.71/0.96from Rmb0.52/0.75/1.04. We derive our newprice target of Rmb41.5(from Rmb45) using a DCF-based methodology(WACC=8.4%). We maintain our Buy rating.