China South Publishing &Media Group:China A-Share Conference 2016takeaways

H1 earnings slowdown due to financial services, Tianwen Digital Media

    At our China A-share conference in Shenzhen, the company said H116 revenue wasRmb4.74bn (+7.9%) and net profit attributable to shareholders was Rmb840m(+6.6%), with the slow bottom-line growth mainly driven by: 1) a 3.7% YoY decline inrevenue and 11% decline in gross profit in financial services; and 2) a Rmb40m net lossat Tianwen Digital Media, deepening from Rmb30m in H115.

    Tianwen Digital Media: 2016 revenue could reach Rmb600m

    We expect the company to have signed contracts with 3,000-3,500 schools by end-2016, causing Tianwen Digital Media's revenue to reach Rmb600m, up 50% YoY, withnet profit of Rmb30m. In the initial phase, the company is signing contracts withschools under a B2B model whereby it sells equipment to schools. After revenuereaches Rmb1bn, it will shift to a B2C model, generating income through sellingcontent.

    We expect publishing and distribution revenue to maintain ~10% growth

    Publishing and distribution revenue lost momentum in H116, growing 8.5% and 11%YoY, respectively. Looking at the next two years, we expect publishing and distributionrevenue to grow ~10% YoY pa, helped by use of new teaching materials and fastgrowth in revenue from supplementary materials.

    Valuation: Maintain Rmb25.4 price target, Buy rating

    Our price target is based on DCF and assumes a 7.5% WACC. We will be re-visiting ourearnings forecasts.