Huayi Brothers:TP cut due to 5M17weak content;maintaining Hold

We cut our target price but maintain Hold on future earnings uncertainty.

    Per Entgroup data, we believe total box office in China in 5M17 will reachRMB22.4bn, a yoy increase of 8% from RMB20.7bn in 5M16. However, webelieve the underperformance by Chinese movies in 2017 is not over. Given thehigh uncertainty of movie production returns and volatile earnings, wemaintain Hold on Huayi Brothers, with a new target price of RMB10, downfrom our previous target price of RMB15.

    China total box office in 5M17 recovering but Chinese movies remain weak.

    Despite a rebound of the movie sector in 2017 on the strength of Hollywoodmovies, as we had expected, Chinese movies continue to underperform in1H17 (accounting for only c.45% of total box office in 5M17 vs. c.59% in5M16). In addition, among the current 20 top box office movies, HuayiBrothers participated only in the production of Journey to the West: DemonChapter, which generated a box office collection of RMB1.65bn. As Huayi’smovie pipeline is concentrated in 2H17, including Feng Xiaogang’s Fang Hua,the whole-year 2017 performance of its movie business is uncertain.

    We cut our 2017 earnings forecast.

    We basically cut our Media Entertainment 2017/18 revenue growth forecaststo 30%/20% yoy, from c. 50%/35% previously. As a result, we lower our targetprice to RMB10 because we cut our earnings forecasts for 2017/18 by17%/21% to RMB929m/1,107m, representing yoy growth of 9%/20% in2017/18. This is mainly due to a lower base in 2016 (owing to weaker contentin the media entertainment business).

    Valuation and risks.

    We derive our target price of RMB10 from a DCF-based valuation (8.6%WACC, equity risk premium of 5.6%, risk-free rate of 3.9%, beta of 1.1 and a4% terminal growth rate to reflect the strong long-term growth potential ofChina's media entertainment sector.) The stock trades at 23.9x 2017E PER butat a much lower multiple (20.1x) to our 2018E earnings. This seems fair to uscompared with the 24x 2017E PER of its peers under our coverage. Thus, wemaintain our Hold rating. Downside risks include lower-than-expected returnfrom films and production delays. Upside risks include a better-than-expectedbox-office performance.