Songcheng Performance:New "revenue share"model starts to contribute to earnings;Buy

Songcheng is ramping up its "revenue share" business for performance shows.

    Following Songcheng's first "revenue share" performance show of NingxiangTanhe (in Hunan Province) launched in 2016, for which the company will chargean initial franchise fee of RMB260m and 20% revenue share in the next fiveyears, the company has recently signed another two new revenue share shows:1) Mingyue; and 2) Xiqiaoshan. We are expecting Songcheng to receive aninitial franchise fee of RMB270m/260m in 2018 and 2020, and revenue share ofRMB40m/60m in 2017/18. We like Songcheng's new revenue share model in that:1) it is asset-light; 2) demand is strong with sufficient pipeline from many localtourism-oriented governments. Songcheng is guiding to add one revenue shareeach year in the long term; and 3) margin is much higher than for Songcheng'sself-owned performance shows. We reiterate our Buy on Songcheng for its longtermgrowth and expansion in China via its new revenue share business model.

    1H17 preview - Hangzhou growth has recovered but Jiuzhai is struggling.

    We believe Hangzhou-based tourist traffic in 2017 will match the 2015 level (15%of traffic growth). This is mainly due to the impact of G20 in the same periodlast year. We increase our traffic growth forecast for Hangzhou to 15% (from theprevious 5%) for 2017. However, the Jiuzhai performance show was negativelyimpacted by the recent tightening regulation on local travel agencies by theChina Tourism Bureau (Jiuzhai's tourist traffic was down by 14% in 1H17). As aresult, we cut our 2017E traffic growth forecast for Jiuzhai to negative 14% (fromprevious 15%). We also adjust our 2017E Lijiang business growth to 15% (fromthe previous 30%) to match 15% growth of Lijiang tourist traffic in both 1H17 and2016. Therefore, our 2017E earnings are slightly down by 0.5%.

    Show business expansion continues.

    Given its clear strategy of adding two self-owned projects and one revenueshare model every year, we believe that Songcheng is on track for its nationalexpansion (another five self-owned projects in the pipeline, including the recentXi'an project), and the company is actively building a well-rounded eco-systemfor both its online and offline businesses.

    Valuation and risks.

    We derive a TP of RMB33 based on DCF (WACC 7.7%, TGR of 4%, given stronggrowth outlook for performance show business). The stock currently trades at29.6x our 2017E core earnings. Downside risks: a decline in domestic tourism,rising competition, safety incidents and delays in new project development.