Huace Film&TV:Expect more earnings from TV drama to be recognized in 2H17

1H17core earnings down 8% yoy mainly due to margin decrease in TV drama

    Huace Film&TV announced its 1H17results. Although the company’s 2016topline increased by 13% yoy to RMB1,75bn, its core earnings (non-recurring itemsmainly include government subsidies) decreased by 8% yoy to RMB225m. Webelieve that this is mainly due to the significant margin decrease because someof the TV drama revenue/profit recognition will be delayed in 2H17. We maintainour Buy rating for Huace with a target price of RMB14.8.

    Top line up 13% yoy mainly driven by TV drama and talent agency business

    Total revenue increased 13% yoy to RMB1.75bn, which is attributable to: 1) theTV drama production top line increasing by 39% yoy to RMB1.44bn, and 2) thetalent agency top line increasing by 621% yoy to RMB46m. 1H17Chinese movies'weak performance has resulted in a 19% yoy drop in the company’s film businesstop line. The company also shift their film strategy to distribution instead ofproduction. In addition, we saw significant growth of its talent agency and onlinegaming business. However, since total gross margin decreased to 25% in 1H17from 34% in 1H16and SG&A expenses increased by 38% yoy in 1H17, core netearnings dropped by 8% yoy.

    We believe earnings will lean more on 2H17

    Since more revenue/profit will be recognized in 2H17, we are confident on our TVdrama revenue growth estimate of 20%. The company disclosed that there will bemore than 11TV drama's revenue recognition in 2H17. Looking at the full year of2017, management seems to be confident of delivering earnings of RMB 650m,as guided in its previous stock incentive plan.