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Oriental Pearl:Full spectrum;initiating coverage with Buy

发布时间:2015-11-18    研究机构:德意志银行

Fully positioned in fragmenting TV landscape; Buy.

Oriental Pearl (OP) has established a universal pay-TV ecosystem, leveraging itsunique business resources, which makes it better positioned in thefragmenting pay-TV sector. OP has set fast-growing internet-TV as its strategicfocus. It benefits from its unique competitive advantages and solid IPTVfoundation. We forecast sustainable recurring profit growth of 15%/12%/21%in 16/17/18, after analyzing OP’s diverse growth drivers and subscriberleverage. Our DCF-derived target price of RMB46 implies 26% upside potential.

SoTP analysis also suggests OP’s value is not fully discounted. Buy.

Shifting growth drivers.

After a major reorganization in 1H15, OP now commands leading positions inIPTV, TV-shopping, tourism, property, etc. These offer OP a diverse businessportfolio that generates stable growth. We expect OP’s core IPTV business(representing over 50% of recurring earnings) to deliver sustainable earningsgrowth. In addition, the lucrative tourism business and TV-shopping shouldalso contribute growth. On top of that, the monetization of legacy propertyprojects should drive near-term profit and support OP’s investment in internet-TV. In the longer term, we forecast shifted growth drivers to internet-TV whileOP should generate more synergies through technological investments.

Internet-TV: differentiated competitive edges.

OP covers all major internet-TV monetization models, ranging from B2B2C toB2C, which should allow faster subscriber accumulation than for peers. Oncontent, OP is well positioned to execute a differentiated strategy thanks to itsfirst-mover advantage and close bond with SMG (Shanghai Media Group).

Moreover, OP demonstrates full regulatory compliance with a well-roundedlicense portfolio. We believe OP’s communication with the government will befurther enhanced thanks to SMG. OP’s existing IPTV business will be crucial togenerating leverage against growing (fixed) costs from content andinfrastructure investments. The solid IPTV foundation makes OP one of the fewinternet-TV operators with a cash-generating video business globally.

DCF TP of RMB46; SoTP analysis suggests potential not fully discounted; risks.

We value OP based on DCF methodology as we expect investors to focus onOP’s long-term monetization of business resources. We derive a WACC of9.6%, with a cost of equity of 10.1% (risk-free rate 3.9%, beta 1.12, market riskpremium 5.6%) and cost of debt (after tax) of 4.5%. Our SoTP analysissuggests the market is not fully pricing in OP’s business potential. Downsiderisks: weaker user acquisition and ARPU of internet-TV, more severe contentprice inflation, slower property monetization and regulatory loosening.

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