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Oriental Pearl:Entering an investment phase;new target price CNY36

发布时间:2016-05-08    研究机构:德意志银行

Long-term thesis intact despite heavier near-term expenditures

Heavier investments to support more aggressive internet TV user target After recent interviews with management and experts, we now expect Oriental Pearl to become more aggressive in acquiring internet TV users. We agree with management’s strategy to enhance the internet TV market share to better leverage the industry’s growth potential. Nevertheless, the more aggressive user acquisitions will likely lead to heavier expenditure, especially on content investment and subsidy programs. We thus reduced 16E/17E recurring product by 9.9%/6.9% and the DCF-based target price to CNY36.

Heavier investments to support more aggressive internet TV user target

Oriental Pearl (OP) indicated its target to achieve 25mn active internet TV users in 2016. This is higher than the company’s original guidance of 20m and our previous forecast of 17.5m. To achieve such we expect OP to (1) increase content investment: we now expect OP to invest RMB4.5bn in content in 16E- 18E (vs. RMB3.9bn previously). Due to the fast amortization schedule, we expect such to affect OP’s gross margin; (2) accelerate the OTT box subsidy program; and (3) increase marketing. We cut 16E/17E recurring earnings by 9.9%/6.9%, respectively, to reflect aforementioned expenditures (Figure 5).

Good long-term value; TV shopping, tourism and advertisement steady

Despite the heavier expenditure required in the near-term, we continue to like OP for its unique resources. These include (1) both B2C and B2B2C channels to grow internet TV users, (2) a stable IPTV business to deliver leverage against fixed costs (mainly content amortization), (3) healthy growth in TV shopping, tourism and advertisement businesses and (4) strong legal compliances. The recent round of regulation tightening (Figure 9) should enhance OP’s competitive advantage, in our view.

DCF TP of CNY36; SoTP analysis suggests potential not fully discounted; risks

We value OP based on DCF methodology as we expect investors to focus on OP’s long-term monetization of business resources. We derive a WACC of 9.6%, with a cost of equity of 10.1% (risk-free rate = 3.9%, beta = 1.12, market risk premium = 5.6%) and cost of debt (after tax) of 4.5%. Our SoTP analysis suggests the market does not fully price in OP’s business potential. Downside risks: weaker user acquisition & ARPU of internet TV, more severe content price inflation, slower property monetization and regulatory loosening.

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