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CSCI-Initiation-TMT-Maoyan Entertainment (1896 HK)：Market-leading position established, monetisation ahead - 20190312

Market-leading position established, monetisation ahead

• We anticipate that China’s movie market to maintain robust growth in the foreseeable future, in view of the consumption upgrade, entertainment infrastructure development and more high quality domestic movies.
• Leveraging on the strong shareholders, substantial big data advantages and vertical integration capabilities, Maoyan Entertainment (“Maoyan”) is well poised to deliver strong growth over the coming 2-3 years, in our view.
• We initiate coverage on Maoyan with a BUY rating and DCF-based PT of HKD25.4, implying 54.5% upside potential and FY20E 15.3x PER.

“Golden era” for online service platforms riding on the booming entertainment market in China. Boosted by rapid entertainment infrastructure development, consumption upgrade and a rising number of high quality domestic movies, China’s movie market witnessed significant growth in recent years and became the world’s second largest market by gross box-office revenue in 2017. Meanwhile, the online penetration rate of movie ticketing has surged from 18.4% in 2012 to 85.5% in 9M18. Looking forward, we expect the online movie ticketing market to maintain robust growth, supported by the gross box office growth (at a 8.5% CAGR during 2018-2020E) and increasing online penetration rate. Subsequent to consolidation of the online ticketing market in China over the past few years, the leading incumbents have cemented its industry dominance and are looking to upgrade their services towards greater vertical integration and geographic expansion going forward.

Vertical integration and services diversification make Maoyan Entertainment (“Maoyan”) an unrivalled market leader. Maoyan is China’s largest online movie ticketing service provider with a GMV market share of 61.3% in 9M18, according to iResearch. Leveraging on its strong controlling and strategic shareholder’s platforms as traffic entrances, Maoyan has significantly increased its user coverage market share, with average MAU amounting to 134.6mn in 9M18. Also, having established substantial big data analytics capabilities, Maoyan is able to deliver superior promotion and distribution services to its business partners and seek service expansion into content production and e-Commerce, etc.

High visibility of profitability. During FY15-17, Maoyan witnessed strong revenue growth at a CAGR of 106.6%. Coupled with declining ticket subsidies, diversified revenue streams and rising economies of scale, Maoyan is well positioned for a turnaround in earnings over the coming 1-2 years. On such basis, we expect the company to enjoy revenue, adjusted EBITDA and adjusted net profit to grow at a CAGR of 34.4%, 128.0% and 134.0% over FY17-20E respectively.

Valuation and investment risks. Our DCF generated the PT of HKD25.4. Maoyan currently trades at FY19E/20E PER of 18.1/9.9x respectively. The major investment risks lie with the competition from its peers, slowing growth of the entertainment industry as well as higher-than-expected online movie ticket subsidies.