CSCI-Stock Connect-Internet Media：Digital reading：an investment theme - 20171218
Digital reading: an investment theme
China’s digital reading business heralds substantial growth propelled by rising paid subscription take-up and ARPU. China’s RMB12bn digital reading market grew a further 25% YoY in 2016, with online literature, e-books and audiobooks respectively accounting for 38.1%, 37.6% and 24.3%. This market is expected to charge ahead at a CAGR of 35-50% towards 2020, thanks mainly to a doubling paid subscription take-up rate and an ARPU growth rate of 5-7%, in our estimation.
Digital reading produces profits through paid subscription, ad placement, copyright sales and physical book publication. Paid subscription as the major cash cow contributed 82.2% of total digital reading revenue in China in 2016, down 8.3 pct YoY, with copyright sales and adverts gaining more ground to account for 6.5% and 4.8%, respectively. The aggregate number of online literature books in China was 11.6mn by year-end 2016, up 19.6% YoY, and is expected to grow at a CAGR of 17.8% to 22.4mn by 2020.
Our picks for this sector include China Literature (772:HK), ChineseAll (300364:CH) and IReader (603533:CH), which dominate the domestic online literature landscape with a 72%/27.5%/5.2% market share. China Literature, a Tencent spinoff, logged a revenue/profit of RMB1.924bn/213mn in 1H17, carrying forward robust momentum from 2016, when the company posted RMB2.557bn/1.054bn in operating revenue/gross profit, up 59.1%/81.7% YoY, alongside a gross margin of 41.3% and a net profit of RMB30.36mn. Looking ahead, we believe there is still a potential upside to China Literature’s net profit given its revenue growth far outpaces the growth of its marketing spend and SG&A expense. IReader reported RMB773mn in first-half revenue, up 63.08% YoY, building on a revenue/net profit of RMB1.198bn/77.21mn in 2016, up 87.23%/161.1% YoY. ChineseAll was the first Chinese digital reading company to float on the stock market. Ever since its 2015 IPO, the company has been maintaining an average revenue growth rate of 50%, with its operating revenue/net profit attributable to the parent coming in 30.81%/132.14% higher YoY at RMB297mn/28.965mn in 1H17.
Risk factors: industry policy headwinds; slowing growth; unwillingness to pay for digital reading.
中信建投国际研究部是中信建投证券香港子公司中信建投国际下属研究部门，负责香港上市公司、行业和宏观研究。我们的研究产品和服务包括行业报告、公司、宏观、常规日报、新闻摘要、分析员路演、上市公司非交易路演和反向路演 以及策略会。
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