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Gehua CATV:In search of growth;initiating coverage with Hold

发布时间:2015-11-18    研究机构:德意志银行

High-quality cable TV operator showing signs of slowdown.

Gehua is the cable-TV operator in Beijing with leading network quality andmore advanced broadband technology than other cable peers in China. Thecompany faces user saturation in Beijing and decelerating broadband revenuegrowth. Gehua has been proactively shifting its business model from datatransmission to value-added services, but we think this may take time tomonetize. We forecast recurring profit growth of -2%/18%/18% in 2016/17/18,driven by profitability recovery. Our DCF-derived target price implies 4%downside risk. Hold.

Cable-TV business facing saturation, despite recovering profitability.

Gehua’s cable-TV operation has fully penetrated Beijing audiences to reach110% household penetration. With a household-based subscription fee(instead of screen-based), we expect muted growth for Gehua’s cable-TVbusiness. Nevertheless, the company’s profitability should normalize thanks tofading depreciation from the 2009-11 OTT box deployment cycle. Our scenarioanalysis suggests limited downside from potential cord-cutting and verysignificant upside should the government approve Gehua’s cable-TV rate hike.

Broadband business decelerating; new initiatives not yet major growth drivers.

The cable broadband business serves as Gehua’s major growth driver andmanagement’s strategic focus. We view Gehua as having a very competitiveoffering in the lower-end segment. However, rising household penetration,intensifying competition as well as consumers trading up to higher bandwidthhave decelerated Gehua’s broadband growth. Faced with decelerating growthat cable-TV and broadband, Gehua is proactively forming industry alliances tooffer more value-added services, most notably movie VoD (Video on Demand).

In addition, the company is employing new technology to enhance its ecosystem,by investing in a cloud platform. We believe, however, that it may taketime for Gehua’s new initiatives to generate more financial return.

DCF TP of RMB23; shares trading at 2-year mean +1 std. dev. EV/EBITDA; risks.

We value Gehua based on DCF methodology, as we expect investors to focuson its stable transmission business and new initiatives. We derive a WACC of8.8%, with a cost of equity of 8.9% (risk-free rate 3.9%, beta 0.9, market riskpremium 5.6%) and cost of debt (after tax) of 5.5%. Our EV/EBITDA valuationsuggests Gehua’s shares are fairly valued. Note that we do not factor in therecently announced equity placement (19% dilution). Upside (downside) risks:cable rate hike (heavier cord-cutting), better adoption of VoD products, etc.

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