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Gehua CATV:More uncertainties on long-term outlook;new TP of CNY17.2

发布时间:2016-04-07    研究机构:德意志银行

Cable TV solid, but growing risks on broadband and investment; Hold.

Gehua’s 2015 earnings missed DBe on a lower government grant, but its corecable TV revenue again demonstrated resilient growth of 6% YoY. We remainon the sidelines on Gehua’s shares after witnessing heavier price competitionin its broadband business and execution risks in investing the proceeds from arecent rights issue. We reduce our revenue growth assumptions and factor inthe share base expansion (16%/19% for fully diluted/weighted average shares),driven by the rights issue and convertible bond conversion. Maintaining Hold.

2015 missed on weaker government grant.

Gehua reported 2015 net profit of CNY673m, up 11% YoY but 9% off ourestimate (Figure 2). The shortfall was on a lower-than-expected governmentgrant (by CNY117m), which aims to offset part of Gehua’s depreciation fromthe OTT box investment in 2009-11. We expect Gehua to fully depreciate theOTT boxes (deployed for the Beijing government) in 2016E, while, on the otherhand, depleting all of the unrealised government grant. We expect the OTT boxprogramme to affect Gehua’s 2016 EBIT by CNY102m (vs. CNY131m in 2015).

Incremental risks: 1) broadband competition; 2) unclear investment scheme.

Despite the reduced financial distortion from OTT box depreciation in 2017, weremain on the sidelines due to incremental risks to Gehua’s growth potential.

Firstly, in cable broadband (major growth driver in 2015), we sensed heavierthan-expected price competition upon reviewing Gehua’s latest offerings. Wepraise Gehua’s efforts to offer better broadband quality, but we are concernedthat a sharp decline in rates will dilute growth (Figure 5 and Figure 6). Weestimate that Gehua’s broadband ARPU fell 17% YoY in 2015 (vs. a 10%decline in 2014). Secondly, we are cautious about Gehua’s plans to investCNY3.3bn (funds raised through recent rights issue, equivalent to 23% of totalassets) in the coming years. According to the company, CNY1.9bn will beinvested in media content and CNY1.4bn on infrastructure upgrades. Gehua’srelative lack of track record in media investment fuels our cautious attitude.

Reflecting share base expansion, earnings cut and capex in target price; risks.

We have reduced our revenue growth estimates for Gehua and cut 2016/17EEPS by 15%/19% to reflect a 16% expansion in fully diluted shares, driven bythe rights issue. Gehua’s weighted average shares increased by 19% (rightsissue and convertible bond conversion), and we lower our DCF-based targetprice accordingly (by 25%; see page 3 for details). We value Gehua based on aDCF methodology, as we expect investors to focus on its stable transmissionbusiness and new initiatives (details later in report). Upside risks: cable ratehike; better adoption of VoD products. Downside risks: heavier cord cut.

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