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Gehua CATV Alert:Still in search for growth;reiterate Hold

发布时间:2017-02-20    研究机构:德意志银行

We review our forecasts by factoring in Gehua’s recent announcements

We reviewed Gehua’s recent operation and fine-tuned our forecasts. We continue to see saturation in the Beijing City cable TV market. Industry statistics suggest a very stable subscription base. This also points to the lack of room to grow. On the other hand, Gehua’s cable broadband businesses may continue to face competition from major telecom companies. We appreciate management’s efforts in driving more revenue streams but reiterate our view that such initiatives may take more time to materialize. Reiterate Hold recommendation.

Minimum changes to our forecasts

We slightly adjusted (1) Gehua’s cable TV subscriber forecasts to factor in the population change in Beijing City (2) its recent preliminary 2016 earnings announcements. We slightly lowered our PT from 17.20 CNY to 17.00 CNY. Our forecasts remain largely unchanged (Figure 1).

Valuation and risks

We use discounted cash flow (DCF) as our primary approach to value Gehua’s shares. We adopt the DCF methodology as we expect investors to focus more on Gehua’s long-term value creation leveraging its stable transmission business and new initiatives. In our DCF model, we derive a WACC of 8.8%, with cost of equity of 8.9% (risk-free rate= 3.9%, beta= 0.9, market risk premium= 5.6%) and cost of debt (after tax) of 5.5%. We assume a long-term growth rate of 1% considering Beijing’s stable household growth.

Upside risks: (1) Beijing cable TV rate hike (2) Better-than-expected adoption of value-added services (3) Less significant competition at cable broadband. Downside risks: (1) Cable TV cord cutting. (2) More severe competition at cable broadband (3) Heavier-than-expected competition from internet TV.

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