Company background: Sky Pigeon Interactive operates real-time social video communities such as 9158.com and Sina SHOW in China. The company's platform design allows multiple users to connect together at the same time via video. The company listed on the Stock Exchange on July 9, 2014, issuing a total of 349.9 million shares at an issue price of HK $5.28 per share. Sky Pigeon Interactive is a leading real-time video community provider, mainly covering 2-4 tier cities, with a market share of 34% in 2015. The company launched three new real-time video communities in the first half of 2016, including Crystal Live, Meow Live and Happy Live for mobile devices. The company has four mobile live streaming platforms and five PC live streaming platforms.

The company reported brilliant first-quarter results in May. Revenue in the first quarter of 2017 rose 61 per cent year-on-year to 244 million yuan, while net profit rose 255 per cent to 98 million yuan. The company's first-quarter results beat market expectations, mainly due to continued growth in users of mobile live streaming platforms, including Meow and Crystal Live. Gross profit in the first quarter was 207 million yuan, up 88 per cent from a year earlier. Gross profit margin rose from 72.6% in the first quarter of 2016 to 84.7% in the first quarter of 2017 (down from 86.1% in the fourth quarter of 2016). Management explained that the continued decline in gross profit margin was due to the increase in the number of distribution channels in the first quarter of 2017. The company's monthly active users (MAU) and quarterly paying users (QPU) rose 14 per cent and 4 per cent, respectively, to 24.9 million and 1.314 million, respectively. Quarterly average user revenue (QARPU) fell 12 per cent month-on-month to Rmb160. Sky Pigeon's live broadcast platform has about 110000 anchors.

The company's management believes that the first quarter of 2017 will be the lowest point for the company's quarterly performance. QARPU will rebound month-on-month in the second quarter of 2017. Management also said that the company will deliver satisfactory results in 2017. In the first quarter of 2017, the company launched Meow, a short video sharing platform similar to Meitumi. At this stage, Sky Pigeon will use Meow to capture the growth potential of the short video market, one of the fastest growing segments of the Internet market. Anchors can use meow beats to attract followers and increase stickiness. In addition to its core dynamic business, Tige also diversifies its revenue by: a) providing casual games on mobile platforms; b) generating advertising revenue from third-party developers; and c) providing analytical services to online financial platforms, thereby generating service revenue. Management believes that the company will have a new source of revenue in 2017, and the impact will emerge in the second quarter of 2017.

Recently, there have been several transactions about the live broadcast platform, reflecting that the live broadcast platform market is being integrated. In May 2017, Xuanya International [300612.CH] acquired a controlling stake in Yingke, China's leading live broadcast platform, and in December 2016, Huayi Brothers [300027.CH] entered into a strategic partnership with lunch box LIVE. Sky Pigeon also announced that it will invest RMB 100 million in Beijing Secret Hefeng Technology, which is mainly engaged in live video sharing business on mobile social media platforms. The company is currently operating Huajiao TV, a well-known live video sharing platform in China. Huajiao TV is supported by Qihoo 360 Technology Co., Ltd. Sky Pigeon did not disclose its shareholding in the secret territory. Sky Pigeon and Huajiao TV have formed a strategic partnership to develop live broadcast technology, explore innovative business models, and jointly develop new technologies. Sky Pigeon management said that the company has an advantage in second-to fourth-tier cities, while Huajiao TV mainly develops first-tier cities. Huajiao TV has strong technology, while Sky Pigeon is good at using the platform to generate cash flow. By working with Huajiao TV, Tian Pigeon can use big data of Huajiao TV's user group to attract more users. Both Sky Pigeon and Huajiao TV can use each other's expertise to create business opportunities. Moreover, with the integration of live streaming platforms, leading platforms such as Sky Pigeon will gain more market share.

Compared with its peers, Sky Pigeon does not rely on famous anchors or Internet companies to drive traffic, and the company is cultivating potential talents to maintain the operation and cost of the platform. Tiange also has a team of international anchors (about 110000 people) to help the company produce more content and enhance coverage.

Our point of view: since the beginning of 2016, the share price of Tianyi Interactive has outperformed most Hong Kong-listed Internet and IT service companies. Although the share price of Sky Pigeon Interactive has accumulated a lot of increases, as it is the only company on the Shenzhen-Hong Kong Stock Connect list with live broadcast business, it can still benefit from the development of the Shenzhen-Hong Kong Stock Connect. Taking into account the guidance of the management of the company, we consider that the current market consensus forecast does not fully reflect the growth potential of the company. The company has diversified its revenue sources to reduce the risk of over-concentration of revenue sources, which may trigger a further revaluation of the company if the company's new business generates more revenue contribution.

Catalyst: (1) the company announced strong 2017 results; (2) disclosed more details about the new business; and (3) announced the details of the cooperation with Huajiao TV.