The domestic party culture industry ushered in 10 times the market space. Chinese party culture is the largest Cosplay (role playing) clothing participant in China. We believe that the company's core competitiveness lies in I) strong product design ability and strict product quality control process, the company has become a recognized manufacturer of Disney stores for 9 years in a row; ii) the customer network covering more than 30 countries and regions around the world helps to maintain full capacity utilization throughout the year. And iii) the production and R & D center is strategically located in Yiwu, where many suppliers gather, and the company can purchase a wide variety of high-quality raw materials at relatively stable prices and favorable terms. At present, Chinese animation clothing consumption is not popular, Cosplay clothing is mainly used for all kinds of masquerade parties, commercial performances and animation clothing enthusiasts and so on. As the domestic animation industry enters a period of rapid growth and the rise of the middle class, the future growth of the industry is huge. The output value of domestic party culture in 2015 is only about 1 billion US dollars. With reference to the development of animation and party culture industry in the United States and Japan, as well as the comparison of pan-two-dimensional consumer population, we conservatively estimate that the size of the domestic market will exceed 10 billion US dollars in 2025.

China's 300 million secondary population will catalyze the IP derivatives industry. IP reflects the meaning of values, outlook on life, world outlook or philosophy, and will eventually resonate with people in culture and emotion. IP will not be attached to a specific form, the ultimate goal of IP is to pursue value and cultural identity. The personalized consumer demand of post-90, post-95 and even post-00 is particularly obvious, and the impact on the supply side is more obvious. We believe that it will become the main consumer group of IP derivatives. IResearch Consulting estimates that the CAGR of China's secondary population will reach 27.4% in 2014-17e and 308 million by 2017e. We observe that the continuous rise in domestic IP asset prices has squeezed the profit space of the IP industrial chain; on the other hand, the stock of high-quality IP in China is constantly decreasing, and if the IP industry wants to achieve long-term and healthy development, in addition to the copyright conversion of IP, it is also necessary to deeply develop the derivatives market and obtain new profit growth points, so as to prolong the life cycle of IP and enhance the stickiness between consumers and IP.

Join hands with Letiao Qiang to create an economic cash platform for IP fans. In May 2016, the company issued HK $20 million of convertible bonds to IDS13 Holdings Limited, a unit of Leteau Games, accounting for about 4.76 per cent of the enlarged share capital.

The company and Lotte have also set up a joint venture company to develop IP derivatives business in June this year. Amusement game is the largest independent mobile game distribution platform in China, introducing the popular "Temple Run" series, "Fruit Ninja", "Metro Parkour", "Monument Valley" and "brain Secret Service" into the Chinese market. We believe that the advantages of Letiao games lie in 1) high brand awareness of its game products, 2) holding several well-known IP authentic licenses, and 3) a large user base of more than 100 million MAU, which will achieve synergy with the company's excellent new product research and development capabilities in the future, including Cosplay clothing, plush peripherals, physical games and daily necessities. As well as offline theme stores, Cosplay shows and other ways to create IP fans economic cash platform, the future performance is worth looking forward to.

Give a "buy" rating for the first time. The company currently trades on a dynamic price-to-earnings ratio of only 8.5 2016E/17E 7.3 times. We believe that I) the accelerated development of the domestic IP industry; ii) the accelerated acquisition process of the IP business; and iii) the gradual landing of the business of the joint venture company will be the catalyst for the rise of the stock price. We price at 0.8 times 2016E-18E PEG (or 12 times dynamic price-to-earnings ratio of 2016E) with a target price of HK $1.35 and an initial "buy" rating.