Company background: Huaxia Animation operates a number of businesses related to the animation market, and mainly focuses on the trading of animation derivatives (mainly toys), and purchases these products for toy companies and theme parks in Japan. The company also operates the business of indoor animation amusement parks in China. The company listed on the Hong Kong Stock Exchange in March 2015, offering a total of 107.3 million shares at HK $3.65 a share. Huaxia Animation aims to establish a multimedia animation business in China and has been actively expanding the business in the past two years, including opening up Shanghai JOYPOLIS, granting patents for animation characters, and using the company's proprietary animation characters to develop multimedia animation entertainment business.

Animation derivative trade: the core business of Huaxia Animation is to trade a series of popular animated character toys owned by third parties and provide related value-added services to customers. The company's products cover ordinary plastic toys, food-grade toys (that is, toys that are in direct contact with food, and toys packaged with candy), as well as molds purchased from suppliers. Product molds are designed and manufactured by suppliers and are used to produce animation-derived plastic toys. Huaxia Animation's customers are mainly Japanese companies, which are: (1) Japanese toy companies purchasing animation derivative products; (2) Japan's leading outdoor theme park; and (3) Japanese companies that distribute products in Japan and the United States. By providing high-quality toy products and services, Huaxia Animation and customers have always maintained a solid relationship of cooperation. The company also provides value-added services, including quality control and improving product design as required by customers. These services have become an advantage of Huaxia animation over other toy traders. The division had an average annual compound growth rate of 16.2% from fiscal year 2012 to fiscal year 2016, and its revenue for fiscal year 2016 accounted for 93.3% of total revenue.

Indoor theme park. The company cooperates with SEGA and SEGA LIVE CREATION of Japan to develop JOYPOLIS Indoor Amusement Park in China, which is the only JOYPOLIS outside Japan. Shanghai JOLPOLIS is located on the third and fourth floors of Shanghai Global Port, with a total floor area of 8300 square meters. The park brings together 21 types of high-tech amusement equipment carefully developed by Sega, including high-tech amusement equipment such as Transformers, headline D and Wild Wings. JOYPOLIS also has two major theme areas, "Wonder Forest" and "P+Closet", which provide a variety of children's play space for tourists, as well as a video theme pavilion of Japan's latest and popular Cosplay clothing. Huaxia Animation is the first JOYPOLIS operator authorized by SEGA Holdings Co., Ltd and SEGA LIVECREATION Inc in China. In equipment development, testing, content design, technical personnel and even staff training, all meet Sega's stringent standards on game equipment, and are guided and supervised by Sega throughout the process. In addition to being introduced into the popular Japanese amusement equipment, Huaxia animation has also made its own virtual idol "Ziyan" one of the theme characters of the park. Shanghai JOYPOLIS aims at China's youth market, and through cutting-edge technology to create video products and create a fantasy world for players to bring them a rich digital animation experience, and finally provide players with excellent animation amusement facilities and wonderful interactive experience.

In addition, Huaxia Animation Group has obtained permission from Sega and is preparing for the next development work to set up JOYPOLIS in China. The company will cooperate with Sega to inject more independently developed amusement facilities and animation elements, Cosplay, VR virtual reality technology, to bring players the most technological and modern amusement experience and animation mobile game experience, resulting in greater synergy. The indoor theme park business accounts for 6.7 per cent of the company's annual revenue in 2016.

Intellectual property related business: the company has strong R & D capabilities in the creation and development of animation characters. Through acquisition and internal development, the company owns several popular proprietary animation intellectual property rights, such as "Han eight Turtles", "Purple Yan", "Animal Environment Conference" and "Magic Youyou". One of the most popular is "Ziyan", which held its first holographic 3D animation concert in China. In addition, since May 2015, the company has launched five "Ziyan" animation games, including two VR games, two mobile games and an online game. Huaxia Animation is speeding up the development of animation characters and plans to further commercialize its patented animation characters.

VR related business: the company has opened a VR game center next to JOYPOLIS (Happy City) in Shanghai. Visitors to the company's VR Game experience Center can wear VR glasses to experience a 360-degree VR experience, enter a virtual 3D environment and enjoy a multi-sensory interaction experience. Visitors can also buy VR wearable devices and download game applications on the company's website, allowing them to have an interactive VR gaming experience at any time. The VR Game Center offers 17 games, including adaptations of Stephen Chow's film "Yangtze River 7", action games "Space" and "Thunder Fighter", as well as games centered on the company's proprietary animated characters such as "Han eight Turtles" and "Ziyan". The company has expanded its share of the VR entertainment market in China. The company is involved in operating more than 1000 VR game centers in China, including by investing, operating directly or obtaining licenses. The company also works with Chinese VR game developers and operators to design "capsule" VR game devices and develop related VR game content. In addition, Huaxia Animation also signed a strategic cooperation agreement with an independent third party on the development of VR projects.

Our point of view: in the case of limited information, it is difficult to assess how much actual revenue the VR Game Center will bring to the company (admission fee is 20-30 RMB per person, admission time may be about a few minutes), but it has the opportunity to bring good growth momentum to Chinese animation. In addition, we believe that Huaxia Animation can use its relationship with Sega to accelerate the development of JOYPOLIS in China and develop more VR games. The company is also actively seeking to form partners with the industry to develop new business. We believe that Huaxia Animation will be more active in explaining the company's trends, strategies and development roadmap to the market after announcing its results in fiscal year 2016.

Catalyst: there is news about business development or forming partners with the same industry.