Event
The company recently announced the acquisition of 45% stake in Tianyi Film and Television and related party transactions. The company intends to acquire 45% of Zhejiang Tianyi Film and Television Co., Ltd. in cash at a transaction price of 395 million (corresponding to a price-to-earnings ratio of 8.8x for the promised profit in 2017). The company will hold 96% of Tianyi Pictures after the acquisition. Tianyi Film and Television promised that the audited net profit in 2017, 2018 and 2019 would not be less than 100 million, 120 million and 150 million respectively, while transferring Fang Xinyu Shangshan Ruoshui (Wu Yi holds a 92.32% stake in Shangshan Ruoshui) and Wu Yi promised to buy no less than 5000 million Lugang Culture shares in the secondary market through bidding and bulk trading in the future, and lock it up to December 31, 2019.
Comment
1. The transaction plan is better than the market expectation, which is reflected in: (1) before, the market predicted that the remaining 45% of the shares would be issued in the form of directional additional issuance to raise cash and issue shares, but now it will be changed to all-cash, which will not lead to share dilution; (2) the probability of passing cash acquisitions is higher than that of issuing shares; (3) the speed of cash acquisition is faster than that of issuing shares.
two。 The follow-up supporting plan is conducive to protecting the stock price of the secondary market: this time 45% of the shares are sold at a price of 395 million. The announcement said that the transferor Xinyu Shangshan Ruoshui (Wu Yi holds 92.32% of Shangshan Ruoshui shares) and Wu Yi promised to buy no less than 5000 shares of Lugang Culture in the secondary market through bidding and bulk trading in the future. for example, at today's closing price of 6.34 yuan per share. The capital required for 50 million shares is 317 million (80% of the cash held), with the current company fundamentals at the bottom, which we believe will provide a strong support for the stock price in the secondary market.
3. We predict that the transferor's earlier ownership of shares (Wu Yi and his representative Shangshanruoshui) will avoid the rise in shareholding costs: 4Q17, Tianyi's "good Life" will confirm the report that in 2018, Dianyi promises a 20% increase in net profit compared with the same period in 2017, and the shooting of "Cao Cao" is expected to get better and better. With our judgment on the market at the bottom of the media sector, owning shares earlier can avoid raising the cost of shareholding.
Investment suggestion
We estimate that Lugang Culture's net profit in 2017 is 250 million (of which textile business is 90 million), and that in 2018 is not less than 370 million (of which textile business is 100 million). The current stock price corresponds to the 2017 PE22.2x and 2018 PE15.4x respectively, reiterating the "buy" investment advice.
Risk hint
Increased competition in the textile industry and the risk of exchange rate changes. The revenue of the boutique TV series fell short of expectations.
