The company invested in JAKKS to help the company become a global derivatives leader. JAKKS and its subsidiaries are the company's largest customers. Since 2006, the two parties have established a long-term partnership and formed good business collaboration during long-term cooperation. In 2016, the company's transaction volume with JAKKS was 205 million yuan, accounting for 32.36% of the company's total revenue. In February and May 2017, the company acquired 19.5% of JAKKS's shares through its wholly-owned subsidiary Hong Kong Meisheng, by purchasing and issuing additional shares from the secondary market, respectively, and became its largest shareholder.
Strong partnership, strategic collaboration, analysis of subjective and objective factors of the company's successful acquisition of JAKKS:
The pressure on JAKKS's capital market has yet to be resolved. The company uses this to supplement the competitive advantage of the entire industry chain, which is an important subjective factor in the successful acquisition of JAKKS. 1) From the JAKKS level, in the face of increasing capital market pressure, JAKKS actively introduced strategic investors, which was one of the factors driving the company to successfully acquire JAKKS; 2) At the company level, JAKKS's outstanding R&D capabilities help the company quickly expand into R&D and design with high added value. With JAKKS's high-quality IP licensing resources and channel resources, the company will supplement the competitive advantage of the entire industry chain.
The good adaptability shown by the two parties and the huge room for momentum in the domestic derivatives market are important objective factors contributing to the successful acquisition of JAKKS. 1) Looking at the company level, on the one hand, the company's early industrial chain layout is beginning to bear fruit, and the financial situation continues to improve; on the other hand, the company's successful transformation from a simple processing manufacturer to the role of operator of the entire IP industry chain with higher added value is one of the objective factors constituting the successful acquisition of JAKKS. Based on the company's IP operation experience accumulated in full-chain exploration, the two sides will show good adaptability; 2) From an industry level, compared to mature markets such as the US and Japan, the domestic derivatives market is still in its infancy, with huge potential for development, superimposed on second-generation dividends and consumption upgrades Domestic demand will grow, and the domestic derivatives market capacity will continue to expand, which will provide a favorable market environment for the company's development.
There is still room for exploration in the global derivatives market, and Meisheng+JAKKS's dominant product, gameswear, has more potential for development. 1) The size of the global toy market has not yet reached the ceiling, and there is still plenty of room for growth. It is expected to grow at an average annual growth rate of 5.7% in the future. IP-authorized derivatives are the core driving force for the growth of the global toy market and are a key factor for major toy manufacturers to achieve continuous performance growth; 2) The competitive pattern for leading global derivatives market is stable. Compared with other giants, Meisheng+JAKKS has great potential in terms of revenue scale and brand awareness, and Meisheng+JAKKS has a competitive advantage in the game wear field. In the future, along with the rise of the domestic market and the continuous expansion of overseas markets, JAKKS+Meisheng's derivatives sales and market share are expected to grow rapidly.
Investment suggestions: After a three-year layout and two years of optimization, the entire industry chain is relatively complete. The acquisition of JAKKS will further improve the competitiveness of the entire industry chain. We expect the company to complete the merger of JAKKS in 2018. After the acquisition is completed, as JAKKS's supplier, the number of orders and product categories will increase significantly (the company will fully benefit from the JAKKS “Frozen 2” license in 2018); on the other hand, the merger of JAKKS will greatly increase the company's profits. Excluding the impact of the acquisition of JAKKS on performance, we expect the company's net profit for 2017-2019 to be 465 million yuan, 600 million yuan, 704 million yuan, and EPS of 0.51 yuan, 0.66 yuan, and 0.77 yuan, corresponding to the current stock price PE of 36, 28, 24 times; if we consider JAKKS's consolidated performance in 2018, the profit for 2018-2019 is 740 million yuan and 854 million yuan (we expect JAKKS's net profit for 2018-2019, respectively, to be 275 million yuan, 294 million yuan). Considering the company's position as a global leader in derivatives after acquiring JAKKS and its scarcity in A-shares, it was given 30 times the target PE in 2018, corresponding to the target price of 24.30 yuan, with a “buy-A” rating.
Risk warning: M&A integration falls short of expectations; risks such as expansion of the influence of own IP and lower monetization capacity than expected; piracy; exchange rate fluctuations, etc.