Event

Lugang Culture received a notice of industrial and commercial change from Tianyi Film and Television and Tangqiao sewage treatment Company. The company's shareholding in Tianyi Film and Television increased from 51% to 96%, and that in Tangqiao sewage treatment Company increased from 30% to 60%.

Comments:

With the successful completion of the Tianyi film and television acquisition, the company's performance is expected to grow rapidly. According to the company announcement, after the completion of this asset delivery, the company's stake in Tianyi Film and Television increased from 51% to 96%, and Tianyi Film and Television updated its committed performance in 2017-2019, achieving net profits of 100 million yuan, 120 million yuan and 150 million yuan respectively. The performance of listed companies will be greatly thickened. The major TV programs of Tianyi Film and Television in 2017, such as "good Life", "Flowers like Dreams" and "your first name and my Last name" are expected to confirm revenue in the fourth quarter to help Tianyi Film and Television fulfill its 2017 performance commitment. At the same time, the revenue of the Tianyi film and television reserve projects "one step to the sky" and "the decisive Court" are expected to be confirmed in 2018, while the production of the blockbuster "Cao Cao" is expected to start in 2018 and is expected to confirm its revenue in 2019, helping Tianyi Film and Television fulfill its performance commitments from 2018 to 2019. The consideration of the acquisition transaction is 395 million yuan, corresponding to an average price-to-earnings ratio of only 7 times for 2017-2019, which is lower than the 2014-2016 average price-to-earnings ratio for the acquisition of 100% stake in Century Changlong in 2014 and the 2015-2017 price-to-earnings ratio for the acquisition of 51% stake in Tianyi Film and Television in 2015. the performance has increased significantly.

The other party promised to buy the company's shares to deepen the binding, which is conducive to the development of the company's secondary market. According to the company announcement, Xinyu Shanruoshui and Wu Yi promised that within 12 months from the effective date of the acquisition agreement, the purchase price would be used to purchase not less than 50 million shares of the company (5.59% of the company's total share capital and 5.73% of the company's circulation). And locked up to December 31, 2019. According to the closing price of 6.63 yuan per share on December 4, 2017, Xinyu Shangshan Ruoshui and Wu Yi need to pay no less than 331.5 million yuan (more than 80% of the consideration for this transaction) to buy the company's shares in the secondary market by means of bidding and bulk trading, which is conducive to the development of the company's secondary market. After the completion of the stock acquisition, Xinyu Shangshan Ruoshui and Wu Yi are expected to become one of the top five shareholders of the company, and will have sufficient motivation and determination to fulfill the promised profits and promote the continued growth of Tianyi Film and Television performance.

The continuous layout of movies and online dramas will create new growth points of performance. According to the company announcement, in addition to Tianyi Film and Television, Century Changlong, a wholly-owned subsidiary of the company, participated in "Big bombing", "Beast" and "Psychological Crime" in 2017, accumulating a great deal of experience in the film industry for the company, which is conducive to the future film business development of the company; the wholly-owned subsidiary Lugang Internet drama project "touch Jinfu" is in the preliminary preparation state and is expected to recognize revenue in 2018 and promote the company's performance growth in 2018.

The main textile industry has developed steadily, and the acquisition of assets has made huge profits. As the company accurately judges the rise in the price of wool raw materials and prepares inventory in advance, the company's main textile industry in 2017 is expected to grow on the basis of high growth in 2016. In 2018, the company will improve the product grade through technological reform, so as to increase the gross profit margin, and the performance of the main textile industry is expected to rise steadily. At the same time, the company's shareholding of Tangqiao sewage treatment company has increased from 30% to 60%, which has met the consolidated requirements; Tangqiao sewage treatment company has promised to achieve net profits of not less than 2300 yuan, 2450 yuan and 27 million yuan respectively from 2017 to 2019, which will be a rich company performance.

Investment advice: Tianyi film and television high-quality drama project reserve is rich, with the gradual landing of major projects, its performance growth will be verified, and greatly increase the performance of listed companies; at the same time, the other side of the transaction promised to use more than 80% of the transaction consideration for the acquisition of shares in the company, which will be deeply bound to the company, with sufficient motivation and determination to promote the company's performance growth and be conducive to the company's secondary market performance. The active layout of the company in the field of movies and online dramas is expected to promote the sustained growth of the company's performance; the company's main textile industry is steadily rising and the acquisition of assets is lucrative, which will contribute to the company's performance. We expect the company to achieve net profit of 2.5 yuan and 350 million yuan in 2017 and 2018, corresponding to 0.28 yuan and 0.39 yuan per share respectively. Refer to similar comparable companies to give a 30X valuation to the 2017 EPS and a "buy-A" rating corresponding to the six-month target price of 8.40yuan.

Risk Tip: the release progress of the company's TV series project is lower than expected, and the box office of the company's film project is lower than expected.