On January 26, 2018, the company announced that its wholly-owned subsidiary Hong Kong Meisheng plans to subscribe for JAKKS's newly issued common stock at a price of $2.95 per share, and ultimately hold 51% of JAKKS's shares. As the company's largest customer (accounting for 32% of revenue in 2016), if the JAKKS acquisition is successful, it will help the company complete the expansion of the upstream industry chain and leverage performance growth with lower acquisition costs:
1) In the short term, focus on improving JAKKS's performance in 2018 and increase the company's performance. The release of “Frozen 2” and “The Incredibles 2” and the sale of related derivatives will drive JAKKS's performance growth;
2) Focus on the synergistic effect of Meisheng+JAKKS in the medium to long term to expand revenue sources and reduce production costs. In the R&D design process, JAKKS has outstanding product design and R&D capabilities, and its superior product categories will fill the gaps in the company's product categories, providing favorable conditions for the company to achieve all categories; in the product production process, strong collaboration is expected to reduce production costs and upgrade the company's supply chain to improve product quality; in the channel distribution process, use JAKKS to open up global terminal channels such as Wal-Mart, Target, and Amazon to achieve comprehensive online and offline coverage.
The operating capacity of the entire industry chain has been further improved, consolidating the company's leading position in the derivatives industry. JAKKS has been deeply involved in the derivatives industry for 22 years, has the advantage of operating the entire industry chain, has an authorized IP+ original IP system similar to the company, and has successfully launched a number of mobile game apps and related derivatives. Based on the parties' ability to operate the entire IP industry chain, it is expected that the two parties will show good adaptability after the acquisition is completed.
Strong alliances are expected to enhance the influence of the global industrial chain. IP operations, including the copyright value of IP and peripheral derivative value, JAKKS' IP operation (design and development) experience, and Meisheng's derivatives production supply chain strength, are expected to continue to enhance scale advantages on a global scale.
Investment suggestions: After three years of layout optimization, the company's 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. The company's net profit for 2017-2019 is estimated to be 465 million yuan, 605 million yuan, 784 million yuan, corresponding to EPS 0.51 yuan, 0.67 yuan, and 0.86 yuan. If JAKKS merger and synergies are taken into account, the estimated profit for 2018-2019 is 705 million yuan, 886 million yuan, corresponding to EPS 0.78 yuan and 0.97 yuan. Considering the company's leading position in the derivatives industry and its scarcity in A-shares, we gave it a target PE of 30 times for 2018, corresponding target price of 23.25 yuan (considering the consolidated table), and a “buy-A” rating.
Risk warning: M&A integration falls short of expectations; own IP monetization capacity falls short of expectations; risk of authorized derivatives piracy; risk of exchange rate fluctuations.