2014 profit is lower than expected, but still optimistic about the development of non-lottery business.

Maintain the "hold-surpass peer" rating, and raise the target price to 68 yuan: people's Daily online's profit in 2014 increased by 21% compared with the same period last year, but it was 16% lower than the center's expectations due to rising fees. Although its profit is lower than expected, we are still optimistic about the company's non-lottery business. Overall, following the suspension of Internet lottery business, we maintain a cautious view of the unit. We raised the target price to RMB 68 because 1) the valuation base was pushed from 2014 to 2015; and 2) the target price-to-earnings ratio was raised from 78 times to 88 times.

2014 earnings fell short of expectations, but dividends were attractive: 2014 people's Daily online revenue rose 54 per cent year-on-year to 1.58 billion yuan. We attribute the steady growth in revenue to 1) the company's vigorous development of mobile value-added services, and 2) the contribution of subsidiaries to revenue. However, the net profit (up 21% year-on-year to RMB 330 million) was 16% lower than the center's expectations.

We believe that this is due to the increase in costs caused by technology upgrading and business expansion. The company will pay a cash dividend of 1.8 yuan (0.18 yuan per share) for every 10 shares and increase 10 shares.

We are still optimistic about the company's non-lottery business: revenue from people's Daily online information services / mobile value-added services increased by 44% in 2014 compared with the same period last year, accounting for 17% of total revenue and 27% respectively. We expect that information services will continue to contribute stable revenue in 2015, while mobile value-added services (mobile entertainment services) will become the new growth momentum. However, considering the uncertainty caused by the current suspension of Internet lottery business, we are still cautious about the company's lottery business.

We cut our earnings forecast for 2015 by 14% to reflect the underperformance of the lottery business: we pushed the valuation base from 2014 to 2015. The new target price-to-earnings ratio of 88 is 10% lower than the average price-to-earnings ratio of the software sector, reflecting our concerns about the development of the company's lottery business.