Incident Overview

According to the announcement issued by the company on June 1, 2020, the controlling shareholder of the company signed an “Investment Intent Agreement” with China Radio and Television to jointly initiate the establishment of China Radio and Television Network Co., Ltd. (provisional name, hereinafter referred to as “Joint Stock Company”) with 19.09% of the company's shares. The actual controller of the company will be changed from Beijing Radio and Television to the State Council. Beiguang Media will become the company's second largest shareholder with a shareholding ratio of 18.33%, and promised to maintain the controlling position of the joint stock company in the “Investment Intent Agreement”. As the controlling shareholder of Future Joint Stock Company, China Radio and Television promised to give Beiguang Media and its controlling shareholders the right to nominate at least one director of the joint stock company.

In the announcement that China Radio and Television initiated the establishment of a network integration company, or the disclosure of participation in the formation of a joint stock company by various local radio and television listed companies for future listed entities, only Gehua Cable clearly disclosed that the controlling shareholder, Beiguang Media, had invested in the formation of a joint stock company, while other companies only disclosed that they had invested in the form of cash and the like. We believe that Gehua Cable has a higher level of participation in this joint stock company formation process, and that the role card (with the right to nominate directors) has an advantage over other listed companies. We infer that if a network integration company enters the capital market in the future, Gehua Cable may be its listed entity.

Analysis of the path of integration of one network: divided into a listing stage and an integration stage According to publicly disclosed relevant information, we expect the integration of a national network company to be divided into two stages, namely the listing stage of a national network company and the stage of integration of radio and television assets. Below is our summary of the specific implementation plan for each stage.

Listing stage: The integration of Radio and Television Network will be achieved through the establishment of China Radio and Television Network Co., Ltd. (China Radio and Television Network Co., Ltd.), with China Radio and Television as the majority shareholder. On the strategic shareholder side, China Mobile will strategically invest in cash or business investment to jointly build and share the China Radio and Television 5G network. Alibaba will invest in the strategic share with cash to participate in the operation of the radio and television 5G network to enhance the vitality of radio and television operations. In terms of participating shareholders, the listed company will participate in the formation through cash or a portion of the controlling shareholder's shares. Beiguang Media, the controlling shareholder of the company, will participate in initiating the establishment of a network joint stock company in consideration of the controlling rights of listed companies. As a minority shareholder of the company, they have the right to nominate at least one company director. It is expected that other listed companies will also use cash and other assets to participate in the establishment of a network joint stock company in the future and obtain a corresponding share of shares according to the amount of investment. It is expected that unlisted radio and television companies will participate with a controlling interest of 51% or more. The original controlling shareholder will become a minority shareholder of One Network Joint Stock Company, and the former Provincial Network Company will become a subsidiary of One Network Joint Stock Company.

We expect that after the listing and establishment of One Network Joint Stock Company, its shareholding ratio will be further increased by increasing its capital by injecting high-quality assets into Gehua Cable. The main entity of Gehua Cable's listed company became a network joint stock company. In the future, the company will integrate radio and television assets owned by other listed companies one by one by issuing shares, absorbing and merging them. The assets of most listed radio and television companies with a single business will be absorbed and merged into One Network Joint Stock Company, and the original listed company entities will be delisted; some companies with more complex businesses may put out their radio and television assets in exchange for a small number of shares in One Network Joint Stock Company, and the original listed company entities will retain them.

19.09% of Gehua shares were valued at more than 2.5 billion dollars, and the monetary capital of more than half of the listed radio and television companies was less than 1 billion yuan. According to the share pricing method disclosed in the agreement, we expect the investment amount corresponding to Gehua Cable's 19.09% shares this time to be about RMB 2,563 billion (the 2019 annual report revealed that the company's net assets were 13.430 billion yuan, 134.30 X 19.09% = 2,563 billion yuan. The weighted average market value consideration corresponding to the 30 trading days prior to the announcement was significantly lower than the above net assets). We speculate that the investment ratio of other listed radio and television companies will be smaller than that of Gehua Cable's controlling shareholders. Referring to Gehua Cable's investment consideration of 2,563 billion yuan, according to the first-quarter reports of various companies in 2020, in addition to Gehua Cable, listed radio and television companies with book capital exceeding 2 billion yuan include Oriental Pearl (8.333 billion yuan), Huashu Media (4.550 billion yuan), Jiangsu Cable (2,866 billion yuan), and TV and radio media (2,114 billion yuan). The feasibility and probability of the above four companies participating with cash investment is high. The other six listed radio and television companies all had less than 1 billion yuan in monetary capital in 2020Q1, and it is possible that some of the controlling shareholders' shares will participate in the investment.

Investment advice

The integration of the radio, television and television network will bring a lot of room for change in the company's future performance, but since the first network integration company has not yet been listed, there is still great uncertainty about the specific plan. Due to prudent considerations, we are maintaining our previous earnings forecasts for the time being. It is estimated that the company will achieve operating income of 2,876, 30.97, and 3,534 billion yuan respectively in 2020-2022, with net profit attributable to the mother of 617, 665 and 739 million yuan respectively, and EPS of 0.44, 0.48, and 0.53 yuan respectively. PE corresponding to the current stock price is 26, 24, and 21 times, respectively, maintaining the “increase in holdings” rating.

Risk warning

The development of the 5G industry fell short of expectations; the “National One Network” integration progress fell short of expectations; the willingness of radio and television users to pay fell short of expectations; and the progress of new radio and television infrastructure fell short of expectations.