Recent situation of the company
On December 8, 2020, the company announced that it intends to acquire Hengdian Holdings' holding in cash.Hengdian Film and Television100% equity in production company and 100% equity in Hengdian Film Industry, with purchase prices of 2054 million yuan and 102 million yuan respectively, totaling 122 million yuan. After the completion of the transaction, Hengdian Film and Television production Company and Hengdian Pictures will become wholly owned subsidiaries of Hengdian Film and Television, and the other party, Hengdian Holdings, will be the controlling shareholder of the company, and Hengdian Holdings will hold an 80.35% stake in the company as of October 12, 2020.
Comment
Cash acquisition of content assets, consideration of 122 million yuan. 1) valuation of the underlying business and acquisition:
Hengdian Film and Television production Company is mainly engaged in film and TV series production business, with income and net loss of 2973 million yuan and 19.4 million yuan respectively in 2019, and 8.56 million yuan and 56.88 million yuan from January to August 2020, respectively. Hengdian Pictures is mainly engaged in domestic film distribution business, with revenue and net profit of 9080 yuan and 10.29 million yuan respectively in 2019, and income and net loss of 18.6 million yuan and 30.34 million yuan respectively from January to August 2020. We believe that the price of this acquisition is relatively reasonable, taking into account the highly regulated environment at the supply end of TV series production in 2019 and the impact of the 2020 epidemic on the film industry. 2) method of payment: within 10 working days after the signing of the agreement, the company shall pay 30% of the purchase price within 10 working days from the date of examination and approval by the relevant institutions of the company, and within 10 working days from the delivery date, the company shall pay the remaining 70% of the purchase price. As of 3Q20, the cash on the company's account is 719 million yuan, and the payment consideration accounts for 17% of the cash on the account. While 2Q20's cinemas are all closed, the net cash flow expenditure on operating activities in a single quarter is 32.74 million yuan. We judge that the company's proposed cash acquisition will put limited pressure on its own cash flow.
We will strengthen the layout of the upper reaches of the industrial chain and deepen the all-round development of "content + channels". Hengdian Film and Television production Company and Hengdian Film, in recent years, they have participated in the production of works such as "the Great return of Journey to the West" / "Anti-Japanese Hero Qi Jiguang" / "distant Marriage" / "chasing Dreams" / "Operation Red Sea" / "me and my Motherland" / "Young you" / "A Story sadder than sadness" and so on. Among them, "the Great return of Journey to the West" / "Operation Red Sea" / "me and my Motherland" / "teenagers' box office and word of mouth are good. According to Yien data, according to the caliber of the film investment company, the November ticket market share of Hengdian cinema line ranked third in the country in 2020, with 4.2%. We believe that, combined with the advantages of terminal cinema channels, under the steady recovery of the national box office market after the epidemic, the IP resources and business resources accumulated by the company, film and television production and Hengdian film industry are expected to achieve a certain degree of synergy and diversify their income structure.
Valuation proposal
Considering that the transaction needs to be reviewed and approved by the shareholders' meeting, we keep our profit forecast unchanged.
The current share price corresponds to 12.6 times the 2021 EV/EBITDA. Maintain an outperform industry rating and target price of 20.25 yuan, corresponding to 15 times 2021 EV/EBITDA, which has 20.1% upside compared to the current stock price.
Risk
The acquisition has not yet landed with uncertainty; the risk of performance fluctuations of the target of the transaction; the recovery of cinemas under the influence of the epidemic is not as expected; box office growth is not as expected; market competition aggravates the risk; cinema and screen expansion is less than expected.