Investment suggestion
We downgraded the company to neutral and lowered the target price by 33% to $5.98 for the following reasons:
In the fourth quarter, the pace of confirmation of film and television business projects is still slow, and the investment of variety show advertisements did not meet expectations. The company announced its 2020 results forecast that the net loss of 4Q20 in 2020 is expected to be RMB2.05-265 million, while the net loss of HNL is RMB1.87-245 million, which is lower than our expectation, mainly due to the provision for impairment of assets such as goodwill and project recognition that are lower than expected. Affected by the epidemic, its film and television production and distribution basically came to a standstill before May 2020, resulting in less revenue and profits for the whole year, while the variety show "our Song"
The first and second seasons and "dancers" advertisements failed to meet expectations. We believe that due to the impact of the epidemic, the shooting progress of the film and television project is still recovering. The company plans to set aside 127 million yuan for impairment of goodwill and other assets, including 111 million yuan for impairment of goodwill and 16.58 million yuan for book goodwill after impairment.
A number of projects are in the pipeline and revenue is expected to improve in 2021. At present, the production or post-production project "is as pure as ice jade pot" / "Tianya Ke" / "Rat King" / "one River Water" / "epidemic War" / "killing Wolf" / "two conjectures of Marriage" / "Summer Bone" / "Dad is coming" / "Sword laughter" / "City of streamer" / "Summer of bifurcated time" / "Yanghui Town", etc.; filming the project "Haitang Mansion" Zichuan is scheduled to start in April 2021. Under the new revenue criteria, if the company agrees on the online broadcast time in the contract and the buyer is unable to dominate the broadcast time, the revenue recognition will increase the "TV series start broadcasting" condition, and its cumulative impact will be reduced by 138 million yuan in retained earnings at the beginning of 2020, which has no effect on the profits and losses of the current period in 2020. We judge that a number of projects will be recognized in 2021 one after another, but under the new revenue criteria, the company's future show revenue recognition may be more dependent on the buyer's schedule.
The proposed construction of Ciwen Wu Chu Film and Television City and the strategic layout of the pan-entertainment industry chain still need to pay attention to the progress. On January 28, 2021, the company signed a "Framework Cooperation Agreement" with the people's Government of Liangzi Lake District and Wutong Lake New area of Hubei Province. The company plans to invest in the construction of Ciwen Wu Chu Film and Television City (tentative name) in Wutong Lake New area. We believe that the company in the core business recovery process or further deepen the strategic layout of the pan-entertainment industry chain.
What is the biggest difference between us and the market? We believe that the company's film and television project revenue recognition volatility is high and the pace of project progress is slow.
Potential catalysts: key projects are less advanced than expected; supervision is tighter.
Profit forecast and valuation
We lowered our 2020 profit forecast from 150 million yuan to a loss of 225 million yuan, lowered our 2021 net profit forecast by 33% to 203 million yuan, and introduced a 2022 net profit forecast of 212 million yuan. The current share price corresponds to 13.4 times the 2021 PCME. Taking into account the high volatility of the company's film and television projects and the slow pace of project progress, we downgraded the original outperform industry rating to neutral, and lowered the target price by 33% to 5.98 yuan, corresponding to 14 times 2021 Phand E, which has 4.2% upward space compared with the current stock price.
Risk.
The pace of the project has accelerated; substantial progress has been made in new business.
