The company's recent situation

Company announcement: 1) Wuhan Guochuang Capital Investment Co., Ltd. (Guochuang Capital for short) plans to transfer 1.94% of the company's shares held by rising star Hanyi, the company's original controlling shareholder, through a bulk transaction within three months. Meanwhile, within 36 months, rising star Hanyi entrusted the voting rights of its remaining 11.79% of shares and 13.66% of the shares held by its co-actor, Contemporary Group, to Guochuang Capital; Tianfeng Ruiyuan, the rising star Hanyi's concerted actor, relinquished the voting rights corresponding to 2.58% of the shares held by him. 2) Since rising star Hanyi and its co-actors are currently planning a transfer of control of the company, and the previously announced 2020 non-public offering plan is for the company to privately issue 175 million shares to Rising Star Hanyi, the company decided to end the 2020 non-public offering of A-shares. 3) Jiang Lizhang, a shareholder of the company, and his co-actors (total shareholding 10.72%) plan to reduce their holdings of the company's shares by no more than 4.69% through centralized bidding, bulk trading, etc. within 6 months after 15 trading days.

I theory

State-owned assets have changed their holding rights, and various measures have been taken to support the company's long-term development. After this change is completed, Guochuang Capital will become the controlling shareholder of the company, and the Wuhan Municipal State-owned Assets Administration Commission will become the actual controller of the company. At the same time, Guochuang Capital will strengthen its control by increasing the company's shares by including but not limited to continuing to transfer shares and participating in the subscription company's non-public offering of shares. We believe that investing in state-owned assets and subsequent capital increases, and becoming the actual controller through the transfer of voting rights, is expected to ease the pressure faced by the company, such as high debts and financial expenses; however, the original controlling shareholders and their co-actors still maintain most of their shares, which shows the recognition of the company's development prospects by the original controlling shareholders. Guochuang Capital also promised that it will support the company's core management team to nominate senior managers of listed companies to maintain the overall stability of the management team and core workforce. We believe that the stability of the core management team helps the company maintain steady development of its core business.

The start of the European Cup is expected to help the sports business reverse losses, and the broadcast of key series is expected to increase profits. The 2020 European Cup will start on June 12, Beijing time. The company has exclusive rights to new media and global sponsor rights. We expect that the start of the European Cup and the promotion of equity sales for the 2023 Asian Cup will help the sports business reverse losses. In terms of film and television, 20% of the company's participation in the drama “Happy to Ten Thousand Families” has already been included in Youku's 2021 movie list. The company expects it to be broadcast within the year. We expect to increase the company's profits.

Valuation and advice

We keep our original profit forecast unchanged. The current stock price corresponds to a price-earnings ratio of 23 times 20 times 2021/2022. Maintaining a neutral rating and a target price of 6.88 yuan corresponds to a price-earnings ratio of 21x/18 times in 2021/2022, and there is room for 9.1% decline from the current stock price.

risks

Failure to approve voting rights entrustment and abandonment matters caused the actual controller change to fail. The impact of the epidemic exceeded expectations, the performance of mergers and acquisitions fell short of expectations, risk of impairment of goodwill, risk of inventory impairment, and the progress of film and television projects was slow.