Rating: BUY* (Initiation) 

Target price: RMB13.00 

Share price (18 Aug): RMB11.21 

Market Cap (RMBm): 10,756.1 

Up/downside: 16.0% 

We initiate coverage with a BUY call and a target price of RMB13. As the only Chinese listed company with full coverage of the sports supply chain, CSI owns rich resources along with a wide-spectrum ecosystem. With its asset restructure completed, the lottery business has become a new growth driver, allowing the company to maximize policy advantages. We expect CSI to milk the industry potential for its own sustainable growth. 

Backed by General Administration of Sport; full coverage of sports supply chain 

China Sports Industry (CSI) was the first listed company to focus on sports and its business covers the entire sports supply chain. The main lines are events, sports communication, education and training, sports lottery, an offline sports platform, an online digital technology platform, and brand operation, capital operation, standard certification, research and consulting, as well as sports real estate. 2020 revenue: real estate accounted for about 38%, its lottery segment about 38%, and event management and operations about 9%. 

Industry growth and optimization: building out services and platforms 

Market demand and the industry scale have increased year after year, supported by policies, so development potential is high. The supply chain includes event resources in the upstream market, media communications in the midstream, and sports derivatives downstream. Currently, the sports derivative segment has the lion share of total industry value. Guided by policies and a growing diversity of consumption forms, the market share of sports services will continue, in our view. 

CSI’s businesses cover the core value chain of the industry 

Its business lines include: event resources (focusing on leading IP development and operations); sports communication (one-stop intermediary services); education and training (nurtures talents) and a fitness platform (for the health of all consumers). In the context of national fitness and the Covid-19 pandemic, China is prioritizing the buildout of a sports services complex. CSI’s experience from its Ningbo project will help it to roll out nationwide promotions and coverage. National policies are also helping to drive the construction of sports towns, along with an online digital technology platform to cater to smart sports. 

Lottery business a new profit driver with overall financial structure stability 

CSI’s key acquisitions of China Sports Lottery Technology and China Sports Color Printing in June 2020 has boosted its lottery business. Subsidiary IntraDak’s business is lottery terminals sales and maintenance. Sports Lottery Technology added R&D and core technology system operations and maintenance, while Sports Color Printing handles instant sports lottery services, thermal tickets supply and product color design. After the acquisitions, CSI’s lottery business revenue rose from RMB57.81m in 2019 to RMB749.72m currently, while gross profit margin lifted 31.46% to 59%, the highest level over the past eight years. Except for a decline due to M&A in 2020, the company's asset-liability ratio has been reasonable and stable, with good cash flow. 

Valuation and risks 

As the only Chinese listed company with full coverage of the sports supply chain, CSI owns rich resources and a full-spectrum business ecosystem. With its asset restructure completed, the lottery business has become a new growth driver and would allow the company to maximize its policy advantages. We expect CSI to milk the industry potential for its own sustainable growth. Based on the launches of sports events over the past two years, we expect net profit of RMB150m/240m/270m in 2021/22/23E; with a market cap of RMB12.4bn in 2022E, corresponding to our target price of RMB13. We initiate coverage with a BUY rating. Risks include: pandemic impact risks; policy risks; event operation risks; business risks; and new projects falling short of expectations. 

* Note: The investment ratings given by TFI Asset Management Limited may have taken reference to the research report previously issued by other entities of the TF Group.  For details, please contact us at research_tfi@tfisec.com. 

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