The company is transforming to a business model with stable cash flow and high production capacity
China's drama industry is a fragmented market with relatively stable growth. According to Frost Sullivan, the market for TV shows fell from 60.5 billion yuan in 2015 to 54.4 billion yuan in 2019, with a compound annual growth rate of-2.6% and is expected to continue to decline at a compound annual growth rate of-0.5%. Reach 53 billion yuan in 2024. According to Frost Sullivan, the market for series broadcast on online video platforms grew from 22.5 billion yuan in 2015 to 44.7 billion yuan in 2019, with a compound annual growth rate of 18.7 percent. It is expected to continue to grow at a compound annual growth rate of 8.9%, reaching 68.3 billion yuan in 2024. Founded in 2014, Straw Bear is one of the leading producers and distributors of TV series in China. As of December 21, 2020, the company has invested in, produced and distributed 32 TV series that have been broadcast and 3 dramas that will be broadcast. Straw Bear mainly has three business models: 1) authorize homemade dramas to TV stations or online video platforms (1.0 business); 2) purchase dramas from online video platforms or drama producers and delegate them to TV stations, third-party distributors or online video platforms (2.0 business); and 3) provide customized drama production services (3.0 business) according to the requirements of the online video platform. Through close cooperation with the online video platform, Straw Bear is transforming from a high-risk return business model (1.0 business) to a more sustainable business model with stable cash flow (3.0 business). In the long run, this will bring capacity expansion and better growth prospects for Straw Bear. Straw Bear's advantages lie in its platform-based business model, rich IP reserves and close cooperation with online video platforms.
Over the years, Straw Bear has been highly praised in the industry, and its industry status has also been widely recognized. According to Frost Sullivan, Straw Bear ranks fourth among all TV series producers and distributors in terms of the number of TV series premiered in 2019, with a market share of 6%. In terms of show revenue in 2019, the company ranks sixth among all series producers and distributors, with a market share of 1.8%. We believe that Straw Bear's leading position in the industry is mainly due to the following three aspects: 1) the platform business model can integrate industry participants and provide industrial production and distribution processes; 2) has a rich and diverse IP reserve to support the continuous flow of high-quality drama production; and 3) work closely with the online video distribution platform to transform the business model. These advantages can help the company consolidate its leading position in a rapidly changing competitive environment.
Cover and give a buy rating for the first time; target price HK $11.4
We expect Straw Bear's income to grow at a compound annual growth rate of 51.2% from 2019 to 2022, which will reach 948 million yuan / 2.012 billion yuan / 2.643 billion yuan in 2020 / 2021 / 2022, respectively, while gross profit margin and adjusted net profit margin will reach 24.2%, 23.8%, 22.7% and 13.3%, 14.8%, 14.1%, respectively. We expect the company's adjusted net profit to grow at a compound annual rate of 78.9% from 2019 to 2022, and the adjusted net profit will reach 126 million yuan / 298 million yuan / 372 million yuan respectively in 2020 / 2021 / 2022. We cover Straw Bear for the first time and give it a target price of HK $11.4, mainly based on the 21-year forecast price-to-earnings ratio of eight companies, which is 22.0 times higher than the average of their peers, and the company's 21-year adjusted net profit.