Key points of investment:

Overview of the acquisition plan: 48% of Hollywood's shares were purchased in cash, and the founder took shares in a listed company. The purchase capital came from long-term loans from the founding shareholders. The plan did not form a backstage; related parties bought the remaining 43% of Hollywood's shares.

The company announced that it plans to use 2,895 billion yuan in cash to acquire 48% of Beijing's Hollywood shares held by Hollywood founders Feng Yousheng, Liao Jieming, Hou Guangling, Inke Changqing, Inke Huanzhong, and Inke Yuanda. After the acquisition, the company will become the actual controller of Hollywood; the founder of Hollywood plans to increase the capital of the four major shareholders of the listed company by a total of 2.165 billion yuan, obtaining minority shares of 42% of each of the four major shareholders. The control of the listed company remains unchanged. At the same time, the four largest shareholders of the company provided a loan of 2.85 billion yuan (divided over 3 and 15 years) from the acquisition for the asset purchase; since this plan would not change the control of Xuanya International, the founding shareholders of Hollywood obtained minority shares in the listed company, which did not constitute a backdoor listing; at the same time, the related party Jiahui Investment will acquire another 43% of Hollywood's shares with 2,654 billion yuan in cash. After the acquisition was completed, Xuanya International and Jiahui Investment held a total of 91.6% of the shares in Hollywood. The two GPs of Jiahui Investment were Xuanya Investment and Zhongmin Tianze respectively.

The core asset of Hollywood is “Inke Live”, which mainly operates a live streaming platform on the Internet. Inke Live, a subsidiary of Hollywood, is currently the number 1 pan-entertainment mobile internet live streaming platform in China (iResearch data). Inke Live mainly connects the anchor with the audience. The core profit model comes from the audience's collection of recharges, rewards, gifts, etc. from the anchor's content. In addition, due to traffic advantages, advertisers can be provided with various methods of online promotion to obtain advertising revenue. As of Q1 2017, the cumulative number of registered users of Inke Live was about 165 million, with an average of 24.58 million monthly active users from January 2016 to March 2017. According to financial data, from 2016 to Q1 2017, Hollywood achieved revenue of 4,338 million yuan and 1,035 million yuan, of which Yingke's live streaming revenue accounted for more than 99%; Guimu achieved net profit of 482 million yuan and 245 million yuan. Driven by the live streaming business, performance is growing rapidly.

The company is a leading integrated marketing and communication service provider in China and has established a “traditional+digital” all-brand communication model. The company achieved revenue of 210 million yuan (-6.74%) in the first half of 2017, achieved net profit of 27 million yuan (+4.22%), and gross profit margin of 47.04% (up 3.06 percentage points over the previous year). Among them, digital marketing revenue of 126 million yuan in the first half of the year reached 60%. The company continued to increase its investment in digital marketing, and the company's digital marketing revenue grew rapidly, from 31.93 million yuan in 2013 to 126 million yuan in H1 in 2017. The company insists on all-round integration of marketing communication services to form a brand full communication service model with marketing strategies and creative content as the core and “traditional communication channels+digital communication channels” as the channel.

After this acquisition, Xuanya International became a listed company integrating “PR integrated marketing and Internet live streaming”. The acquisition of Hollywood helped the company improve the development system for integrated marketing and communication services, made up for the company's lack of a media platform at the end of the integrated marketing communication industry chain, upgraded the company from the original service provider to a media owner, and further consolidated the main advertising and marketing business. From 2017 to 2019, Hollywood promised to achieve net profit of no less than 492 million, 575 million and 665 million yuan respectively, with performance growth rates of 17% and 16% in the next two years. Since cash purchases do not increase share capital, the performance of listed companies has increased markedly, and the original shareholders of Hollywood have taken shares in listed companies. The mechanism has been straightened out. We judge that future collaboration between the two main businesses will be an important focus.

Profit forecasting and valuation analysis. 1) If we do not consider the parallel performance of Hollywood and only consider the company's normal main business situation, we expect the company's net profit from 2017 to 2019 to be 72 million yuan, 88 million yuan, and 105 million yuan respectively. The corresponding EPS from 2017 to 2019 was 0.67 yuan, 0.82 yuan, and 0.97 yuan respectively. 2) According to the estimate that the net profit after tax from 2017 to 2019 will not be less than 492, 575, and 665 million yuan respectively, we expect the asset acquisition to be completed in Q4. If we consider the company's performance for the fourth quarter of this year, based on the actual 48.25% of the shares held by the listed company in Hollywood, we expect the company to achieve overall net profit of 222 million, 366 million yuan, and 426 million yuan respectively from 2017 to 2019. The corresponding EPS will be 2.05 yuan, 3.39 yuan and 394 yuan respectively. According to the current calculation The market capitalization corresponding to the 2017-2019 PE was 32X/20X/17X respectively. Referring to the valuations of comparable companies in the same industry and considering the development prospects of the company's Internet live streaming business, we gave the company a 23 times valuation in 2018, with a corresponding target price of 77.97 yuan, covering the purchase rating for the first time.

Risk analysis: risk of decline in traditional marketing business, approval and termination of transactions, failure to meet promises of performance, and impairment of goodwill.