Investment positives

The company is a bellwether in the dairy industry in the southwestern region. It has been moving to the culture andmedia industry since 2014. By acquiring and investing in Charter Movies & TV Production, Sun Shine and BGHDTV, it hasmade deployment for the full cultural industrial chain from content to platform and created dual core businesses of dairyand culture & media. The dairy business has maintained stable growth in recent years and provides strongsupport to earnings. For cultural industry, the company has built up a business structure based on cloudplatform as technological support, covering movie/TV, preschool education and internet finance.

Movie/TV: The industrial chain of “content production – media operation – terminal communication –derivative development” fuels growth. Based on the extensive IP and copyright resources of Royal Charter Movies& TV Production and Sun Shine, the company cooperates with mainstream media channels, including internet videopartners, cable TV operators, IPTV and OTT, which lays a solid foundation for sustained development of content.

Preschool education: T2O2O commercial closed-loop built through TV, online and offline (T2O2O)deployment. By cooperating with Sun Shine, BNCZ, BGHDTV, Xindongman and Yaozhi Technology, the companyrealizes synergy in content, channels and technologies, which improves long-term growth potential.Internet finance. The company has established the Yingshibao crowd funding platform and invested in Perfect Online(UnionPay electronic bill service provider). It expands the financing channel for movie/TV & culture business andpromotes derivative products on e-commerce platform.

Financials

We expect 2016/17/18e operating revenue of Rmb2.43bn/2.97bn/3.55bn, up 44.4%/21.8%/19.7%YoY, and net profit of Rmb380mn/510mn/650mn, up 105.9%/33.8%/27.0% YoY.

Valuation and recommendation

The company profit mainly comes from dairy and movie/TV businesses. We expect the two businesses to respectivelycontribute net profit of Rmb148mn and Rmb352mn in 2017. Considering the business structure, we adopt SOTP methodfor valuation. By referring to the valuation of comparable companies, we assign 25x 2017e P/E for dairy business,implying market cap of Rmb3.7bn, and assign 34x 2016e P/E for movie/TV business, with market cap premium of 15%,implying market cap of Rmb13.8bn. The target market cap is Rmb17.5bn. The 2016e P/E is 46x, with TP ofRmb20.8. Initiate with BUY. Risks: dairy competition increases; acquisition performance disappoints; businessintegration risk.