Results in line with expectations

Royal’s 2016 revenue was Rmb2.446bn, up 45.2% YoY; net profit attributable to shareholders was Rmb219mn, up57.4% YoY, or Rmb0.35 per share. In 1Q17, revenue dipped 2.42% YoY to Rmb454mn and attributable net profit rose2.79% YoY to Rmb167mn. It guides an attributable net profit rise of 0~30% YoY to Rmb101~131mn for 1H17.

Trends to watch

2016 results largely in line with expectations with rising contribution from media business. In 2016, bothrevenue and net profit rose steadily YoY. Notably, revenue from film/TV, advertising and media business increased83.89% YoY and accounted for 34.44% of revenue in 2016 （+7.25ppt）。 Contribution from media business rose further.

Continued roll-out of quality film/TV content. Upside room in Sun Shine’s operating revenue. CharterMovies & TV Production released five TV dramas in 2016 with Rmb374mn revenue （contribution at 17.67%）。 Besides, itis still working on five dramas with 230 episodes. Sun Shine recorded Rmb91.5578mn earnings in 2016, beating itsearnings promise by 1.73%. However, operating revenue accounted for only 38.22%, lower than promise by 16.87ppt.

Four main businesses taking shape; synergy to boost integrated strength. In 2016, it completed acquisitionof the remaining 40% stake in Perfect Online and invested in operation of yoohobox.com （cross-border e-commerce formother & baby products） and Evision （SAAS platform）。 Business consolidation should boost comprehensive strength.

Earnings forecast

Considering slowing growth in traditional business, we lower 2017 our earnings forecast by 16% from Rmb0.54to Rmb0.46 per share, and our 2018 by 22% from Rmb0.71 to Rmb0.55 per share.

Valuation and recommendation

The stock is trading at 24x 2017e & 20x 2018e P/E. Considering falling average valuations, we maintain our BUYrating, but lower our target price by 35.1% to Rmb13.50 （29x 2017e, 25x 2018e P/E）， implying 21.95%upside room from the current price.

Risks

Intensifying competition in dairy market; M&A targets’ earnings miss expectations; integration of M&A targets.