Results largely in line with expectations

Leshi Internet Information & Technology announced its 1H16 results: operating revenue +125.6% YoY toRmb10.06bn; net profit attributable to shareholders grew 11.6% YoY to Rmb280mn, implying EPS of Rmb0.14.

Trends to watch

Strong operating revenue growth; revenue from paid services recorded >100% growth; resultslargely in line with expectations. Revenue growth was mainly driven by excellent sales of its “Super TV” andrapid growth in paid services for members and its advertising business. While net profit growth slowed YoY due tofalling non-recurring losses & gains. Operating revenue from terminals reached Rmb5.13bn, accounting for 51.0%(+8.6ppt YoY) of its total revenue. R&D costs surged 70.9% YoY; and, financial expenses surged 246.8% YoYmainly due to rising interests of bonds and shareholder borrowings.

Advantages of traffic and user base became more visible. The daily UV of the company’s websitesreached >80mn and peaked at ~230mn; daily VV reached 390mn and peaked at 610mn. Its cloud-based videoplatform now offers services to >100,000 corporate clients across the world, covering billions of users. Thanks toits increasingly larger end user base driven by excellent sales of smart terminals and the popularity of quality videoproducts, the user loyalty of Leshi’s video segment improved further.

Excellent sales for smart terminals; TV shopping to facilitate traffic monetization. As of end-1H16,Leshi’s “Super TV” sales totaled ~7mn sets (three years after launch); in 1H16, sales reached ~3mn sets and thecompany will likely deliver >100% growth in “Super TV” sales volume for three consecutive years. Leshi officiallylaunched its TV shopping business in May in a bid to build a home-based shopping platform. Its “platform +content + terminal + applications” ecosystem will bring synergies into full play and further facilitate trafficmonetization over the long term.

Valuation and recommendation

Given the high initial costs of its TV shopping business, we trim 2016/17e EPS by 11.11%/14.49% fromRmb0.45/0.69 to Rmb0.40/0.59. The stock is trading at 117x 2016e P/E. Maintain BUY; as the sector’s averagevaluation has moved downwards and earnings forecasts have been lowered, cut TP by 14.29% to Rmb60, implying27.04% upside potential.

Risks

Hardware sales disappoint; fundraising misses expectations.