Event:

Leshi announced yesterday that it received approval from the SARFT to migrate all of itsexisting internet TV customers to the integrated platform of CIBN (CIBN internet TV). Thismove officially marks the beginning of the long-term partnership between Leshi and CIBN.

Leshi’s existing internet TV customers will still be able to legitimately access contentsoffered by CIBN internet TV.

Comments:

Policy risk removed as Leshi gears up for its foray into the large-screen TVecosystem

According to its announcement, Leshi will migrate all of its existing internet TV customersonto CIBN’s internet TV platform whilst shutting down its existing platforms including itsOTT and integrated TV systems. All migrated customers will be managed and serviced byCIBN in the future, in accordance with relevant laws and regulations.

The SARFT has unveiled a directive in 2011, which prohibits internet TVs to access anycontents that are not legally provided by online TV content services providers approved bythe Administration. Currently, only seven of such services providers (including CIBN) havereceived approval from SARFT to operate relevant businesses.

In order to resolve the licensing issue, Leshi has already undertaken collaboration withChina Radio International, in jointly devising a plan to offer internet TV services. As such,the approval from SARFT for the new partnership with CIBN marks the removal of anypotential policy risks to Leshi’s engagement in the internet TV business. This puts theCompany in a favorable position for the race of development in the smart TV industry, byensuring sustainable growth from a regulatory perspective.

Rising sales of smart TVs as Leshi ramps on its presence at the terminal endBy cutting into the terminal end via its smart TVs, Leshi is delving deep into productinnovation and striving to turn large-screen TVs into the household entertainment “hub” forits users. The product lineup for Leshi’s “Super TVs” is becoming increasingcomprehensive, with coverage over the mainstream, high-end and ultra-high-end markets.

In addition, the Company struck up a strategic partnership with TCL to engage inextensive collaboration across supply chains, distribution channels and after-sales service,with the aim to establish the next generation smart TV brand.

Sales volume of Leshi’s “Super TVs” has risen consistently since the launch in 2015. As ofJun 2016, Leshi has sold a total number of 700mn TVs. Thanks to the rapid increase insales of terminal products, the Company raked in revenue of Rmb5,132mn from thisbusiness segment in 1H16, up 171.13% YoY. Given the buoyant demand for its smartdevices, “Super TVs” have become the key channel for Leshi to attract customer traffic forLeshi Internet Information & Technology Corp. Beijing (300104)Please read the disclaimer at the end of the report 2its online video business.

The long-term partnership with CIBN will enable Leshi to: (i) significantly increase thesales volume of its large-screen internet TV terminals; (ii) accelerate expansion of itsuser base (in size); (iii) further lift its market share; (iv) consolidate its strength in smartTV terminals; and (v) make further inroads into its foray of the large-screen TVecosystem.

Leshi’s ecosystem of “platform+contents+devices+apps” has already takenshape

Ever since its IPO, Leshi has consistently adhered to its strategy of developing a“platform+contents+devices+apps”-based ecosystem. On the platform end, it offerspremium content services via TV, PC and cell phone to users with the support of a fullrange of copy rights on movies/TV dramas as well as top-notch movie/TV dramaproduction studios. On the terminal end, it offers high quality internet TVs and smartphones. On the application end, it offers ever diversifying applications based on variousterminals via its open ecosystem.

We believe the latest approval for collaboration with CIBN strengthens Leshi’spresence in the large-screen TV ecosystem. The approval from SARFT will givemore assurance to Leshi’s diversified operations within the large-screen TVecosystem, as well as lift its user experience. As a result, Leshi has built up fullcoverage of the entire value chain, thanks to the efforts in its“platform+contents+devices+apps”-based ecosystem strategy.

Risks:

(i) Disappointing sales of terminals; (ii) earnings of Le Vision Pictures fails to meet thoseset out in the valuation adjustment mechanism; (iii) exacerbating competition for thevideo and smart TV industries.

Investment advice:

Taking into account: (i) the boost to its 2H16 earnings from the consolidation of Le VisionPictures; (ii) increased revenue contribution from product sales, advisement and usersfees as a result of accelerating growth in sales of TVs and cell phones, we maintain itspro forma 2016-18EEPS forecasts of Rmb0.49/0.87/1.43. The stock is currently tradingat Rmb45.79, implying 2016-18E P/E of 97/54/33x. Given the continued inroads madeon its goal of building up a closed-loop ecosystem of “platform+contents+devices+apps”,as well as its robust balance sheet which will give further impetus in this direction, wereiterate the BUY rating.