Event:

On 13 Jan, Leshi announced the plan of introducing Jiarun Huixin, a subsidiary of SunacChina, as its strategic investor to resolve the capital problem and drive ahead with thestrategic upgrade of its business ecosystem. The Company also announced to resumestock trading on 16 Jan.

Comments:

The deal helps to ease the fund strains

During the deal, Sunac China will invest Rmb15,041mn in total, including Rmb6,041mn fora 8.61% stake in Leshi, Rmb7.95bn for a 33.5% stake in the subsidiary Leshi Zhixin andRmb1.05bn for a 15% stake in another subsidiary Le Vision Pictures. Prior to it, LeshiZhixin has raised Rmb1.43bn and Rmb400mn from Leran Investment and Huaxia Life,respectively.

Through this deal, Leshi will notably ease its funding pressure. We expect it to boost thefund utilization efficiency, speed up the construction of the business ecosystem andbroaden the profit-making channels to boost profit growth going ahead.

The deal helps to optimize Leshi's governance structure and boost businesscooperation

In our view, the deal is significant in three aspects:

First, the deal helps Leshi to resolve its fund problem and realize strategic upgrade.

During the deal, Leshi and its controlling subsidiaries will get capital injection of Rmb7.1bn.

This helps Leshi build up a full-fledged business ecosystem and achieve better synergiesbetween the business segments.

Second, the deal improves Leshi's governance structure. After the deal, Leshi is expectedto upgrade its corporate governance by allowing the strategic investor to nominatedirectors, setting up the investment decision-making committee and the managementcommittee under the Board of Directors, appointing the president etc. Additionally, thestrategic investor will also participate in the governance of Leshi Zhixin and Le VisionPictures through its delegates.

Third, the deals boost the business cooperation between Leshi and Sunac China. SunacChina is primarily engaged in the development of residential and commercial properties.

So far, it has developed over 230 high-end projects across more than 30 tier-1/2 cities inChina. We expect both parties to cooperate in the fields of smart hardware, “Internet +properties” etc., which helps their business development going ahead.The deal may give an impetus to the whole sectorIn 2016, the CITICS media index tumbled by 31.6%, ranking it the second worst performeramong all CITICS sectors. Entering 2017, the CITICS media sector index further lost2.14%, the 6th steepest among all CITICS sectors. At present, valuation of the mediasector has fallen to 47.4x TTM PE, which represents a medium to low level in history.

Leshi lost more than 30% in 2016. As a bellwether during the last bullish turn in the capitalmarket, the share price correction of Leshi took a big toll on the investor sentiment anddented performance of the broad growth stocks. The introduction of the strategic investorwill not only help Leshi get out of the business crisis, but also restore the marketconfidence in the growth names. This bodes well for recovery of the SME and ChiNextboards, including the media sector.

Risks:

Disappointing strategic cooperation with Sunac China; uncertainties tied to theestablishment of the business ecosystem; stiff competition in the OTT segment.

Investment advice:

We maintain estimates of Leshi's 2016-2018E EPS at Rmb0.49/0.87/1.43. Its last shareprice of Rmb35.80 translates to 73x/41x/25x 2016-18E PE. We reiterate the BUY rating asintroduction of the strategic investors is tipped to ease the Company's funding pressure,upgrade its corporate governance and fuel its strategic cooperation with Sunac China.

In the sector universe, considering that the valuation multiples of media companies havefallen to the historical median level and that the leading companies boast stronger-thanaverageprofit growth momentum, we recommend investors to build exposure to thestocks with attractive valuation and rosy growth prospects. Taking into account thevaluation and the expected high box office during the looming Chinese New Year holiday,investors are advised to watch out for Beijing Enlight Media （300251）， Zhejiang HuaceFilm & Tv （300133）， ChineseAll Digital Publishing Group （300364）， Wanda Cinema Line（002739）， China Film （600977） etc.