What's new

On January 13, Leshi announced the introduction of strategicinvestor: 1） Tianjin Jiarui Huixin （Sunac China is the actualcontroller） that would spend Rmb1.05bn, Rmb6.041bn andRmb7.95bn in purchasing 15% stake in Le Vision Pictures, 8.61%stake in Leshi Internet Information and Technology and 33.50%stake in Leshi Zhixin Electronic Technology. 2） Leshi resumedtrading on January 16.

Comments

First introduction of strategic investor after IPO to easeshort-term funding pressure. Sunac China is major investor,and it will invest ——Rmb16.8bn in Leshi, Leshi Zhixin and Le VisionPictures. The investment should help cover the short-termfunding shortage for Leshi's ecosystem and medium-termbusiness development, facilitate growth in smart TV, filmproduction & release and online video, expand the user base andaccelerate monetization to cope with intensifying competition.

Adjustment in strategy and improved governance holdthe key to long-term turnaround. We expect 2017 to be keyfor Leshi's strategic adjustment. According to its plan, Leshi willgradually shift its strategic focus to shoring up its existingbusiness and improving operating cash flow, by: 1） improvingthe supply chain and promoting construction of O2O proprietarysales system; 2） cutting expenses and ensuring positive growthof operating cash flow; and 3） starting organizationalrestructuring to streamline corporate structure.

Valuation and recommendation

We forecast 2017/18e net profit at Rmb1.172bn/1.735bn, up47.2%/48.0% YoY. Leshi said it would promote the injection ofassets with potential synergies into the listco. Peers' average2017——18 P/E has fallen to 50x and 35x. We cut our TP by28.3% to Rmb43 to reflect a downward trend in marketvaluations and uncertainty over the long-term operation.

Risks

Sales of hardware and growth of user number miss expectation.