Variety: Record viewership in H1; look for international team to build leader

Our takeaways from Hualu Baina's teleconference on its interim results are as follows:Management is confident in the outlook of variety programs in the next 1-2 years. Thecompany's variety program segment covers a wide assortment of genres, includingmusic, reality, romance and fashion. King Cross and The Greatest Love, screened in H1,were original productions and enjoyed better-than-expected viewership. With aviewership rating of 1.9 for its finale, the next season of King Cross could achievestrong success next year. Also, since the Kim Young-hee (South Korean producer) teamis on the company's international staff and does not appear on the show as celebrities,it is not much affected by China's cutback on Korean shows. Already with 11 topKorean program directors, with another 3-4 set to join early next year, the team is thepreferred channel for top Korean directors to enter the Chinese market.

Film & TV: Likely to emerge from trough and enter uptrend

In H1, the film & TV segment delivered revenue of Rmb240m, mainly from first/secondreleases of TV dramas. This year's key projects, Wrestling City and Midnight Diners,which indicate the company shift in focus at film & TV production towards the youngergeneration and the online platform, are likely to contribute to profit in H2.Underpinned by key film & TV projects, the company is likely to bounce back from aprevious slump into an uptrend.

Outlook: We raise revenue/GM for Film & TV on faster-than-expected recovery

We trim our 2016-18E EPS 1-2% to Rmb0.59/0.77/0.93. Adjustments include: 1) Weestimate Midnight Diners' per-episode price/gross profit is above Rmb7m/4m, with animplied gross margin (GM) close to 60%, suggesting the transformation of the film &TV segment was faster than expected. Therefore, we raise our 2016-18E revenue 18%and GM 19/15/11ppts for this segment. 2) Despite King Cross's good ratings, in view ofthe large investments required for the first season, we estimate GM per program ismerely 5%, far below the variety program segment's overall GM of 25% in 2016E.Therefore, we lower our 2016-18E net profit for this segment 21-22%. 3) For thesports segment, we raise our 2016-18E revenue a hefty 167% but estimate GM at only12%.

Valuation: Trim PT to Rmb25.26; maintain Neutral rating

We trim our price target (DCF-based, 7.6% WACC) to Rmb25.26 to factor in theadjustments to our earnings estimates. We maintain our Neutral rating.