Leshi Internet (A-share):Way more than hardware

类型：公司研究机构：麦格理证券股份有限公司研究员：麦格理证券研究所日期：2017-02-10

We initiate coverage of Leshi Internet (乐视网) with an Outperform anda TP of Rmb50 with 37% upside. Competitively priced and well designed,we expect Leshi will grow the installed base from 10mn TVs and 20mnsmartphones in 2016 to 27mn and 61mn, respectively, by 2018, setting thefoundation for Leshi’s eco-system as well as monetization throughmembership subscriptions and advertising. We believe all these will drive a50% revenue CAGR and 48% earnings CAGR between 2015 and 2018.

    Cash flow overhang eased with Sunac investment. Since late 2016, cashflow issues surfaced at the parent level, particularly with the handset supplychain with Rmb10-15bn in overdue bills estimated by the industry and media.

    In Jan 2017, Sunac and others invested Rmb17bn into Leshi. Of which,Rmb7.1bn will support listco’s investments in video content and computinginfrastructure. Another Rmb4.1-6.7bn in cash along with better alignment ofhandset sales and the cash flow cycle will address the handset supply chainoverhang. At the listco level, we expect operating cash flow to improve fromRmb0.4bn in 2016 to Rmb3.8bn 2017.

    Ecosystem founded on vast hardware installed base. Competitively pricedand well designed with the latest features including 3D, UHD and curveddisplays, Leshi is on track to achieve the annual target of 8mn in 2017, orabout 10%+ market share in China’s TV market, from nowhere when its firstTV debuted in 2013. Relatively late as an entrant in China’s smartphonemarket, from its first Le 1 series in mid-2015 to now the 3rd generation Le Pro 3,Leshi is on track to sell 19mn in 2017, or <5% market share. We expect thehardware revenue to grow at a CAGR of 55% between 2015 and 2018.

    From hardware to membership and advertising. About 80-90% of Leshi’sTV buyers also subscribe to a Leshi Video membership and 20-30% to aLeshi smartphone. Original content, licensed content, films and dramas fromLe Vision Pictures, Flower Film & TV, and sports content from LeSportscomprise a rich content portfolio. As such, we expect Leshi’s membership andad revenue to grow at a 51% and 39% CAGR during 2015 to 2018.

    Strategically, hardware subsidies are to incentivise membership and driveadvertising. We project revenue from subscriptions and ads should help liftOPM from 0% in 2016 to 2.9/4.7% in 2017/18.

    More asset injections to come. Leshi has announced intentions to inject themovie production arm Le Vision Pictures (LeVP) into the listco in 2017. TheTV maker Leshi Zhi Xin is growing its shipments and lifting profitability with anaim to inject into the listco by 2020. LeSports, with 3rd biggest mobile monthlyactive users (MAU), is also in the pipeline but there is no timeline yet. The lastfinancing rounds value LeVP, Leshi Zhi Xin and LeSports at Rmb7bn,Rmb30bn+ and Rmb20bn+ relative to listco’s market cap of Rmb76bn.

    Valuation. We value Leshi at Rmb50 based on a SOTP with 80% of thevaluation from the video business including advertising and membershipsubscriptions. Our net income is 10% and 9% above Wind consensus in 2017and 2018 for better margin improvement in TVs. Downside risks. Hardwareexecution incl. cash flow management for the supply chain, a cash shortfall inthe auto business, development and licensing of quality content offerings, andrecruiting new membership subscriptions in the face of fierce competition.