20210222-软库中华金融服务-恒腾网络_新_-00136.HK-Initiation__China_s_Netflix_backed_by_Evergrande_and_Tencent_21页_710kb

HengTen Networks (00136.HK) Summary

Core Content and Overview

HengTen Networks (00136.HK), initiated as a joint venture between HengDa (China Evergrande Group) and Tencent, is transforming into a leading online long-video platform with a business model similar to Netflix. The company has acquired 100% of Virtual Cinema Entertainment Limited (VCE), a move that strengthens its position in the market by leveraging the resources of both shareholders. The acquisition is valued at HK$7.2 billion, with HK$3.5 billion settled through a new share issuance.

Key Information and Main Points

Company Structure and Ownership

• Shareholding Structure:
  • China Evergrande Group holds 45.6% stake.
  • Tencent holds 16.9% stake.
  • Mr. KE Liming, owner of VCE, holds 12.5% stake and has the potential to increase it to 27% if warrant shares are exercised.
  • Public shareholders hold 25% stake, with a total of 9,235 million shares outstanding after the acquisition.
  • Fully diluted shares are expected to reach 11,069 million shares if profit guarantees are met.

Business Lines

• Shanghai Ruyi: Focuses on film and TV show production with a strong track record.
• Pumpkin Film: Operates as an online video platform with an ads-free subscription model, similar to Netflix.

Content Production

• Original Content: Shanghai Ruyi has produced high-quality original content, including the blockbuster film "Hi, Mom" (2021) which achieved RMB3.3 billion in box office revenue.
• Content Pipeline: Plans to produce approximately 4, 9, and 12 movies/TV shows in FY21, FY22, and FY23, respectively.
• TV Shows: Includes "All Quiet in Peking," "Doctor of Traditional Chinese Medicine," and "Frontier of Love."

Financial Highlights

• Current Price: HK$13.8
• Target Price (TP): HK$24.0, representing a 74% upside potential.
• PEG Ratio: 1.0x, compared to peers at 1.9x.
• Market Cap: HK$127.8 billion.
• Paying User Growth: From ~6 million in FY20E to 75 million in FY23E, a CAGR of 135%.
• User Growth: Expected to grow significantly due to the integration with Tencent's ecosystem and Evergrande's offline distribution channels.

Revenue and Profitability

• Paying User Ratio: Expected to rise from 22% to 32% by 2025E.
• ARPPU (Average Revenue Per Paying User): Expected to improve due to better content quality and user experience.
• Content Cost Control: Depreciation and amortization cost as a percentage of revenue is expected to decrease from 42% in FY19 to 22% in 2025E.

Market Position

• China Online Video Market: Expected to grow from RMB120 billion in 2020E to RMB254 billion in 2025E, with a CAGR of 16%.
• Long Video Users: Projected to grow from 681 million in 2020E to 860 million in 2025E, with a slower growth rate than short video platforms.
• Pumpkin Film's Strategy: Focus on high-quality, original content and a data-driven approach to improve ROI visibility and user engagement.

Differentiation and Competitive Advantage

• Content Differentiation: Focus on original content and genre-specific productions.
• User Experience: Ads-free subscription model, similar to Netflix, enhances user satisfaction and retention.
• Synergies with Shareholders:
  • Evergrande: Provides offline distribution channels, advertising, and marketing opportunities.
  • Tencent: Offers online traffic redirection and content/IP rights sharing, enhancing Pumpkin Film's visibility and reach.

Conclusion

HengTen Networks (00136.HK) is well-positioned to become a leading online long-video platform in China, thanks to its strategic acquisition of VCE and the backing of Evergrande and Tencent. The company is expected to grow its paying user base significantly, driven by its focus on high-quality original content, data analytics, and a strong monetization strategy. The combination of offline and online resources, along with a proven track record in content production, positions HT as a top contender in the long-video market with substantial upside potential.