HIM International Music (8446 TT)
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Company Report May 09 2017 HIM International Music (8446 TT) BUY Close (NTD) 121.50 3M target price (NTD) 144.00 Significant increases in quarterly earnings from 2Q17 onwards; 12M target price (NTD) 144.00 initiate coverage with BUY Last report date, rating, previous close Key takeaways: (1) Recommendation : We initiate coverage with BUY and TP of NTD144 due to the following: a) the company’s valuation appears low as the current stock price Company information already reflected operating declines during the low season in 1Q17; b) the Paid-in capital (NTD mn) 428 company is expected to organize nearly 20 concerts in Taiwan and abroad in 2Q17, significantly catalyzing its revenue and quarterly earnings; c) the Market cap (NTD bn) 5 company may organize significantly more concerts in FY17 than it did in FY16 BVPS (NTD) 26.09 and post steady income from other sources; FY17 EPS is forecasted to approach FINI holding (%) 13.98 NTD7.19; d) the market’s demand for live performances has risen persistently, Local fund holding (%) 1.51 suggesting solid earnings in the long run. Major shareholders (%) 35.19 (2) 2Q17 consolidated revenue is estimated at NTD522mn (+104.71% QoQ) Margin buying (‘000 shrs) 1,584 with net profit of NTD67mn (+121.05% QoQ) or EPS of NTD1.57 : In 2Q17, Cash Div. Payout Ratio (F) (%) 76.11 HIM International Music (HIM) is estimated to organize 16 overseas concerts, 3 concerts in Taiwan and six stage plays. The details are as follows: a) ~10 Product mix concerts featuring Taiwanese artists Hebe and Power Station; b) Yoga Lin already kicked off two concerts (2017 The Great Yoga) in APR17; he is expected to perform at another four overseas concerts; c) Shin’s 2017 Gentle Monster concert is scheduled to commence later in MAY17; d) Hebe’s JUN17 Serenade stage play is scheduled to be held in Taichung and Kaohsiung in JUN17. 2Q17 consolidated revenue is forecasted at NTD522mn (+104.71% QoQ) with operating profit of NTD77mn (+58.12% QoQ). Net profit is estimated at NTD67mn (+121.05% QoQ) or EPS of NTD1.57, showing significant increases in quarterly earnings. Share performance relative to TAIEX (3) FY17 consolidated revenue is forecasted at NTD2.050bn (+25.49% YoY) with net profit of NTD308mn (+9.57% YoY) or EPS of NTD7.19 : The income derived from entertainment agency may remain as the company’s major revenue growth driver in FY17. HIM is forecasted to organize more concerts in FY17 than it did in FY16 (the number of overseas ones is estimated at 46), catalyzing FY17 revenue. 2H17 revenue may rise further HoH due to the following: a) more concerts in 2H17 than in 1H17; b) more opportunities for commercial performances and product endorsements at the end of the year; c) Ella, who is a famous artist, may resume work after childbirth in 2H17. Additionally, HIM may continue recognizing shared profits derived from music licensing to Alibaba, KKBOX and Apple Music; its graphics artists may also continue to cooperate with other industries; licensing income is forecasted to rise steadily. FY17 physical product revenue is forecasted to edge down YoY due to a lack of albums released by popular artists like Hebe and Yoga Lin (both released albums in FY16); only artists like Janice Yan and Calvin Chen release albums or EP singles in FY17. FY17 consolidated revenue is estimated at NTD2.050bn (+25.49% YoY) with operating profit of NTD372mn (+15.84% YoY). FY17 net profit is forecasted at NTD308mn (+9.57% YoY) or EPS of NTD7.19. Capital Investment Management 1 Company Report (Unit: NTD mn) 2015 2016 2017F 1Q16 2Q16 3Q16 4Q16 1Q17F 2Q17F 3Q17F 4Q17F 1Q18F Sales 1,052 1,634 2,050 248 337 449 600 255 522 655 617 301 Gross profit 503 708 833 128 156 189 235 134 205 250 243 176 Operating profit 247 322 372 54 65 87 116 49 77 118 130 82 Net profit 225 281 308 49 68 64 100 30 67 100 111 74 EPS (NTD) 5.27 6.57 7.19 1.15 1.59 1.49 2.33 0.71 1.57 2.33 2.59 1.72 Gross margin (%) 47.85% 43.37% 40.64% 51.58% 46.48% 42.00% 39.25% 52.66% 39.27% 38.22% 39.41% 58.50% Operating margin (%) 23.45% 19.68% 18.17% 21.75% 19.30% 19.32% 19.31% 19.01% 14.68% 17.94% 21.02% 27.19% Net margin (%) 21.43% 17.20% 15.02% 19.90% 20.18% 14.25% 16.62% 11.89% 12.84% 15.20% 17.97% 24.43% Sales YoY/QoQ (%) 9.53% 55.31% 25.49% -20.42% 35.56% 33.33% 33.62% -57.46% 104.71% 25.43% -5.76% -51.19% Net profit YoY/QoQ (%) 17.25% 24.67% 9.57% -38.03% 37.46% -5.84% 55.87% -69.57% 121.05% 48.47% 11.43% -33.63% Note: Net profit means the net income attributable to the parent company; EPS estimate is based on paid-in capital of NTD0.428bn HIM is engaged in pop music production and entertainment agency: (1) Established in 1999, HIM is engaged in pop music recording/publishing, copyright licensing, entertainer agency, etc. The company’s revenue is categorized as follows: a) the income derived from physical products (mainly sales of audio/video albums, peripheral products and artists’ photo albums); b) licensing income mainly derived from new digital media like Apple Music, KKBOX and Alibaba, as well as music licensing to KTV parlors; c) entertainment agency income derived from artists’ concerts, commercial performances (such as Banana Festival, Spring Wave Music and Art Festival, Strawberry Music Festival in China, year-end banquets, weddings, etc.), dramas and product endorsements. In particular, large-scale concert tours account for the greatest share of the company’s total revenue. (2) FY16 revenue breakdown was as follows: physical products 3%; licensing 26%; and entertainment agency 71%. As the number of HIM’s concerts may surge in FY17, FY17 revenue breakdown is estimated as follows: physical products 2%; licensing 22%; and entertainment agency 76%. Exhibit 1: HIM’s revenue breakdown Source: HIM; Capital Securities Capital Investment Management 2 Company Report Income related to licensing and entertainment agency are major sources of growth momentum: (1) HIM’s entertainment artists include S.H.E, Yoga Lin, Power Station, Shin, Olivia, Popu Lady and Lin Mei-hsiu; its graphics artists include SECOND, Cherng, ByeByeChuChu and Wan Wan. Since the music industry is undergoing a paradigm shift, HIM, which generated revenue mainly from the sale of physical records in the past, already transformed to mainly derive its income from digital licensing and entertainment agency of live performances. (2) Digital licensing income is determined by HIM’s bargaining power during each contract signing, which is also determined by popularity of each song in the past. Currently, HIM’s licensing income is mainly derived from three contracts: A contract signed with Alibaba in 1Q15: Chinese listeners can access of HIM’s music on Alibaba’s xiami.com and TTPOD. This contract ensures a minimum payment amount and shared profits if clicks exceed a certain level. This contract is scheduled to expire in MAR18. The upcoming contract renewal may generate a new round of revenue growth. A contract signed with KKBOX in 3Q15. A contract signed with Apple Music in 2Q16. The contract with Alibaba contributes the most to HIM’s licensing revenue. HIM’s licensing revenue also includes shared profits from the advertisement income derived from YouTube clicks, shared profits derived from the number of HIM’s songs requested at KTV parlors, etc. Thanks to strong overseas demand for live performances, artists’ performances and prices have increased: (1) HIM’s live performance income depends on an artist’s market price, availability and show contents. Generally speaking, as an artist grows in seniority and popularity, his/her market price may rise accordingly. Furthermore, in recent years, since economic conditions of overseas markets (Southeast Asia and China in particular) have matured, these markets start to pursue music and art for pleasure. Their demand for live performances has soared and boosted artists’ prices substantially. (2) Currently, HIM’s artists spend most of their time conducting overseas concert tours. Maintaining relationships with overseas fans is a key focus of artist management. Thanks to development of social media like weibo and Facebook, HIM has achieved a certain level of success in managing overseas fans and artists’ public images. However, a concert cannot attract audience without concrete contents like new songs, new stage effects and new styles/looks of artists. Generally speaking, after a concert tour, an artist waits for 1~3 years to conduct another one as he/she needs time to recharge and produce/record new songs. Therefore, cultivating many famous artists is critical to HIM’s steady Capital Investment Management 3 Company Report revenue growth. HIM scouts new talents persistently for long-term deployment: HIM has set up HIM Music Institute and organized events like online contests of song/lyric composition to cultivate onstage performers and offstage talents. HIM also invested in Ni Guang Movie (a 40% stake) and B2 Studio (a 40% stake) in FY15 and the movie “The Tag-Along” (a 10% stake) in FY16 to establish a diversified entertainment business for more opportunities available to its music/artists. We expect this strategy to help HIM spot talents and make new stars at lower costs, which may catalyze long-term earnings persistently. Profile of the music industry: (1) The music industry includes different segments like production, licensing and live performance.