22-Feb-2021 ︱Research Department

HengTen Networks (00136.HK) SBI China Capital Research Department T: +852 2533 3700 Initiation: China’s Netflix backed by Evergrande and Tencent E: [email protected] ◼ Transforming into a leading online long-video platform with similar Address: 4/F, Henley Building, No.5 Queen's DNA to Netflix. Road Central, Hong Kong ◼ As indicated by name, HengTen (HengDa and Tencent) (136.HK) will leverage the resources of its two significant shareholders in making Ticker (00136.HK) Pumpkin Film the most profitable market leader Recommendation BUY ◼ New team has proven track record in original content production Target price (HKD) 24.0 with an extensive pipeline. Current price (HKD) 13.8 ◼ Initiate BUY with TP HK$24.0 based on 1.0x PEG, representing 74% Last 12 mth price range 0.62 – 17.80 upside potential. Market cap. (HKD, bn) 127.8 Source: Bloomberg, SBI CHINA CAPITAL Transforming into a leading online long-video platform with similar DNA to Netflix. HengTen Networks (“HT”) (136.HK) announced to acquire an 100% stake in Virtual Cinema Entertainment Limited. The company has two main business lines: “Shanghai Ruyi” engages in film and TV show production while “Pumpkin Film”operates an online video platform. Currently one of the only two profitable online video platforms, we expect the company to enjoy similar success as Netflix given their common genes such as: a) a highly successful and proven content development team b) focus on big data analytics which improves ROI visibility and c) enjoyable user experience with an ads-free subscription model

As indicated by name, HengTen (HengDa and Tencent) (136.HK) will leverage the resources of its two significant shareholders in making Pumpkin Film the most profitable market leader. Robust monetization strategy by leveraging China Evergrande Group’s (known as HengDa in Chinese) resources in tourism, residential property management, and Chinese super league football club. Moreover, we expect Tencent to play a more active role going forward. Thus, user growth should see substantial growth as Pumpkin Film eventually is embedded within Tencent’s ecosystem, allowing for online video content rights sharing with Tencent Video as well as exposure to robust traffic from a possible integration with WeChat. Finally, we believe that Pumpkin Film should be more profitable in the long run given lower user acquisition costs and resources provided by its two influential shareholders. We estimate Pumpkin Film’s accumulated paying users to grow from c.6mn in FY20E to 75mn in FY23E, a CAGR of 135% over the period.

Performance (00136.HK) New team has proven track record in original content production with an 18 extensive pipeline. Shanghai Ruyi invested movie, “Hi, Mom”, recorded 16 th 14 RMB3.3bn box office in 8 days during 2021 Chinese New Year, the 12 movie 12 10 title with over RMB3.0bn box office in China’s box office history. Shanghai 8 6 Ruyi targets to produce c.4/9/12 movie and/or TV shows in FY21/22/23E 4 2 while Pumpkin Film target to produce 100/200/280 episodes’ original TV 0 shows exclusive for its online video platform in FY21/22/23E.

Initiate with BUY rating and a target price of HK$24.0 based on 1.0x PEG, representing 74% upside potential. We initiate our BUY rating on HengTen

1 mth 3 mth 12 mth Networks Group (136.HK) with TP HK$24.0 based on 1.0x PEG versus its online video platform peers’ 1.9x PEG, given (1) it is one of the two Change 319% 361% 443%- profitable online video platform in China, (2) interest alignment and Relative change 314% 343% 417%- synergies with China Evergrande Group and Tencent , (3) explosive earnings

Source: Bloomberg, SBI CHINA CAPITAL growth of 339% (CAGR) from FY20E to FY23E. HT currently trade at 14x FY23E

P/S and 111x FY23E P/E

Please refer to important disclosures at the end of this report 1 22-Feb-2021 ︱Research Department

Future online long-video platform leader focusing on film and original content TV shows HengTen Networks (136.HK) has transformed into an online long-video platform and film and TV shows production company after its recent acquisition of Virtual Cinema Entertainment Limited HengTen Networks (“HT”) (136.HK) announced on 26th Oct 2020 that the company will acquire 100% stake in Virtual Cinema Entertainment Limited (VCE) from Mr. KE Liming at a valuation of HK$7.2bn, of which HK$3.5bn consideration will be settled by 1.15bn new shares issuance at HK$3.0 per share, representing 12.5% enlarged outstanding shares of HT (136.HK). The remaining HK$3.7bn consideration will be settled in the coming 3 years in 3 tranches of 611mn warrant shares each with HK$0.96 exercise price which is exercisable if VCE audited net profit is more than RMB400mn/ RMB500mn/ RMB600mn in FY21/22/23E, respectively, or if the cumulative audited net profit exceeds RMB1.5bn before FY23E. We see the acquisition valuation is attractive at a 15.6x/12.5x/10.4x FY21/22/23E PE versus its online video streaming platform peers’ 65x/42x/35x FY21/22/23E PE.

Post HT’s (136.HK) acquisition of Pumpkin Film, which was completed on 20th Jan 2021, Mr KE Liming became the listed company’s third largest shareholder with a 12.5% stake, behind China Evergrande Group’s (3333.HK) 45.6% and Tencent’s (700.HK) 16.9%. Should the 1.8bn consideration warrant shares at HK$0.96 be exercised, Mr KE Liming’s stake in the listed company will increased from 12.5% to 27%, making him the second largest shareholder after China Evergrande Group.

Exhibit 1: Shareholding Structure

Before acquisition Latest Fully diluted upon profit guarantee achieved No. of shs Stake No. of shs Stake No. of shs Stake Evergrande (3333.HK) 4,207 52% 4,207 45.6% 4,207 38% Tencent (700.HK) 1,561 19% 1,561 16.9% 1,561 14% Director 4 0% 4 0.0% 4 0% Mr. KE Liming 0% 1,154 12.5% 2,989 27% Public 2,309 29% 2,309 25.0% 2,309 21% Total 8,080 100% 9,235 100.0% 11,069 100% Source: Company data, SBI CHINA CAPITAL

VCE is a BVI company wholly owned by Mr KE Liming and is entitled to 100% of the economic benefits of the following three companies via contractual agreements - Shanghai Ruyi, Jingxiu and Beijing Xiaoming.

Online video platform business – “Pumpkin Film” Jingxiu is the licensed company and Beijing Xiaoming is the operating company for Pumpkin Film’s online video platform business.

Film and TV shows content production and investment business – “Shanghai Ruyi” Shanghai Ruyi is an independent Movie and TV Shows production, development and investment company that has its own IP and in-house content screening, development

Please refer to important disclosures at the end of this report 2 22-Feb-2021 ︱Research Department

and production systems which leverages big data analysis to customize content for target audiences. Major Movie productions included but not limited to Hi, Mom (2021), A Little Red Flower (2021) So Young, Old Boys: The Way of the Dragon, Animal World and City of Rock. Major TV Shows production included All Quite in Peking, Doctor of Traditional Chinese Medicine, Frontier of Love and The Legendary Tavern.

Exhibit 2: Major production of Shanghai Ruyi

Source: Company data, SBI CHINA CAPITAL

Please refer to important disclosures at the end of this report 3 22-Feb-2021 ︱Research Department

MARKET SUMMARY: REAP WHAT YOU SOW

- While the long video market overall user growth is less attractive than that of the short video market, we expect a substantial growth in paying users driven by customized, high quality original content

- We expect Pumpkin Film to dominate the long video online market in the long run, with a similar approach as Netflix focusing on targeted content based on data analytics, resulting in higher ROI visibility.

- Exposure to a massive network of potential customers across aligned shareholders Evergrande and Tencent should allow for Pumpkin Film to rapidly gain market share while decreasing customer acquisition costs.

China online video market is expected to grow 17% yoy to RMB120bn in 2020E and more than double to RMB254bn by 2025E, representing a 16% CAGR over the time period. Long video platform users, however, is expected to grow 5% yoy to 681mn users in 2020E, and 860mn users by 2025E. Despite the total users growing at a slower rate, we estimate a 26% growth in paying users from 2020E to 2025E, which means an improvement of the paying user ratio from 22% to 32% over the same time period. This result is largely due to increasing user recognition of high quality original content. We estimate China online video platform paying user increase from 150mn in 2020E to 276mn in 2025E, representing a paying users CAGR of 13% from 2020E to 2025E, the core driver of profitability for China’s online video market.

Exhibit 3: China online video market revenue estimates

Source: Satista, SBI CHINA CAPITAL

Please refer to important disclosures at the end of this report 4 22-Feb-2021 ︱Research Department

Exhibit 4: China long video platform user estimates and paying ratio

Source: CNNIC, iResearch,, SBI CHINA CAPITAL

High quality exclusive/original content is not only able to improve paying user ratio but also improve ARPPU. Quality content is the core value proposition for subscribers of online video platform, and the fee based subscription model of popular content is gradually gaining user adoption. Since 2019, the top 3 online video platforms experienced a slowdown of total users growth except MangoTV with an overall strategic shift in focus to (i) improving user paying ratio and (ii) enhancing subscriber’s ARPPU (Average revenue per paying user) aiming to improve platform profitability. For example, Tencent Video launched its premium video on demand (PVOD) model which allow subscriber to unlock unreleased episode in advance by top-up purchase per episode in August 2019, which was followed by other online video platforms. In terms of subscription fees, Tencent charges RMB12 per episode for members and RMB6 per episode for non-members.

Please refer to important disclosures at the end of this report 5 22-Feb-2021 ︱Research Department

Top 3 platforms currently dominated China online video market China’s online video industry is a highly concentrated market with the top 4 players accounting for roughly 75% of revenue market share. iQiyi, Tencent Video and Youku dominated the market with 2019 revenue market shares of 28%/26%/13%, respectively, while MangoTV has grown considerably to share 7% of the market through differentiation as a top variety show online video platform.

Pumpkin Film is an online video platform with IPs and contention production focusing on best user experience and content investment return Pumpkin Film is a vertical online video platform with IPs, content production, marketing and distribution. The pain point of current China online video market is the substantial investment in content per year. In efforts to mitigate rising content costs, major platforms have tried to introduce ads and POVD as means to create additional revenue streams. This strategy, however, may inhibit the user experience due to longer waiting times stemming from advertisement and may also erode customer loyalty in making users top up for premium content.

Taking Netflix as an example, the company is able to maintain over 100% return on its content investment since 2013 when it debuted the first original title, “House of Cards,” which was a huge success. Netflix has improved its operating leverage, returns on content investment, and rapidly grown its brand equity over the last few years.

Among the major online video platform players in China, only Pumpkin Film is able to achieve an over 100% return on content investment from subscription revenue, MangoTV was able to achieve close to 100% content investment return after taking into account of the advertising income source while other major platforms were loss making on a subscription only base.

Please refer to important disclosures at the end of this report 6 22-Feb-2021 ︱Research Department

Exhibit 5: China online video platform landscape

Source: Company data, Enlightent, Statista, CNNIC, SBI CHINA CAPITAL *** Accumulated paying user for Pumpkin **Accumulated registered user for Pumpkin * SBI China Capital estimates

Positioning, brand and content differentiation is key to securing and/or maintaining market share Content positioning, particular in regards to time duration of the video has been the ongoing focus for top players, with the rapid ramp up of short-video content platforms like TikTok and Kuaishou experiencing significant growth given the overlap of users on instant messaging and/or music steaming platforms. According to QuestMobile, daily time spending by person on short-video reached 110mins in Jun 2020, exceed 96mins of integrated video and 57mins of online live streaming platform.

Content differentiation by genre, especially for original content is also critical given: (i) relatively low content investment cost as compared to external content procurement and (ii) increasing brand recognition opportunities for smaller platforms and market share longevity for larger players (iii) profitability improves given better paying user ratios and ARPPU. Most major platforms have increased their investment in content production: - iQiyi to invest in shorter, better and cheaper TV shows to improve user acquisition and profitability after the major success of“The Bad Kids”, a short 12 episodes TV shows in the suspense genre.

Please refer to important disclosures at the end of this report 7 22-Feb-2021 ︱Research Department

- Tencent Video announced a RMB100bn investment in content over the next 3 years. - MangoTV targets to ramp up its original and short TV shows content production by riding the success of its original variety shows in an attempt to gain market share beyond the variety show genre.

We believe it is difficult for integrated online video platforms to challenge and gain substantial market share in the short video segment. Hence we believe that integrated online video platforms will shift focus to produce high quality long-video content and try to improve the 96 minutes daily user time spent on integrated videos. Given Tencent’s exposure to the short video segment via its 17.7% stake in market leader Kuaishou, we believe there’s a high chance for Tencent to support Pumpkin Films as its long video champion.

Pumpkin Film shares the same DNA as Netflix We believe optimizing the success rate of original content is the driving factor behind Netflix’s success as the leading global online video platform. We attribute Netflix’s success in user adoption of content to the following: (a) a talented content production team, (b) big data analytics, (c) better user experience on an Ads-free subscription platform. We expect Shanghai Ruyi and Pumpkin Film to share similar success as Netflix their given common genes.

(1) Talented content production team: A talented production team is the linchpin for the ongoing production of highly rated original content. MangoTV in China, for example, has shared similar success to Netflix and rapidly grown its market share given its experienced content production team with a proven track records. Mango TV produced 6 of 10 the most viewed 2020 variety shows in China such as “Sister Who Makes Waves.” Mango TV’s variety show production capabilities are inherited from its parent Hunan Satellite TV, the largest provincial TV station in China with long standing history of high quality variety shows series such as “Where Are We Going, Dad?

Content creation and content production personnel accounts for 20% and 50% of total staffs in Shanghai Ruyi with the rest from marketing and administrative.. Among the top 4 online video platforms, Pumpkin Film’s market positioning in online video platform is similar to MangoTV as both companies have a talented original content production and management team. We believe Pumpkin Film can quickly replicate the market share catch up strategy of MangoTV in China’s online video market given Shanghai Ruyi’s time-tested capability of original content production in films and TV shows. We believe Pumpkin Film is well positioned to be a top 5 online video platforms in terms of profitability in coming 3 years, thanks to the support by (i) China Evergrande offline resource in distribution (6mn residential households managed by its prop mgmt. company, Cinema chain), advertising and marketing (Football Club, NEV, Tourism and Theme Park) and capital support for original content production and (ii) Tencent online resource in user traffic re- direction (Pumpkin Film app icon shortcut on WeChat pay interface) and online video content/IP rights sharing.

Please refer to important disclosures at the end of this report 8 22-Feb-2021 ︱Research Department

(2) Big data analytics: Upon Netflix’s major success of its first original title “House of Cards,” the company’s in-house analytics showed that the British version of the series had also been popular. Currently, online video platforms such as Netflix is able to track a user’s activity when viewing any given video as well as identify genre and content preferences for any particular customer. Through big data analytics, online video platforms are able to decrease content investment risk and improve ROI visibility. The effectiveness of the in-house analytics engine coupled with an experienced content production team largely determine the market dominance of the platform.

(3) Better user experience on an ads-free subscription platform: Pumpkin Film adopts an ads-free subscription model similar to Netflix. The disadvantages of the model are shadowed by its proven advantages with the right ingredients. Potential disadvantages include (i) higher customer acquisition cost (ii) possible slower user growth rate on the platform and (iii) lower user retention rate if the video content is poorly received. The advantages, however, are an overall hassle free experience and quicker delivery of content for the user. The latter, coupled with high quality original content and precise push recommendation on titles to paying users clearly mitigates the disadvantages of the model and are instrumental to Netflix’s success using such a model.

Pumpkin Film content library cover most original video content on Netflix. The content acquisition team accounts for 15% of total Pumpkin Film staffs with remaining 40% /25%/15%/5% from video content editing/IT/Admin and marketing The content acquisition team will only consider high IMDb and/or Douban rated movie and TV shows titles. For unreleased content, the content production team will review and screening out high quality contents for internal discussion, and only contents approved by senior management will be procured.

Pumpkin Film have not adopted the top-up purchase PVOD model like other major platforms. Pumpkin Film’s PVOD model is based on earning and accumulating the in-platform currency called “Pumpkin Seeds”. Paying user receives 1 unit of Pumpkin Seed for every 60mins of movie/TV shows watched. Pumpkin Seed can then be used to unlock premium on demand movie titles (i.e. 6 pumpkin seeds unlock one premium title). Pumpkin Film uses this in-platform virtual currency to increase paying user time spent on the platform and improve user experience without additional costs to the user for accessing premium content.

Pumpkin Film maintains stringent content cost control measures as depreciation and amortization cost was RMB31mn in FY19 or 42% as revenue, 35ppt lower than iQiyi’s 82%. We estimate the content depreciation and amortization cost as % of revenue will further improve to 22% in 2025E, thanks to (1) promising original content production, (2) lower content procurement costs and (3) enriching content library by sharing Tencent Video’s online video content IPs.

Please refer to important disclosures at the end of this report 9 22-Feb-2021 ︱Research Department

Exhibit 6: Content cost and content investment return comparison

Source: Company data, Enlightent, Statista, CNNIC, SBI CHINA CAPITAL

Please refer to important disclosures at the end of this report 10 22-Feb-2021 ︱Research Department

Leveraging Evergrande and Tencent’s resources to become the most profitable market leader Robust monetization strategy by leveraging China Evergrande Group resource HT (136.HK) announced on 18th Feb 2021 the company’s Ruiyi Films has entered into a strategic cooperation agreement with Evergrande Tourism Group which intends to use Ruiyi IPs in 14 children’s world theme parks (“Evergrande Fairyland”) across the country with estimated 15mn to 20mn annual visits. HT (136.HK) is able to monetize its IPs under a fees-sharing model under the cooperation, a new income stream for the company.

Evergrande Property Services Group (6666.HK) HT (136.HK) started to cooperate with Evergrande Property Service Group (EPSG), property management arm of Evergrande Group, to boost up Pumpkin Film paying user growth by penetrating into over 1,400 property projects managed by Evergrande Property Service Group which covering 6mn residential household across the country. EPSG target to increase its 6mn residential household to 10mn by 2025E. HT (136.HK) disclosed Pumpkin Film operation data with 0.86mn newly registered members add and 0.92mn paying users add in Jan 2021 with total 36mn users and 5.9mn paying user on Pumpkin Films APP. EPSG will promote Pumpkin Film to the property owners and the Pumpkin Film subscription fee paid by property owners may able to claim payment reduction in other value-added service offered by EPSG. We estimate Pumpkin Film accumulated fee paying user base to grow from 5.8mn in FY20E to 75mn in FY23E, representing a 135% CAGR during the same period.

Guangzhou Football Club (GZFC), formerly known as Guangzhou Evergrande, is a professional Chinese football club that participates in the Chinese Super League. Its home stadium, Tianhe Stadium, has a seating capacity of 54,856. Guangzhou Football Club provide an efficient marketing channel for Pumpkin Film. GZFC has placed advertising banner for Pumpkin Film during match to marketing Pumpkin Film brand. There are also potential room for Pumpkin Film to produce original TC shows content with Football topic to monetize its IPs with GZFC.

We believe more Evergrande resources are coming for Pumpkin Film to monetize its IPs, creating new income sources from derivate products. Potential and foreseeable resources including but not limited to: - China Evergrande New Energy Vehicle Group (708.HK) - Evergrande Water World, a popular water entertainment park, total 8 parks have been built and expect to increase to 20-30 in coming 2-3 years - Evergrande Life Insurance, top 12 life insurance companies in China - China Calxon Group (000918 CH), cinema operator in China with 144 movie theaters with 839 screens, covering 115 cities

We expect Tencent to play a more active role going forward and by enriching Pumpkin Film’s content library and driving traffic acquisition via integration with Tencent’s ecosystem

Please refer to important disclosures at the end of this report 11 22-Feb-2021 ︱Research Department

Online video content rights. Tencent Video is likely to cooperate with Pumpkin Film by sharing the online video content rights to Pumpkin Film without incur content investment cost, we see this is able to enrich Pumpkin Film movie and TV shows content and reduce Pumpkin Film content investment cost, especially when Pumpkin Film original TV shows released from 4Q21E onwards.

Traffic from WeChat ecosystem. Tencent open its WeChat pay interface to its invested companies and ecosystem partners such as online group buying for Pinduoduo (PDD.US), online movie ticketing for Maoyan (1896.HK). It is likely Tencent will integrate Pumpkin Films into its ecosystem by adding Pumpkin Film’s catalogue of online movies and TV shows which should significantly increase Pumpkin Film’s subscription base via traffic access to ＷeChat’s 1.1bn monthly active users.

IPs Library resource. China Literature Limited (772.HK) is a Tencent-staked leading original IPs platform in China. We see synergies between China Literature and Pumpkin Film via monetization of China Literature’s owned original IPs resource through Pumpkin Film’s robust content production capabilities.

Please refer to important disclosures at the end of this report 12 22-Feb-2021 ︱Research Department

Proven track record in original content production with an extensive pipeline Impressive stellar box office movie production by Shanghai Ruyi Chinese New Year Box Office rebounded sharply in 2021 with box office revenues exceeding RMB10bn in 5 screening days ending 16th Feb 2021. The two movies produced by Shanghai Ruyi in 1Q21, “A Little Redflower” recorded RMB1.4bn box office in 48 days since release on 31st Dec 2020 and “Hi, Mom” recorded RMB4.0bn box office in 10 days since upon release on 12nd Feb 2021, and ranked Top 2 at the Chinese New Year Box Office. Hi’Mom is the 12th movie in China box office history with over RMB3.0bn box office.

Exhibit 7: The Twelve movie in history with more than RMB3.0bn box office

Source: Maoyan, Company data, SBI CHINA CAPITAL

Shanghai Ruyi has repeatedly demonstrated its ability to produce well-received content for movies and TV shows. According to Maoyan, Shanghai Ruyi produced movie and TV shows title with and an average rating of 8.6 for movies and an 8.2 rating for TV shows. Before being acquired by HT (136.HK), Shanghai Ruyi produced 1 to 2 movie per year with investment stake below 20% due to capital constraints. With strong capital support by China Evergrande Group, Shanghai Ruyi targets to produce 9 to10 movies/TV shows per year in the coming 5 years and with the goal to produce at least 1 stellar box office title per year.

Please refer to important disclosures at the end of this report 13 22-Feb-2021 ︱Research Department

Exhibit 8: Proven track record of highly rated movie and TV shows content production

Movie name Movie chinese name Genre Year Maoyau/Douban Rating Box Office (RMB mn) Hi, Mom 你好，李焕英 Comedy 2021 9.5 3,381 A Little Red Flower 送你一朵小红花 Plot 2020 9.2 1,432 Once Upon a Time 三生三世十里桃花 Costume 2017 7.1 501 City of Rock 缝纫机乐队 Comedy/Music 2017 9.2 459 Some Like It Hot 情圣 Comedy 2016 8.6 658 Sweet Sixteen 夏有乔木 雅望天堂 Love story 2016 8.0 156

TV shows name TV shows chinese name Total Episodes Year Maoyau/Douban Rating Doctor of Traditional Chinese Medicine 老中医 45 2019 7.5 The Legendary Tavern 老酒馆 46 2019 8.1 Legend of Miyue 芈月传 81 2015 7.0 Nirvana in Fire 琅琊榜 54 2015 9.4 All Quiet in Peking 北平无战事 53 2014 8.9 Source: Company data, SBI CHINA CAPITAL Exhibit 8: Upcoming Pipelines

Name Chinese name Year Episodes Genre Climb on My Old Suffering 温柔壳 2021 Movie Love story N/A 非我倾城 2022 40 Fiction Source: Maoyan, Company data, SBI CHINA CAPITAL

Pumpkin Film target to produce its own branded original TV shows content starting from 2021 onwards Pumpkin Film budgets to invest no less than RMB1.0bn/RMB1.5bn/RMB2.0bn in FY21/22/23E with the following capital layout:

- RMB500mn will be used to procure 100 episodes’ external unreleased TV shows content per year which have passed the internal content production and development team’s assessment.

- RMB500mn/RMB1.0bn/RMB1.5bn in FY21/22/23E will be invested to produce 100/200/280 episodes of original TV shows content exclusive to Pumpkin Film’s APP. These TV shows will shorter drama with 15 to 20 episodes per title in various genres. The first series will begin shooting in 2Q21E and is expected to be online in 4Q21E. Pumpkin Film target to release at least one original TV shows content on Pumpkin Films APP per month from FY22E onwards to support the paying users growth and improve its paying user ratio.

Please refer to important disclosures at the end of this report 14 22-Feb-2021 ︱Research Department

Well positioned to be top 5 online video platform in China. Initial BUY Triple revenue in 3 years thanks to rapid ramp up of paying user base on Pumpkin Film online video platform We estimate online streaming platform revenue to grow from RMB140mn in FY20E to RMB7,274mn in FY23E, representing 274% CAGR from FY20E to FY23E, thanks to 135% accumulated paying user CAGR from ~5.8mn users in FY20E to 75mn users in FY23E. We estimate Pumpkin Film accumulated paying users to reach 122mn in FY25E, surpass the market estimate of 90mn paying user of MangoTV in FY25E, thanks to the synergies and support by its two largest shareholders, China Evergrande Group and Tencent.

Exhibit 9: Assumptions

Source: Company data, SBI CHINA CAPITAL

Robust earnings growth driven by promising content production and film investment return We estimate HT (136.HK) net profit to lift from RMB14mn in FY20E to RMB569mn/RMB882mn /RMB1,202mn in FY21/22/23E respectively, representing an earnings CAGR of 339% CAGR from 2020E to 2023E.

We are confident Shanghai Ruyi and Pumpkin Film is able to beat the acquisition profit guarantee of RMB400mn/RMB500mn/RMB600mn in FY21/22/23E, thanks to the promising stellar box office income sharing from “Hi’Mom” which is the 12th movie title in China movie history with over RMB3.0bn box office and “A Little Red

Please refer to important disclosures at the end of this report 15 22-Feb-2021 ︱Research Department

Flower”with RMB1.4bn box office in 2021.

Initial BUY with TP HK$24.0 based on 1.0x PEG We initiate our BUY rating on HengTen Networks Group (136.HK) with TP HK$24.0 based on 1.0x PEG versus its online video platform peers’ 1.9x PEG, representing 74% upside potential, given (1) it is one of the two profitable online video platform in China, (2) interest alignment and synergies with China Evergrande Group and Tencent , (3) explosive earnings growth of 339% (CAGR) from FY20E to FY23E. HT (136.HK) currently trade at 14x FY23E P/S and 111x FY23E P/E

Please refer to important disclosures at the end of this report 16 22-Feb-2021 ︱Research Department

Risk factors

◼ Potential slowdown of overall online video growth on the competition form short-video, such as TikTok and Kuaishou.

◼ Original TV shows produced by Pumpkin Film may not be success to earn user recognition and differentiate itself as top original TV show online video platform, resulting in low paying user retention rate and lower than expected improvement on paying user ratio.

◼ Film investments by Shanghai Ruyi may fail to meet the box office target, resulting in lower than expected revenue from box office sharing.

Please refer to important disclosures at the end of this report 17 22-Feb-2021 ︱Research Department

Management Profiles Mr. Wan Chao, Executive Director, aged 53: Mr Wan was appointed by the Board as an executive Director on 16 June 2020. He has over 30 years of extensive experience in management in the architectural field. Mr. Wan joined Tencent in 2010. He is currently the Vice President of Tencent Cloud, responsible for the management of smart construction of Tencent Cloud. Mr. Wan graduated from Jiangxi University of Engineering in 1988 with a bachelor’s degree in industrial and structure of civil construction.

Mr. Chen Cong, Executive Director, aged 31: Before joining the company on 20th January 2021, Mr. Chen is legal representative of Jingxiu and he is chairman of the supervisory committee of Beijing Ruyi Xinxin Movie Investment Company Limited* (北 京儒意欣欣影業投資有限公司) from 2009 to 2013. Mr. Chen graduated in July 2010 from Xinxiang University* (新鄉學院) in logistics management and thereafter in July 2016 from Beijing Foreign Studies University* (北京外國語大學) in accounting in the form of an online course. His representative productions consist of movies and television series, such as “A Spoon《一個勺子》, Xia You Qiao Mu Ya Wang Tian Tang《夏有喬木雅望天 堂》, All Quiet in Peking《北平無戰事》, Battle in Kunlun《戰崑崙》, at which he was an executive producer. Mr. Chen has more than 10 years of experience in the movie production and online streaming sectors.

Please refer to important disclosures at the end of this report 18 22-Feb-2021 ︱Research Department

Peers comparison

Please refer to important disclosures at the end of this report 19 22-Feb-2021 ︱Research Department

Financial Statement

Hengten Networks Group Limited Financial Summary | Dec (RMB mn) Income Statement FY19 FY20E FY21E FY22E FY23E Cash Flow FY19 FY20E FY21E FY22E FY23E Revenue 337 202 2,439 5,407 8,939 EBT 109 19 761 1,179 1,605 COGS (135) (93) (1,052) (2,808) (4,982) Depreciation and Amort 26 13 31 661 1,431 Gross profit 202 109 1,387 2,599 3,957 Change in working capital 0 (58) 528 1,026 1,262 Other income & gains 21 10 10 10 10 Others 233 (77) 2,431 5,411 8,147 Selling exp (73) (71) (293) (649) (1,073) Net operating cash flow 98 (52) 1,111 2,545 3,848 Admin exp (73) (57) (366) (811) (1,341) CAPEX/Content Invest (14) 0 (1,350) (2,200) (2,850) Other opex 7 4 4 4 4 Acquisition 0 0 (3,011) (510) (510) Operating profit (EBIT) 85 (4) 742 1,153 1,557 Others 0 27 22 30 52 Provisions or other items 2 0 0 0 0 Net investing cash flow (14) 27 (4,339) (2,680) (3,308) Interest income 27 27 22 30 52 Issue new share 0 0 3,011 510 510 Finance costs (4) (4) (4) (4) (4) Dividend 0 0 0 0 0 Profit after financing costs 109 19 761 1,179 1,605 Others (11) (4) (4) (4) (4) Associated cos 0 0 0 0 0 Net financing cash flow (11) (4) 3,007 507 507 Jointly controlled cos 0 0 0 0 0 Free Cash Flow 84 (52) (239) 345 998 Pre-tax profit 109 19 761 1,179 1,605 Ratio Analysis FY19 FY20E FY21E FY22E FY23E Tax (17) (3) (190) (295) (401) Growth (%) Minority interests (2) (2) (2) (2) (2) Revenue -32% -40% 1105% 122% 65% Net profit 90 14 569 882 1,202 EBITDA -19% -76% 2330% 132% 65% EBITDA 135 33 792 1,840 3,036 Net profit -28% -84% 3908% 55% 36% Adjusted net profit 90 14 569 882 1,202 Adjusted net profit -28% -84% 3908% 55% 36% Adj EPS - Fully diluted (HK$) 0.01 0.00 0.06 0.09 0.12 Adj EPS - Fully diluted (HK$) -28% -87% 3908% 55% 36% Balance Sheet FY19 FY20E FY21E FY22E FY23E As % of revenue Cash & Cash Equivalents 1,313 1,285 1,065 1,436 2,483 Gross profit 60% 54% 57% 48% 44% Trade receivables 107 58 0 0 0 Selling exp -22% -35% -12% -12% -12% Prepayments and other rec 0 0 0 0 0 Admin exp -22% -28% -15% -15% -15% Others 69 54 39 39 39 EIT 16% 16% 25% 25% -4% Current Assets 1,490 1,397 1,103 1,475 2,521 Net profit 27% 7% 23% 16% 13% PPE/Content Rights 17 4 1,323 2,861 4,281 EBITDA 40% 16% 32% 34% 34% Intangible assets 3 3 3,014 3,525 4,035 Adjusted net profit 27% 7% 23% 16% 13% Prepayments for rights 0 0 0 0 0 Days (x) Others 28 28 28 28 28 Receivable days 104 104 0 0 0 Non-Current Assets 48 35 4,365 6,414 8,344 Inventory days 61 61 0 0 0 Trade and other pay 300 185 519 1,385 2,457 Payable days 725 725 180 180 180 Other payables and accruals 0 0 0 0 0 Return (%) Borrowings 54 54 54 54 54 ROE 8% 1% 12% 14% 15% Others 36 29 149 309 499 Gearing Current liabilities 390 268 722 1,747 3,009 Total Liabilities/Total Assets 26% 19% 13% 22% 28% Trade and other pay 0 0 0 0 0 Net gearing 8% 1% 12% 14% 15% Covertible bonds 0 0 0 0 0 Net cash/(debt) (RMB mn) 1,260 1,231 1,011 1,382 2,429 Borrowings 0 0 0 0 0 Net cash (debt) per shs (HK$) 0.16 0.13 0.11 0.14 0.25 Others 7 7 7 7 7 Key Valuation Metrics FY19 FY20E FY21E FY22E FY23E Non-Current Liabilities 7 7 7 7 7 3 yrs EPS CAGR (%) 56% 101% 339% 43% 33% Total Equity 1,142 1,158 4,740 6,134 7,849 P/E (x) 1,234 9,388 234 151 111 P/E - Ex cash (x) 1,613 7,745 193 125 91 Yield (%) - - - - - P/S (x) 329 549 46 21 14 EV/EBITDA (x) 815 3,016 138 60 36 Source: Company data, SBI CHINA CAPITAL

Please refer to important disclosures at the end of this report 20 22-Feb-2021 ︱Research Department

SBI China Capital is a dedicated small/mid cap investment banking/ stockbrokerage house. Find our research on: [email protected], thomsononeanalytics.com, factset.com, S&P Capital IQ and multex.com.

SBI China Capital stock ratings: STRONG BUY : absolute upside of >50% over the next 12 months

BUY : absolute upside of >10% over the next 12 months

HOLD : absolute return of -10% to +10% over the next 12 months

SELL : absolute downside of >10% over the next 12 months

STRONG SELL : absolute downside of >50% over the next 12 months

Investors should assume that SBI China Capital is seeking or will seek investment banking or other related businesses with the companies in this report.

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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by the Research Department of SBI China Capital Financial Services Limited (‘SBI China Capital’) from sources that it believes to be reliable but no representation, warranty or guarantee is made or given by SBI China Capital or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of

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Please refer to important disclosures at the end of this report 21