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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.
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