Investor Notes - Phillip Securities (HK) Ltd

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24 May, 2018 (Thursday)

CHINA XLX FERT(1866)
Analysis：
China XLX Fertiliser Ltd. (1866) is principally engaged in the manufacturing and sale of urea, compound fertiliser, methanol, melamine and furfuryl alcohol. For the three months ended 31 March 2018, the revenue of the Group increased 22% from RMB2.095 billion. Net profit attributable to shareholders increased 72% to RMB160 million, mainly attributable to the increase in the average selling price of urea products by 29% YoY. Revenue derived from the sales of urea increased by 26% to RMB834 million and gross profit margin increased from 18% to 29%. As China urea prices started to rise again recently, the urea business of China XLX Fertiliser is expected to further improve. (I do not hold the above stock)
Strategy：
Buy-in Price: $3.40, Target Price: $3.75, Cut Loss Price: $3.25

ZHOU HEI YA(1458)
Analysis：
The company is a leading brand and retailer of casual braised food in China. 2017 revenue totaled Rmb3249mn, up by 15% YoY, and gross profit came in at Rmb1979m, up by 12.8% YoY. Gross profit margin was 60.9%, compared with 62.3% in 2016. Net profit was Rmb761.6m, up 6.4% YoY. The decline in net profit margin was mainly due to expenses associated with e-commerce, food delivery and membership promotion expenses. During 2017, the company opened 313 self-operated stores, and closed 64 stores, meaning 1,027 self-operated stores at the yearend. We expect newly opening stores to continue to contribute to sales growth in 18E/19E. The company launched new crayfish product “Juyixia” to cater to young generation`s consumption needs. New demand will be met with new capacity, given new factories in Wuhan and Hebei will go into operation in 2018E, while new factory in East China will launch in 2019E.
Strategy：
Buy-in Price: $6.57, Target Price: $8.50, Cut Loss Price: $6.00

NetDragon (777.HK) - International Education Business Going Well; Acquiring A US Education Online Platform

Investment Summary

Recently, Netdragon acquires an international education website EDMODO. We highlight that education business steps up with lowering loss and wining domestic and overseas tenders. We expect mobile games to contribute to stable growth of game segment. Based on our growth assumption and industry valuation, we give education segment target PS 3x, game business target PE 11.3x, thus derive TP of HKD35.71. (Closing price at 18 May 2018)

Business Overview

Acquiring international education online platform. The company announced the acquisition of EDMODO with a consideration of USD137.5mn. EDMODO is a global education online platform to K-12 schools targeting teachers, students, administrators and parents. The EDMODO network enables teachers to share resources, distribute quizzes and assignments, and connect with students, colleagues, and parents. Its registered users amounted to 90mn with 6mn DAU covering 192 countries. EDMODO now starts monetization through advertising, given advertisement revenue reached USD1mn in 2017. We are positive on the synergies among Netdragon's current products (education software and hardware) and EDOMODO's large user base, which is believed to form great monetization potential in future.

Education business to step up with loss narrowing. Education business generated revenue of RMB210mn with 37.9% YoY growth. In terms of international business, Promethean reported revenue of RMB1.78bn up by 32% YoY and EBITDA RMB53mn (2016: -50.6mn), with increasing market share in US, Europe, Middle East and Africa. In domestic market, its business develops quickly given revenue up by 82.2% YoY to RMB330mn in 2017. The installation amount of flagship product 101 PPT now reaches over 1.2mn.

Wining domestic and overseas tenders. For international market, we expect the company to win more government purchase orders. After Russian contract (worthy of USD30mn) last year, Netdragon won its Phase II order to provide interactive learning technologies with contract amount of USD60mn in Mar 2018, which is expected to be recognized in 18H2. Currently, the company is actively preparing for tenders in Turkey and Malaysia. We estimate that GPM of projects in developing countries may be slightly lower, but popular large screen display with higher GPM will help to maintain Promethean's overall GPM around 30%. For domestic market, Netdragon realized sales of RMB279mn in 2017 and Q4 revenue grew dramatically to RMB99.8mn. We expect the company to enhance promotion in domestic market and proactively to explore cooperation with Chines schools and government.

Mobile games contribute to high growth. Benefiting from mobile games` quick growth, game business generates revenue of RMB1.67bn up by 48.2% in 2017. We highlight the good performance of flagship IPs: 1) Eudemons achieved record high with revenue up by 48.2% YoY to RMB1.37bn. Eudemons PC version continued to deliver eight months of gross billings over RMB100mn, while pocket version also reached a record high in Sep 2017, ranking as `top ten most outstanding app by billings` on Tencent Open Platform. Besides, Eudemons Online Mobile, which is cooperated with Kingsoft, attained much popularity since it has been launched in Oct 2017 and contributed to a gross billing of over RMB100mn in first month, ranking as one of the `top five most outstanding app by billings` on Tencent Open Platform for four months. 2) Heroes Evolved, another flagship IP, sustained strong momentum given 17H2 income doubled, with rapid user ramp-up. In future, the company will insist core IP strategy to maximize IP value and launch more mobile games in 2018. It is worth mentioning that a new version of School of Dragons (a MMORPG based on DreamWorks Animation's How to Train Your Dragon franchise) will launch in 18H2 for the propaganda of HTTYD new movie. We expect game business maintain stable growth during 18E/19E.

Investment Thesis & Valuation

We appreciate the great potential of education business and estimate game segment to grow steady. Based on our topline growth assumption, 11.3x target PE for game business and 3x target PE for education business, we increase TP to HKD35.71 considering exchange influence. (Exchange rate=0.8220) (Closing price at 18 May 2018)

Risks

Fail to attain international government purchase orders;

Domestic education business fail expectation;

Game business fail expectation;

Fierce competition.

Financials

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Recommendation on 24-5-2018
Recommendation	BUY
Price on Recommendation Date	$ 19.600
Suggested purchase price	N/A
Target Price	$ 35.710

Writer Info

Eurus Zhou
(Research Analyst)

Tel: +852 2277 6515

Email:
euruszhou@phillip.com.hk

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