2016H1 Profit expected to grow by 60%-80%

Poly Culture recently made a positive announcement and estimated that as of the end of June, the company is expected to see a 60% to 80% YoY increase in net profit in 2016H1. As the net profit recorded for 2015H1 was approximately RMB 71 million and the one for 2014H1 was RMB 123 million, the profit for 2016H1 is estimated to be between RMB 100 million to RMB 130 million, close to that in 2014H1. This significant increase is mainly attributable to the fact that the settlement progress of artworks auction business is on the turn compared to the same period of the previous year. Affected by the settlement progress, the company's performance in 2015 presented a from-down-to-up trend, with the EPS for the first and latter halves of the year being RMB 0.29 and RMB 0.68, respectively. Fluctuations were also seen in gross profit margin because of the changes in business structure. For the first and latter halves of the year, it was 33.8% and 41.4%, respectively.

Recovery of the Auction Business

One of the company's major businesses, auction, is seeing recovery in recent days. Total sales on the 2016 Poly spring auction achieved good results, with the sales on Poly spring auction in Beijing and Hong Kong reaching RMB 2.85 billion and RMB 1.27 billion, respectively. Further increase was also seen in the company's share in the domestic market. Fu Baoshi's `God of Cloud and Great Lord of Fate`, among them, set a new record with a winning bid of RMB 230 million, showing a strong demand on the high-end market. We believe that this recovery in the auction, with its high gross profits, will help enhance the company's performance and profitability.

Active Promotion of New Businesses

On the basis of the three major culture & media businesses, the company is working actively to explore and develop new business models in such service sectors as education, finance and tourism, which is worth noting in the future.As for art education, the company established Beijing Poly Music Art in 2015 and officially launched the Poly Music Education Project with a strategic cooperation with Central Conservatory of Music. Its first school has started the student enrolment work. Poly Music Education Project represents the first attempt of the company to combine culture with education, and for the next step, the company plans to expand such integrative development to performance art, visual art, artwork appreciation and practice to consolidate and establish a unified brand of "Poly Culture and Art Academy", aiming to become the most influential comprehensive art education platform in China.As for cultural finance, the company's artworks financial services business will officially begin operating shortly. In 2015, Poly Culture's subsidiary in Hong Kong was granted the Money Lenders Licence. Meanwhile, in order to facilitate the company to leap forward in cultural financing, the company is duly studying the issue of establishing Poly Cultural Industry Fund, and intending to collaborate with relative professional institutes to bring in capital from the society, absorb art industry resources, and carry out project investment as well as entrepreneur mergers and acquisitions cross various cultural areas.Apart from the aforesaid, riding on its own brand advantages, the company will actively explore the development of innovation and integration of culture industry into tourism and other industries. We believe that these active efforts to integrate supporting industries on the basis of its brand advantages could create new business models and stimulate business profit growth points in the future.

Investment Thesis

For the latest financial estimate, we accordingly gave the target price to HK$23.5, respectively 1.3/1.2x P/B for 2016/2017. "Accumulate" rating.

Risk

Artwork has the qualities of luxury and may be affected by economic downturn and fight against corruption. Due to the relatively intense competition of domestic theatres and cinemas business, the popularity of the products launched is greatly affected by contingency factors.

Main profit breakdown

Financials

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