Leshi Internet:Re-prioritizing business focuses

Conclusion

    Leshi is attending our flagship A-share Conference in Shenzhen on
July 4-5.

    With investment from Sunac China (1918 HK, HK$14.00, Neutral,
TP:HK$4.43, Wilson Ho) coming in place, we are positive on the recovery
in itscore businesses, particularly in TV operations, since late 1Q17.
However,handset, sports and electric vehicle businesses outside of the
listed companyremain cash-strapped. Management is re-prioritizing these
businesses,optimising cost and headcount, and seeking external
financing. RetainOutperform.

    Impact

    TV operations on right track. Leshi targets 7m TV shipments in 2017,
upfrom about 5m TV in 2016, with an aim to turn hardware GPM positive in
2017on reasonable pricing and component cost control. We expect the ASP
ofLeshi TVs will increase modestly this year as its average TV size
expands. Onthe other hand, dropping the US$2bn Vizio acquisition
recently could saveLeshi cash for its core business. This may seem to
impede Leshi’s globalexpansion, which at this stage is both costly and
de-prioritised, in our view.

    Reprioritizing cash-strapped businesses. Outside of the listed
company,Leshi is sensibly trimming handset shipments in 2017, following
the cash flowissues of Leshi’s handset business with supply chain since
late 2016.

    LeSports also dropped the costly broadcast rights for the Asian
FootballConfederation games as well as Chinese Super League games. On
the otherhand, Faraday Future and Leshi’s auto arm are seeking external
financing.

    We believe Leshi is taking the right steps to re-prioritize its
non-core cashstrappedbusinesses, but the process may take some time and
can be bumpy.

    Cutting US operations on cost rationalisation. Leshi is reportedly
cuttingits number of employees from about 400 to less than 100 people in
the USoperations. The impacted US operations is mainly on smart TV,
smartphones,set-top boxes and video content, whereas the labour force
for the electricvehicle operation (outside of listed company) in the US
stays intact.

    Earnings and target price revision

    No change.

    Price catalyst

    12-month price target: Rmb40.00 based on a Sum of Parts
methodology.

    Catalyst: Injection of Le Vision Pictures, fund raising of entities
outside thelisted company, hardware shipments and marginsAction and
recommendation

    Retain Outperform.

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