Jan&Feb Hainan duty free sales up 17% yoy on ticket price expansionYesterday, Ministry of Commerce (MOFCOM) released February’s Hainan dutyfree sales. According to MOFCOM data, Hainan duty free sales (Sanya +Haikou) increased 24% yoy to RMB1.1bn in February 2016, compared to 6.2%yoy growth in January. Based on MOFCOM data, 2M2016 (January + February) duty free sales grew17% yoy to RMB1.7bn, and number of purchases increased 1.1% yoy to419,400. This implies a 15.7% yoy expansion in ticket price to RMB4,120. We believe the increase in ticket price can be attributed to the recently relaxedgovernment policy – effective on 1 February, the maximum duty free quota perpurchase has been lifted to RMB16,000 from RMB8,000. We expect the favorable policy to drive up ticket price throughout the year,and forecast Haitang Bay to benefit and grow its sales by 32% yoy in 2016.

Huace formed strategic cooperation with CJ E&M. Huace recently signed a strategic cooperation agreement with CJ E&M(130960.KQ, NR, CP KRW67,800), the leading Korean entertainment company,to jointly produce 3-4 premium TV dramas (to be broadcasted online as well ason satellite TV stations) over the next three years. About CJ E&M. CJ E&M is the No.1 entertainment company in Korea, producing TV dramas,films, music and live entertainment shows. The company operates 17 TVchannels, of which tvN generates one of the highest viewership in Korea (e.g.1.45 in January 2016). Huace has worked with CJ E&M on three movie productions, including “AWedding Invitation” (Box office: RMB195m), “Miss Granny” (Box officeRMB364m), and “The Peaceful Island” (scheduled to release in July 2016).

More arrival duty free stores in China. Effective from 18 Feb 2016, the government permits the set up additionalduty free shops at the arrival points of c.19 airports and ports. The list of permitted airports includes international airports in tier 2 andcore tier 3 cities such as Guangzhou, Hangzhou, Chengdu, Qingdao, Dalian,Shenyang, Xi’an, and Urumqi. The overseas duty free quota remains unchanged at RMB5,000. However,a customer who has not used up the RMB5,000 at overseas duty freeshops, can carry the unused amount and spend it within China up to atotal of RMB8,000. At airports or ports which have both departure and arrivals duty free shops,passengers travel abroad can also make purchases at the departure dutyfree shops and deposit the products for pick up when return to China.

RMB8,000 per time duty free quota => RMB16,000 total a year with any time From 1st February, 2016, Sanya will cancel the limitation on shopping time(previously twice a year) Total duty free quota is still RMB16,000. However, this means you canpurchase maximum duty free value of RMB16,000 vs. previouslyRMB8,000 per time (twice a year)n The unused budget for each customer can be carried forward to the nexttime they come to shop in Sanya Haitang Bay store. Haitang Bay Store will open online duty free sales as well. DB’s view: policy relaxation expected but this came ahead of the CNY We believe the government is a favorable position to support thedevelopment of the Sanya duty free business. While it is true that cross-border ecommerce and significantly growingoutbound travel to countries like Japan/EU/Thailand have taken part of theshare of domestic duty free business, government is still keen to retainpart of the consumption within China We believe Haitang Bay store are very competitive for its productdiversification and price perspective. Therefore, the key here is to boost the consumer traffic and storeconversion rate. The policy relaxation of a doubled duty free quota will definitely drive upthe sales volume and ASP, especially for the luxury SKU. We are forecasting Haitang Bay store to grow sales by 32% yoy in 2016. As a result, we expect total CITS earnings to grow 25% yoy to RMB2.06 in2016. The stock is trading at 21x DB 2016 PER. We reiterate our Buy rating onthe name.

What’s new – Wanda Cinema is opening Dolby Cinema in China-100 in 5 years Wanda Cinema announced after market close today that it has signed astrategic agreement with Dolby Laboratories Inc (DLB.N, NR) to open 100Dolby Cinema in the next five years. Commission based partnership Similar to the model of IMAX (1970.HK, NR) in China, Wanda is to pay acertain (undisclosed) percentage of the net box office revenue generated fromDolby Cinema plus annual maintenance fee to Dolby Laboratories in China. The first Dolby Cinema is to be opened in March. Not only China but also Australia and New Zeeland The announcement also mentioned that Wanda is in negotiation with Dolby toopen Dolby Cinema in Hoyts, the cinema chain acquired in 2015, in Australiaand New Zealand. The brother company AMC is already a strategic partner with Dolby We have noted that AMC (AMC.N, NR), controlled by Dalian Wanda Group(78%), is targeting to have 50 Dolby Cinemas in the US by the end of 2016 vs. 150 IMAX Cinema, according to AMC’s corporate presentation. We believeWanda Cinema would like to leverage its existing relationship and its widenetwork in China to open Dolby Cinema to differentiate itself from competitorssuch as CJ CJV (079160.KS, BUY, KRW 132,000), SMI (0198.HK, NR), andOrange Sky (1132.HK, NR) etc. DB’s view-positive for Wanda-differentiation through more real experience We reiterate our Buy rating for Wanda Cinema after the recent share price pullback that seemed to mainly come from the expiry of the cornerstoneshareholder’s lock-up period (expired Friday, 22 January). We believe theintroduction of Dolby Cinema is part of a series of moves by Wanda to enhancethe Chinese audience’s movie experience as Dolby Cinema provides highquality laser projection and unique sound equipment. We believe Wanda Cinema would like to learn from its brother company AMCabout how to bring Chinese audiences first-rate movie experiences. We haveyet to see in China features such as 1) dine-in cinema, and 2) recliner seating. We believe AMC’s success and maturity in the US could act as a role model forWanda Cinema’s development in China over the next 5-10 years. Wanda Cinema is currently trading 44x our 2016E PER, which we believe isvery attractive given a less than 1x PEG on 45% 15-18E earnings CAGR.

CITS just reported 2015 preliminary earnings - in line with DB estimate. CITS’s preliminary 2015 EPS was RMB 1.65, in line with our estimate, but 4%below the consensus estimate of RMB 1.72. CITS’s top line was RMB 21.2bn,missing our estimate by 2%. As this is a preliminary earnings snapshot, thereis no detailed discussion on financial and operational breakdowns. We recently upgraded the stock on potential policy relaxation. We upgraded CITS to Buy from Hold on 20 January (“Weak Q4 Priced in;upgrade to Buy on potential policy easing and valuation”). Per our recentchannel checks and feedback from local officers, in order to further attractSanya visitors to purchase in the Haitang Bay store, the Sanya government isconsidering increasing the current duty free quota of RMB8,000 to RMB16,000. We believe this would increase the ticket price, driven primarily bymore luxury duty free products. We expect CITS would continue to subsidizethe part that exceeds the duty free quota. Therefore, duty free sales volumeshould also increase. Valuation looks attractive. The stock is trading at 23x our 2016E EPS of RMB 2.06/sh. If we exclude netcash, 12-M forward PER is only 20x, which seems attractive given the highbarriers to entry.

What’s new – Huace forms agreement with Fox International ProductionsHuace Film&TV announced a cooperation agreement with Fox InternationalProductions (FIP), a division of 20th Century Fox, which focuses on theproduction of local language films. 20th Century Fox is one of the Hollywood’s“Big Six” film studios, and has produced famous box-office hits such asTitanic, Avatar, X-Men series, and Planet of the Apes series. FIP, since itsestablishment in 2008, has generated USD900m in box office revenue. According to the agreement, the priority will be to create Chinese languagefilms targeting Chinese audiences, and second to that will be China-U.S.co-productions. Huace and FIP are currently working on identifying projects, and will soonannounce their first joint productions. According to Huace management, apotential strategy could be for Huace and FIP to create two versionstargeting Chinese and U.S. audiences based on one script.DB’s view – a TV guru aggressively expanding its film businessn。 We believe the deal with FIP could further strengthen Huace’s ability todevelop well-known IP. Learning from Fox’s film production anddistribution expertise, Huace would be able to enhance its film quality, andto grow its film business with an international focus. As we mentioned in our recent initiation report (Huace Film&TV, TV dramaguru – initiating with Buy), Huace has been expanding into film productionover the past two years. The company has established cooperation withseveral international companies including Arclight Films and Korean NextEntertainment World, and has signed agreement with Batman producer Mr.Michael Uslan. Supported by the cooperation with FIP and other international partners, weexpect Huace to achieve strong growth of 55% revenue CARG in its filmbusiness over the next two years. We believe Huace’s leading position in TV drama production will continueto provide it with sustainable cash flow and solid earnings, while theexpanding film business should stimulate strong growth in the near- tomedium-term. We reiterate our Buy recommendation on Huace Film&TV with a pricetarget of RMB38.

Leading TV drama maker - strong on content and channels We initiate coverage on Zhejiang Huace Film&TV with a Buy recommendationand a target price of RMB38. Huace is the leading TV drama producer in China.We believe the company's competitive advantage encompasses its richresources and pipeline of IP and its solid relationships with leading TVstations/video websites. In addition to the TV drama business, Huace is tryingto diversify its products, recently extending into film production andentertainment programs. Huace is our top pick in the media sector. TV drama is the trump card Huace has successfully maintained its leading position in Chinese TV dramawith 10% market share. We have seen a strong pipeline in TV drama for 2H15-2016 that already has a broadcasting license. Our channel checks support ourview that Huace is expanding from traditional TV to video websites such asiQiyi, Sohu and LeTV. Huace’s TV dramas are broadcast on both traditional andnew media channels. As a result, we believe TV drama will continue to be thecompany’s earnings driver over the next three years. Beyond TV drama - movies and entertainment programs Although movies and entertainment are new to Huace and account for only1% and 0.2% of 1H15 revenue, respectively, we expect synergies with the TVdrama segment. We believe that with a strong IP pipeline, TV dramas, moviesand entertainment programs can be manufactured as a one-stop productchain. This should help increase the efficiency and fully monetize Huace’s IP. Valuation and risks We value the company at RMB38 on a DCF-based valuation (WACC of 8.7%and terminal growth rate of 4%). The company trades at 43x our 2016E EPS,implying a PEG of 0.9x on two-year earnings CAGR. Key downside risksinclude 1) piracy issues, 2) tightening SARFT policies, 3) increasingcompetition from self-produced internet dramas, 4) delays in distribution, and5) uncertainty in new business segments.

Duty free sales up 67.4% yoy in August. Sanya duty free sales increased 67.4% yoy in August to RMB293m, higherthan the growth of 41.5% yoy in July and beat our estimate. YTD August salesreached RMB3bn, up 57% yoy. …but be cautious on September performance. As Haitang Bay Duty Free Shopping Mall celebrated its first-year anniversary,we remind investor to be cautious on Haitang Bay’s September performance,given the high base last year. In Sep-14, the opening month of Haitang Bay(which is 10x larger than the old downtown duty free store Dadonghai,)downtown duty free sales surged 118% yoy to RMB320m. We believe thesurge in sales was a one-off event stimulated by a lot of marketing andpromotional effort, as well as accumulated demand. In our view, given thehigh base in Sep-14, Haitang Bay may see a slight decline in duty free sales ona yoy basis, compared to 57% yoy YTD Aug-15. Nonetheless, we believe salesgrowth should return to a healthy level in 4Q15E.

What’s new . CYTS recently announced plans to list two of its subsidiaries, China CYTS M.I.C.E Service Co., Ltd. (i.e. business exhibition) and CYTS Shanshui Hotel Investment & Management Co., Ltd. on the National Equities Exchange and Quotations (NEEQ.)n CYTS currently holds an 82% stake in M.I.C.E Service (i.e. Meetings, Incentives, Conferences, and Exhibitions). As of December 2014, M.I.C.E had RMB969m in total assets and RMB237m net assets. In 1H15, the business generated RMB882m in revenue, and had gross/net margin of 12% and 2.3%, respectively. It contributed to 18% of CYTS’s total revenue and 10% in gross profit in 1H15. The company has 51% ownership in Shanshui Hotel. Shanshui Hotel had RMB436m in total assets and RMB207m net assets as of December 2014. In 1H15, the hotel business generated RMB171m in revenue, contributing 4% to total revenue; nonetheless, gross margin was high at 86%, and gross profit contribution came in at 14%. Net margin in 2014 was 5.6%. (Shanshui Hotel did not disclose its 1H15 bottom line.)DB’s view . We believe as the two subsidiaries go public, CYTS should benefit from the following:n CYTS will be able to monetize some of its initial investment, and realize the market value of the businesses. We believe the listings on NEEQ could also help lift CYTS’ valuation, which is currently trading at 29x our 2016E PER compared to an average of 35x on NEEQ. There will be more liquidity in CYTS as the IPOs bring in more investors. There will be extra funds to grow and expand the M.I.C.E and hotel businesses. In addition, going public could also broaden the financing channels available to the two subsidiaries. As public companies, there will be more visibility in their operational and financial information. Improved visibility could help increase investors’ confidence in the stock. CYTS could potentially introduce stock incentive plans for the management teams of the two businesses, which could incentivise them and improve their performance. We reiterate our Buy recommendation with target price of RMB28.

To develop Romantic Show of Li River in Guilin . The company announced today to set up a subsidiary with Guilin Tourism (000978.SZ, RMB8.69, NR) in Guilin, Guangxi. The subsidiary, Guilin Li River Romantic Show Performance Ltd., will develop a romantic show in Guilin. According to the announcement, Songcheng will construct a corresponding theme park and theatre surrounding the Li River culture theme. Songcheng will invest RMB140m in the subsidiary, with 70% ownership, and Guilin Tourism will put in RMB60m and hold 30% stake. We reiterate Buy with TP RMB34. DB’s view - continuous market expansion . Songcheng Performance is currently operating five romantic shows, and has another three in the pipeline. Romantic Show of Li River marks the ninth one. Under the assumption of 2.5 million visitors per annum (80% of the most maturated show) at ASP of RMB70 (in-line with the latest two shows) and a net margin of 35%, the project could achieve a ROE as high as 30%. As the opening date is still uncertain, we have not factored it into our model. We like the newly announced Li River project for the following reasons. Cooperation with local tourism company. We believe the cooperation could benefit Songcheng, as Guilin Tourism bringing in knowledge on the local business environment and culture, as well as tourism resources. Forming cooperation with local players could also help speed up Songcheng’s national expansion, in our view. Popular tourism destination. Guilin is a popular tourism destination that suitable for travel all-year around, and it is one of China’s national historical and cultural cities. Guilin recently introduced six-day visa-free entry policy to ASEAN tour group in May 2015, and it is also one of the sixteen cities in China that adopt the 72-hour visa-free policy to transit passengers. We believe Guilin’s tourism industry will benefit from the relaxed visa policy. Rich Culture. Guangxi province is one of the five autonomous regions in China, with unique culture. There are 12 minority groups living in Guangxi, and the province has the largest minority population in China. We believe the minority culture could bring rich content to the Romantic Show of Li River, which should in turn help attract visitors. Located in Central China. The previous eight projects (five under operation and three in the pipeline) are located in the Eastern Coast of China, Western China, or on the Hainan Island. Romantic Show of Li River is the first project will be the first one located in Central China. We believe Songcheng is on the right track of its national expansion.

Maintaining Buy, but cutting target price on higher investment in Aoyou.com。 High expenditure in Aoyou.com may drag down earnings nearer term We reiterate our Buy rating on CYTS as we continue to see material upside return after our target price cut to RMB28 (from RMB35) to factor in the higher investment in Aoyou.com with no return nearer term. We reduce our 2015 and 2016 earnings forecasts by 20% and 19% respectively. However, from a valuation perspective on our estimates Aoyou and Gubei Town are free for investors, although they are not making a profit at the current stage. High expenditure in Aoyou.com may drag down earnings nearer term。 CYTS invested heavily in Aoyou.com, following its “Aoyou+” strategy aimed at return and growth longer term. Continuous system upgrades and content enrichment were put in place. In 1H15, CYTS spent close to RMB300m on the sales and marketing of Aoyou.com, opened more than 300 offline service spots for O2O development, and introduced 13 new departure cities. Currently, Aoyou.com does not charge any commission. Ancient towns remain the growth drivers。 Both Wuzhen and Gubei outperformed in 1H15 with a 27% yoy and 135% yoy increase in revenue, respectively. We expect the two ancient towns, especially Wuzhen, to be the key growth driver going forward, supported by an increasing number of leisure tourists, continuous upgrades and content enrichment. It is worth noting that Gubei town turned profitable in 2Q15, and we believe it is highly likely to report positive net earnings in FY 2015. Valuation and risks。 We derive our target price of RMB28 on a DCF-based valuation, with WACC at 8.1% and a terminal growth rate of 3%, in line with China CPI growth. If we break down the current share price by the different segments’ earnings, on our estimates we find Gubei and Aoyou free for investors. Therefore, we believe downside risk for CYTS is limited. Risks: 1) a slowdown in the tourism industry; 2) anti-corruption moves; 3) rising competition; and 4) slow return from new projects.

Box office revenue grew 44% yoy to RMB1.2bn Wanda Cinema reported its August 2015 operational data today. During thisyear's summer holiday period (i.e., July and August), Wanda Cinemamaintained its strong growth momentum and generated box office revenue ofRMB1.2bn, which represents an increase of 44% yoy. The number of movieviewers during the summer holidays came in at 31 million, up 53% yoy. Wereiterate our Buy recommendation with our RMB202 target price unchanged. Our 2H15 forecast on the conservative side The 44% yoy box office growth achieved during the summer holidays beat our2H15 box office growth forecast of 30% yoy. In addition, with Hollywoodmovies Mission Impossible, Rouge Nation and Minions coming into cinemas inSeptember, we believe box office growth will continue to be strong. Oursecond-half box office estimate is likely on the conservative side, and webelieve there could be upside potential to our forecast. Theatre expansion continued Wanda opened 11 new theatres with 106 new screens in July and August2015. This implies that these new theatres have an average of 9.6 screens pertheatre, which is much higher than the 8.9 screens per theatre at the existingtheatres. As of 31 August, Wanda was operating a total of 202 theatres with1,800 screens. The company has opened 20 new theatres so far in 2015, 50%of its annual target of 40 new theatres. Valuation and risks We derive our RMB202 target price on a DCF-based valuation with a WACC of8.3% (3.9% in-house risk-free rate, 5.6% equity risk premium, 1.0 beta) and aterminal growth rate of 4% for structural growth in China’s film industry. Thestock is currently trading at a 44x PER (2016E), which converts to a PEG of1.4x on our 30% CAGR earnings growth over 2016-18E. Key risks include lossof policy support from the government, piracy issues and competition fromonline media.

What’s new? On 1 September 2015, after four years of preparation since the announcementof a preliminary draft, the State Council passed a draft plan to promote China’smovie industry, which will be delivered to the Standing Committee of theNational People’s Congress for further and final inspection. The draft plan hassix chapters with 62 clauses, and it focuses on the following three areas:n To lower the entry barriers by 1) lifting the restriction on movie productionenterprises, 2) simplifying the examination procedures on production andscreening (but more strict on the content compare to the Regulation on theAdministration of Movies) , and 3) enhancing information transparencyn To encourage more corporations and individuals to enter the movieindustry by 1) setting up special fund for movie investment; 2) offeringfavorable taxes policies; 3) encouraging financial institution to providesupport; 4) promoting the development and upgrade of movie theatreswith favorable government policies; and 5) encouraging investment anddonation to the movie industry from non-government forcesn To strengthen supervision and regulate market order by 1) enhancingregular supervision on movie-related operations; 2) ensuring theinstallation of standardised ticketing system to prohibit underreporting ofbox office by theatres; and 3) protecting movie-related IPDB’s view – implication on China’s movie industry. Lowered entry barriers and improved policy and financial support couldencourage more talented directors/producers to enter the field, whichshould bring more high-quality movies to the market. As high-qualitymovies bringing in high box office revenue, this would benefit bothupstream and downstream players. Favorable tax rates and government subsidies would help improvecompanies’ profit margin and thus encourage future investment. Supportive policies on theatre development should benefit bigdownstream operators such as Wanda Cinema, which is expandingquickly in the market with 40 new theatres opening each year. Smallerplayers in lower-tier cities would also have the inventive to expand. China’s box office has been expanding at 37% CAGR over 2009-2014. Amore regulated movie industry would provide a healthier environment formore sustainable long-term growth.

Adjust target price to RMB34, with 2015/16E forecast unchanged. We adjust down our target price to RMB34 from RMB79 to reflect the recent24-for-10 stock split. We leave our 2015E and 2016E earnings forecastsunchanged at RMB618m and RMB910m, respectively. Our new core EPS comein at RMB0.43 in 2015E and RMB0.61 in 2016E. We reiterate our Buyrecommendation on the strong performance of Romantic Shows in Sanya,Lijiang and Jiuzhaigou Valley. 24-for-10 stock split. Songcheng Performance recently conducted a 24-for-10 stock split, whichincreased the current number of shares outstanding to 1,431m from 594m. Asa result of the stock split, each year’s corresponding EPS declined 58%. Chairman Huang purchased 0.29m shares. In August, Huang Qiaoling, Chairman of Songcheng and Director of allRomantic Shows, purchased 0.29m of the company’s shares on the stockmarket. Huang’s shareholding position increased to 8.675% from 8.626%,which reflects his confidence in Songcheng’s future growth outlook. Valuation. We derive a target price of RMB34, based on DCF valuation with a 7.7%WACC and a terminal growth rate of 4% to reflect strong growth in both theoffline cultural show and online business. The stock is trading at 26x our 2016Ecore earnings, which converts to a 1.0x PEG on our 26% earnings CAGR over2016-18E. Risks. Key downside risks include a decline in domestic tourists, rising competition,safety incidents, and delays in new project development.