H116earnings in line; films/variety shows contributed incremental revenue
   
H116revenue was Rmb547m, up 26% YoY; net profit was Rmb116m, up 5.8% YoY,in line with the 2-15% range Shanghai New Culture (SNC) preannounced earlier.Highlights from the semi-annual report include:(1) Revenue rose 26%, largely becausethe film/variety show segment contributed revenue of Rmb79.62/23.7m, whereas nosuch revenues were recognized in H115. Revenue from TV series/advertising rose1%/15% (relatively weaker growth in TV series);(2) gross margins on TVseries/advertising fell 21/11ppts YoY, the main reason net profit growth was slowerthan revenue growth.
   
TV series: transition will take time
   
SNC's revenue from TV series was Rmb180m in H1. Major projects included LurkingBefore Dawn, Fight the Dawn, Two Women in the War and others in the traditionalgenre. For new TV series, the TV version of The Clouds of Han, jointly produced by SNCand Softstar, has begun shooting, while Softstar has given SNC the rights to shoot theTV version of Chinese Paladin 4. However, those series will not premiere until 2017,meaning the transition will still take time.
   
Waiting for new Purity acquisition plan
   
The CSRC previously rejected SNC's Purity acquisition plan, which we mainly attributeto the following:(1) The 2016earnings forecast for Purity is focused on H2. H1dataadd little persuasive weight to the earnings pledge (2) the CSRC recently moved tostrictly regulate the working capital replenishment section of fundraising plans. Weexpect SNC to make adjustments in the above two areas before resubmitting its planfor regulatory review.
   
Valuation: Price target of Rmb37.84
   
Our price target is based on DCF methodology (WACC 7.0%). We are reviewing ourearnings estimates, PT and rating for the company.