Private placement-funded acquisition not given go-ahead
   
New Culture announced on 27 July that its plan to buy assets and raise funds through ashare issue did not pass at the 2016 54th working conference of the CSRC's reviewcommittee for merger, acquisition and reorganization of listed companies, citing anotification from the regulator.
   
Earnings pledge likely to be behind failure to get regulatory approval
   
In New Culture's acquisition and fundraising plan via private placement, counterpartyPurity pledged 2016-19 net profit attributable to the parent of at least Rmb140/190/230/276m excluding one-offs. The pledged 2016 figure is 6.9x 2015 profit excludingone-offs (Rmb20.25m). In the Notice of the CSRC on Feedback of First Round Review ofAdministrative Approval Application, the regulator required New Culture to disclose therealizability of projected 2016 revenue/net profit and the rationality of revenueforecasts for 2017 and beyond. Although New Culture published its replies to thesequestions and detailed the contract situation of Purity's various programs for 2016, theregulator recently stated Purity's earnings pledge is the focus of concern. We believethe earnings pledge may be an important reason behind the failure to get regulatoryapproval.
   
2016-18E EPS in our downside case 10%/40%/44% lower than in base case
   
We estimate New Culture will revise its private placement plan to advance its goal ofacquiring Purity. Excluding a private placement-funded acquisition, our downside caseassumes 2016 production is 24% lower than the planned 370 episodes and perepisodeprice is unchanged. Our downside 2016-18E EPS are Rmb0.63/0.74/0.86,10%/40%/44% lower than in our base case. We estimate downside valuation ofRmb17.09 per share, implying a 30% downside potential from the current level.
   
Valuation: Rmb37.84 price target
   
Our price target is based on DCF methodology (WACC 7.0%). We are reviewing ourearnings estimates, PT and rating for the company.