What happened: On 4 July 2023, China Ruyi （the “Company”） entered into the share subscription agreements to allot and issue 2.5 bn new shares, raising a net amount of HK$4 bn. China Ruyi's major shareholder, Tencent's wholly-owned subsidiary Water Lily, and four independent third parties （Century Spirit, Cubract Ventures, Fame Mountain, and Million Succeed） subscribed for 500 mn new shares each at a price of HK$1.6 per share, representing a discount of 17.53% compared to the closing price before the trading halt. The new subscription shares represent approximately 24.99% of the Company's issued share capital as of the date of this announcement and approximately 20.00% of the Company's enlarged issued share capital after the allotment and issue of the subscription shares. The cash settlement is applied for each subscriber in this share issuance. After the share issuance, there is minimal change in the proportion of the largest shareholder's holdings, with Tencent's ownership decreasing from 20.45% to 20.36%, and the second-largest shareholder, Ke Liming, seeing a decrease from 18.92% to 15.14% in shareholding. The other four shareholders participating in the subscription each hold more than 4% of the Company's shares after the share issuance. The total shareholding proportion of other public shareholders decreased from 59.80% to 47.85%. The net proceeds from the share subscriptions will be allocated as follows: approximately HK$3.6 bn （or approximately 90%） for the development and expansion of the Company's film and gaming businesses, and approximately HKD400 mn （or approximately 10%） for general working capital purposes.
　　Comments and Views: Currently, the fundraising from this share issuance is aligned with the Company's ongoing business development process. According to our previous analysis, in the film production business, as the film industry recovers, the Company is expected to produce more high-quality film works. At the same time, the Company will acquire more content copyrights to enrich its own streaming media platform. As for the gaming business, which was first launched in 2022, the Company has already confirmed two games for release in 2023. We anticipate that in 2023, China Ruyi may release more games than previously expected. The initial expansion of the Company's film and gaming businesses indeed require significant investment, especially in game development. Therefore, we believe that this fundraising, which provides funds for expanding the business at a lower financing cost, aligns with the Company's long-standing development strategy. The support from Tencent, the largest shareholder, both technically and financially, signifies Tencent's immense confidence in the Company's growth prospects. Overall, this is a positive indication for the Company's fundamentals.
　　Investment suggestions: The current development pace of the Company is consistent with its strategic deployment proposed in the past, and we are confident in the long-term growth of the Company. The share subscription not only reflects the strong confidence from the major shareholder, Tencent, in the Company’s future prospects, but also serves as a catalyst for the Company to expedite its venture into new business domains, seizing opportunities and signalling positive developments for its fundamental performance and the secondary market. Based on China Ruyi's huge potential for business expansion and improvement in operating margin, we value the Company at 15.0x adjusted EV/EBITDA for 2023, and estimate a reasonable market capitalization of around HK$25 bn, equivalent to 24.8x adjusted P/E ratio for 2023. We maintain "Buy" investment rating and target price of HK$2.50.