Maintain "Buy" and TP of HK$2.50. We adopt relative valuation based on EV/EBITDA ratio. We assign China Ruyi a 2023 adjusted EV/EBITDA ratio of 17.2x with a target market value of HK$29 bn.
China Ruyi is set to become the new controlling shareholder of Wanda Film. On December 12, 2023, Wanda Film announced that its controlling shareholder, Beijing Wanda Cultural Industry Group and its wholly-owned subsidiary, Beijing Hengrun, along with the actual controller of Wanda Film, Jianlin Wang, signed an agreement to transfer 51% of Beijing Wanda Investment Co., Ltd. to Shanghai Ruyi Investment Management for a total consideration of RMB2.155 bn. If this transaction is completed, Ruyi Investment will hold a 51% stake in Wanda Investment, and Liming Ke, the controlling shareholder of Ruyi Investment, will indirectly control 20% of Wanda Film. Jianlin Wang, through various entities, will indirectly control a 10.9% stake in Wanda Film.
The acquisition price of Wanda Film by China Ruyi was set at a significant discount to market value. From a transaction perspective, China Ruyi will have spent a total of RMB4.417 bn in July and December 2023 to acquire a 20% stake in Wanda Film, equivalent to 435,873,762 shares; this is an 18% discount to the market value of China Ruyi's stake in Wanda Film of approximately RMB5.391 bn as of 26 December 2023 when Wanda Film's share price closed at RMB12.37 RMB.
Wanda Film is expected to provide significant operational synergistic effects to China Ruyi. Wanda film has been deeply involved within the film industry and is expected to bring its extensive experience and resources in creating and distributing films to China Ruyi. The Company's existing IP reserves include series such as "Detective Chinatown," "Sheep Without A Shepherd," "Someday Or One Day," and "Folding City". In addition to film production, the cinema assets owned by Wanda Film, namely the 877 offline cinemas and movie theaters that it owns and operates serve as a strong and stable revenue source for the Company, along with a reliable method of distributing films already made.
The acquisition of Wanda Film by China Ruyi presents significant value creation potential. We adjust our 2023-2025 revenue expectations for China Ruyi. The proposed draft regulation on online game management may impact the gaming industry, leading us to revise down our gaming revenue projections.
After these adjustments, we increase the 2023-2025 forecasts for China Ruyi's EPS by 6.7%, 1.9% and 2.2%, respectively. Consequently, our final projected EPS for 2023-2025 are RMB0.022, RMB0.062 and RMB0.078, respectively.