Investment positives
　　We initiate coverage of Linmon Media (Linmon) with an OUTPERFORM rating and a TP of HK$34.00 (20x 2023e Non-IFRS P/E).
　　Why OUTPERFORM rating?
　　A leading producer of original dramas in China, with 75% of its drama series in 2019-2021 achieving a high viewership rate.[1] Linmon has been producing high-quality dramas since it was established in 2014. As of August 2022, it had produced and distributed 19 dramas, 17 of which were originals. Linmon has some famous TV series, including family life series focusing on family and education (A Love for Separation, A Little Reunion, A Little Dilemma, Xiaomin’s House), female growth series (Twenty Your Life On, Nothing But Thirty), and short dramas (Under the Skin, Nobody Knows). Six of its eight drama series released during 2019-2021 achieved a high viewership rate - this 75.0% rate is higher than the 45.9% average of its top-5 competitors.
　　A well-developed methodology for producing high-quality dramas with strong storylines and that create value. We believe that the drama industry in China has reached a new stage for quality improvement and upgrades, with content quality becoming the determining factor for success. Based on years of experience in the industry, Linmon has developed a mature production methodology for high-quality dramas. It welcomes feedback from crew, audience and critics in the creative process and provides a favorable environment for collective creation. Linmon has an industry-leading and experienced content production team, whose high-quality output is underpinned by management’s control and the production team's strict supervision. Linmon also enjoys strong bargaining power in the distribution of high-quality content. The 15 original dramas the firm distributed between 2016 and 1H22 were all pre-sold, and Linmon maximized IP value through multi-channel distribution. We believe that a people-oriented, creative and dynamic drama production system is the key to Linmon’s success and to maintaining its competitive advantage.
　　Linmon diversifies monetization methods based on high-quality content. Short-term: It has a diverse drama pipeline. We expect it to increase production capacity through team expansion, drama series production, and the exploration of short and micro-length drama series. We think the number of its original drama episodes to be released in 2022 and 2023 will likely rise to 123 and 198. Medium-term: To create a second growth curve, the firm is leveraging its original drama capabilities and is gradually expanding content marketing into three major segments: IP placement, IP long-tail marketing, and IP interest-based e-commerce. Long-term: Linmon has released many of its drama series on overseas platforms. We expect content exports to increase its brand influence abroad and become a long-term growth driver.
　　How do we differ from the market? We believe that as a leading drama company, Linmon will likely increase its market share in the industry's production capacity optimization and upgrades. Based on its leading production capacity and professional reserve, the firm could increase original drama production capacity and make breakthroughs in content marketing.
　　Potential catalysts: Capacity expansion accelerates; content marketing business develops faster than expected.
　　Financials and valuation
　　We estimate Linmon’s 2022 and 2023 non-IFRS EPS forecasts at Rmb0.81 and Rmb1.45, with a CAGR of 36.7% over 2021-2023. The stock is trading at 15.9x 2023e non-IFRS P/E. We initiate coverage with an OUTPERFORM rating and a TP of HK$34.0 (20x 2023e non-IFRS P/E), offering 27.1% upside.
　　Risks
　　Uncertainties resulting from COVID-19; industrial policy changes; competition intensifies; personal risk of industry professionals; new business development disappoints.