A8 Digital Music (800 HK): Domestic consumption underline growth - BUY (unchanged)

FY12/08A in line with expectations, turnover increased 146.9% YoY to RMB706.1m while net profit was up 45.0% YoY to RMB80.2m. Adjusted gross margin stable at 21.4%, down 0.2pcp YoY.

• A8 is well positioned being a domestic consumption oriented company in a growth industry
• Several large players such as Tencent and Sina has already indicated that operating environment in the wireless space has improved markedly and China Mobile has also indicated that driving wireless offerings such as mobile music will continue to be a key strategy
• No advertising revenues a benefit for A8. The company will be shielded from the expected downturn in China’s advertising market
• Healthy top line growth expected for FY12/09F and 10F, though expect some margin compression expected at the gross level. Though overall net margin expected to increase

17.3% drop in stock price yesterday (due to unclear presentation of FY12/07A one-off items) presents a good entry point. Trading at 1.6x ex-cash P/E after yesterday’s sell down. A8 is one of the cheapest pure play domestic consumption plays in our view. Maintain BUY call, target price HK$2.60, 10.7x FY12/09F P/E

Domestic consumption underlines growth