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1 Company Research Report Company Research Report WWW.EMPERORCAPITAL.COM China’s Future Leading Film Company: Developing a Premium Fully Integrated Film Production City-cum Tourist Accommodation Complex National Cultural Industries Backed by Government Policy: According to ―promoting the cultural industry as one of the core industries of the national economy‖ policy, the average annual growth rate of the industry will increase by more than 20% within the next few years. Given the continuous improvement in the standard of living together with the increasing traveling throughout the country, government support cultural industry activities including, tourism and movies/drama productions are anticipated to be potential beneficiary in the market. Developing a Top Film-based Tourist Site: The Group‘s development of Xiqiao Mountain DreamWorks Project (XMDP)is targeted as an integrated film shooting base and tourist zone which includes a film shooting base, a 5-star hotel, and a performance stadium. We believe NAHL will become one of the leading film shooting bases in China. Healthy Finance Position: In December 2012, The Group has declared a four for one four rights issue raising a net proceed of HKD311mn. The Group‘s financial position has become more healthier after the rights issue. The Group‘s net debt-to-equity ratio was reduced to about 2% in FY12. Upon the completion of the film-shooting base late this year, the revenue generated from film pro- duction, film shooting base rental, tourist entrance fees, and hotel businesses will become the future earnings driver for the Group. Valuation: We foresee great prospects for NAHL, mainly attributed to 1) NAHL‘s potential to become one of the leading film shooting base companies in China; 2) The rising earning potentials from the entrance fees and film shooting base rental; 3) The Group‘s hotel business benefitting from the increasing number of tourists. The NAHL‘s current price is trading at a significant 36% discount to its estimated NAV of HK$0.168 a share. As the XMDP is fully com- pletely later this year, the Group will enter into harvest period and its investment properties will enjoy a significant increase in fair value. As the stock gradually gains more recognition in the market, the discount to NAV will be narrowed down. We set their target price at $0.25, which is equivalent to 12.5x its FY14 net earning, representing an upside potential of 131%. We initial with a ‗Buy‘ recommendation. Date Industry 2013/01/22 Entertainment Closing Price Target Price HK$0.108 HK$0.25 Share Information Stock Code 8228 Outstanding Shares (bn) 4.06 Market Cap (HK$bn) 0.44 6-mth Avg Daily Turnover (HK$mn) 1.68 12-mth High/Low (HK$) 0.63/0.097 CFPS (HK$) N/A BVPS (HK$) 0.17 P/E (x) N/A P/B (x) N/A ROA (%) N/A ROE (%) N/A Debt/Equity (%) 2.20 Div. Yield (%) 0.00 Source : Bloomberg, Emperor Securities Research 1-mth 3-mth 6-mth 12-mth Change (%) -5.3 -46.0 -77.0 -78.1 Rel. to HSI (%) -9.9 -50.5 -80.9 -81.4 Source : Bloomberg, Emperor Securities Research Price Performance Financial Information Year Ended 31 Dec. FY10 FY11 FY12E FY13E FY14E Revenue (HK$mn) 11 16 9 119 240 Growth (%) NA 53% -46% 1277% 102% Net Profit (HK$mn) -36 26 -41 -23 81 Growth (%) NA NA NA NA NA EPS (HK$) -0.034 0.006 -0.010 -0.006 0.020 Growth (%) NA NA NA NA NA P/E (x) 0.0 0.0 -10.7 -18.8 5.4 DPS 0.00 0.00 0.00 0.00 0.00 Dividend Yield (%) NA 0.0% 0.0% 0.0% 0.0% Source : Bloomberg, Emperor Securities Research Emperor Securities Limited Research Department Tel : (852) 2836 2763 Fax : (852) 2831 8089 Email : [email protected] National Arts HLD. Ltd. (8228.HK) Initial Coverage 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 01/12 04/12 07/12 10/12 HKD National Arts HSI

HKD Target Price Tourist Accommodation Complex · leisure travel services in film and television content. The Xiqiao DreamWorks Project is the combination of two. Currently, there

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Company Research Report

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WWW.EMPERORCAPITAL.COM

China’s Future Leading Film Company: Developing a Premium Fully Integrated Film Production City-cum Tourist Accommodation Complex

National Cultural Industries Backed by Government Policy: According to ―promoting the cultural industry as one of the core industries of the national economy‖ policy, the average annual growth rate of the industry will increase by more than 20% within the next few years. Given the continuous improvement in the standard of living together with the increasing traveling throughout the country, government support cultural industry activities including, tourism and movies/drama productions are anticipated to be potential beneficiary in the market. Developing a Top Film-based Tourist Site: The Group‘s development of

“Xiqiao Mountain DreamWorks Project (XMDP)”is targeted as an integrated

film shooting base and tourist zone which includes a film shooting base, a 5-star hotel, and a performance stadium. We believe NAHL will become one of the leading film shooting bases in China. Healthy Finance Position: In December 2012, The Group has declared a four for one four rights issue raising a net proceed of HKD311mn. The Group‘s financial position has become more healthier after the rights issue. The Group‘s net debt-to-equity ratio was reduced to about 2% in FY12. Upon the completion of the film-shooting base late this year, the revenue generated from film pro-duction, film shooting base rental, tourist entrance fees, and hotel businesses will become the future earnings driver for the Group. Valuation: We foresee great prospects for NAHL, mainly attributed to 1) NAHL‘s potential to become one of the leading film shooting base companies in China; 2) The rising earning potentials from the entrance fees and film shooting base rental; 3) The Group‘s hotel business benefitting from the increasing number of tourists. The NAHL‘s current price is trading at a significant 36% discount to its estimated NAV of HK$0.168 a share. As the XMDP is fully com-pletely later this year, the Group will enter into harvest period and its investment properties will enjoy a significant increase in fair value. As the stock gradually gains more recognition in the market, the discount to NAV will be narrowed down. We set their target price at $0.25, which is equivalent to 12.5x its FY14 net earning, representing an upside potential of 131%. We initial with a ‗Buy‘ recommendation.

Date Industry

2013/01/22 Entertainment

Closing Price Target Price

HK$0.108 HK$0.25

Share Information

Stock Code 8228

Outstanding Shares (bn) 4.06

Market Cap (HK$bn) 0.44

6-mth Avg Daily Turnover (HK$mn) 1.68

12-mth High/Low (HK$) 0.63/0.097

CFPS (HK$) N/A

BVPS (HK$) 0.17

P/E (x) N/A

P/B (x) N/A

ROA (%) N/A

ROE (%) N/A

Debt/Equity (%) 2.20

Div. Yield (%) 0.00

Source : Bloomberg, Emperor Securities Research

1-mth 3-mth 6-mth 12-mth

Change (%) -5.3 -46.0 -77.0 -78.1

Rel. to HSI (%) -9.9 -50.5 -80.9 -81.4

Source : Bloomberg, Emperor Securities Research

Price Performance

Financial Information

Year Ended 31 Dec. FY10 FY11 FY12E FY13E FY14E

Revenue (HK$mn) 11 16 9 119 240

Growth (%) NA 53% -46% 1277% 102%

Net Profit (HK$mn) -36 26 -41 -23 81

Growth (%) NA NA NA NA NA

EPS (HK$) -0.034 0.006 -0.010 -0.006 0.020

Growth (%) NA NA NA NA NA

P/E (x) 0.0 0.0 -10.7 -18.8 5.4

DPS 0.00 0.00 0.00 0.00 0.00

Dividend Yield (%) NA 0.0% 0.0% 0.0% 0.0%

Source : Bloomberg, Emperor Securities Research

Emperor Securities Limited

Research Department Tel : (852) 2836 2763 Fax : (852) 2831 8089 Email : [email protected]

National Arts HLD. Ltd.(8228.HK)

Initial Coverage

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2

Industry Review

National Culture Industries Supported by the Government Policy: According to PRC‘s ―12th Five-Year Development Plan‖ of ―promoting the cultural industry to become one of the core industries of the national economy‖ policy, the Chinese cultural industry will increase from 2.85% of GDP in 2011 to 5% in 2015 (see Figure 1), implying an average annual growth rate of more than 20% within next few years. In addition, the total revenue of China‘s media industry has increased from RMB2.48bn in 2005 to 6.38bn in 2011, with CAGR of 14.5% (see Figure 2), greater than the country‘s overall GDP growth for the same period (see Figure 3). Given the continuous improvement in the standard of living together with the increasing traveling throughout the country, government support cultural industry activities including, tourism and movies/drama productions are anticipated to be potential beneficiary in the market.

WWW.EMPERORCAPITAL.COM

National Arts Holdings Limited

Given the continuous improvement in the standard

of living together with the increasing traveling

throughout the country, government support cultural

industry activities including, tourism and movies/

drama productions are anticipated to be potential

beneficiary in the market.

Emperor Securities Limited

Source: Bureau of Statistics of China

Figure 1: China's Cultural Industry Revenue and its % of GDP from 2005 to 2011

Source: Bureau of Statistics of China, 2012 Media Blue Book

Figure 2: China's media industry revenue & its growth rate from 2005 to 2011

Source: Bureau of Statistics of China, 2012 Media Blue Book

Figure 3: GDP Growth vs. Media Industry Growth in China from 2005 to 2011

2.30%

2.37%2.43% 2.43%

2.52%

2.75%

2.85%

2.00%

2.10%

2.20%

2.30%

2.40%

2.50%

2.60%

2.70%

2.80%

2.90%

0

200

400

600

800

1000

1200

1400

1600

2005 2006 2007 2008 2009 2010 2011

RMB (bn) China Cultural Industry Revenue

Cultural industry revenue to GDP ratio

9.9%10.7%

11.4%

9.0% 8.7%10.3%

9.2%

16.9%

12.4%

12.4%

12.4%

19.3%17.5%

15.2%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011

(%) GDP Growth Rate (%) Media industry Growth Rate (%)

248334

375 421

502590

6381.34%

1.54%

1.41%

1.34%

1.47% 1.47%

1.35%

1.20%

1.25%

1.30%

1.35%

1.40%

1.45%

1.50%

1.55%

1.60%

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011

RMB(bn)China Media Industry Revenue Media industry revenue to GDP ratio

CAGR 14.5%

3

Steady Growth of the TV Drama Industry in China: The growth of the PRC TV drama industry is mainly driven by advertising revenue and the TV drama broadcasting. Its business model is as such: TV drama production —>Drama broadcasting by TV stations —> Audience. The preference of audiences directly affects advertising revenue and audience rating. Currently, China‘s media industry produces more than 400 dramas or 120K to 140K series of drama broadcasting annually (see Figure 4). The turnover of the TV drama in China rose from RMB4.36bn in 2005 to RMB7.6bn in 2011, with a CAGR of 8.3% (See Figure 5), mainly attributed to the rise of advertising revenue and the sale of broadcasting rights. As watching TV drama series become a popular trend among the mass population and younger generation is becoming more enthusiastic about popular movie stars and TV episodes, we believe the TV drama industry is still in an expanding cycle. The continued growth of advertising revenue in wireless TV, cable TV and Internet TV, would lift the price of the drama broadcasting rights and this would further encourage investors to increase the production of TV dramas.

Robust Growth of China’s Film Industry: China film industry business model is as such: Films production by investors —> Film distributors allocate movies to different cinemas and generate cash from box office and film distribution rights —> audience. Industry revenue is mainly contributed by the local and overseas box office receipts, and non-box office receipts (including food and advertising. Box office revenue and copyright sales remain the key profit driver. According to the ENTGROUP statistics, China film industry‘s revenue increased from RMB4.2bn in 2005 to 17.8bn in 2011, with a CAGR of 23% (see Figure 6). In 2011, the box office receipts in China was RMB 13.2bn which account for a dominant 74% of the total industrial revenue. With the rise of urbanization rate and continuous improvement of per capita income in China, the China film industry is expected to grow at a high speed.

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National Arts Holdings Limited

Emperor Securities Limited

The total turnover of the TV drama broadcasting in

China rose from RMB4.36bn in 2005 to RMB7.6bn

in 2011, with a CAGR of 8.3%, mainly attributed to

the rise of advertising revenue and the sales of

broadcasting rights.

Source: The State Administration of Radio Film and Television of China

Figure 4: No. of Chinese TV Drama & its Series Production from 2005 to 2011

China film industry’s revenue increased from

RMB4.2bn in 2005 to 17.8bn in 2011, with a CAGR

of 23%. Given the rise of urbanization rate and

continuous improvement of per capita income in

China, the China film industry is expected to grow at

a high speed.

Source: The State Administration of Radio Film and Television of China

Figure 5: The Total Amount of TV Drama Broadcasting Rights from 2005 to 2011

514 500 529502

402 436 469

12265

1384714670 14498

12910

14685

14942

0

2000

4000

6000

8000

10000

12000

14000

16000

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011

Units No. of Chinese TV drama production (Number)

No. of Chinese TV drama production (Series)Series

4.364.85

5.14 5.075.48

5.92

7.60

1.50%

11.2%

6.0% -1.2%8.0% 8.0%

28.4%

-5%

0%

5%

10%

15%

20%

25%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2005 2006 2007 2008 2009 2010 2011

RMB(bn)Total Amount of Broading Rights

Growth Rate (%)

4

Audience Per Capita Rate in China Lower than the Global Level: According to ENTGROUP statistics, the global box office increased from USD23.1bn in 2005 to USD32.6bn in 2011, with a CAGR of 5.0% (see Figure 7). According to the global box office ranking in 2011, rank no. 1 is North America with USD10.2bn; rank no. 2 is Japan with USD2.27bn; rank no. 3 is China with USD2.03bn (see Figure 8). Despite the third ranking in the global film market in 2011, China's audience per capita rate was a dismal 0.54 and this is substantially below the rates reportedly other developed countries such as the United States, Australia, and France (see Figure 9). Since the CAGR of Chinese film industry revenue is of a much faster rate of 23% (only 5.0% in global market) from 2005 to 2011, we believe that the gap will narrow down in the near future.

WWW.EMPERORCAPITAL.COM

National Arts Holdings Limited

Emperor Securities Limited

The current audience per capita rate in China was

lower than the global level. Since the CAGR of

Chinese film industry revenue is at a much higher

rate of 23% (only 5.0% in global market) from 2005

to 2011, we believe that will narrow down in the near

future.

Source: The State Administration of Radio Film and Television of China

Figure 6: China's Box Office Revenue & its Distribution from 2005 to 2011

Source: EntGroup

Figure 7: Global & China Box Office from 2005 to 2011

Source: EntGroup

Figure 8: The Ranking of Global Box Office by Countries in 2011

23.125.4

26.728.1

29.930.5 32.6

0.34 0.42 0.53

0.69

0.99 1.63 2.121.5% 1.6%

2.0%2.5%

3.3%

5.4%

6.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011

USD(bn)Global's box office revenuesChina's box office revenuesChina to global box office %

CAGR 5.0%

102

22.7 20.3 19.7 16.7 14.3 12.1 11.6 11.3 11.1

0

20

40

60

80

100

120

USD(bn)

2.12.6

3.34.3

6.2

10.2

13.2

0.40 0.50 0.70 0.80 1.10 1.602.601.7 1.9 2.0 2.5

2.83.5 2.0

0

2

4

6

8

10

12

14

2005 2006 2007 2008 2009 2010 2011

RMB(bn)

Domestic film box office revenue

Foreign film box office revenue

Non-domestic box office revenue

5

The Growth of Cinemas Stimulate Film Production in China: According to the State of Administration of Radio Film and Television (SARFT) statistics, the number of films production increased from 260 films in 2005 to 791 films in 2011, with CAGR of 17.2% (see Figure 10). This is mainly attributed to the increasing in movie expenditure, which, in turn, would encourage more interest in film production. In 2012, the total box office revenue in China was RMB17.1bn, in which the top ten domestic films accounted for 22.3% or RMB 3.81bn of the total. High quality and popular movies are highly profitable. For instance, the top rank movie <Lost In Thailand> reported the total box office revenue of RMB 1.0bn, accounting for 5.88% of the total national box office revenue. In addition, the number of cinemas and screens in China increased at a CAGR of 13.3% and 20.3%, respectively, from 2006 to 2011 (see Figure 11). We believe that the continual increase in cinemas and screens together with the popularity of movie watching in China will encourage more films producers to invest in film production.

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National Arts Holdings Limited

Emperor Securities Limited

The number of cinemas and screens in China

increased at a CAGR of 13.3% and 20.3% respec-

tively, from 2006 to 2011 (see Figure 11). We be-

lieve that the increasing number of cinemas and

screens together with the rising popularity of movie

watching in China will encourage more films pro-

ducers to increase in movie production.

Source: The State Administration of Radio Film and Television of China

Figure 9: The Ranking of Cinema Visiting Frequency by Countries in 2011

Source: The State Administration of Radio Film and Television of China

Figure 10: Number of Films Production & its Growth Rate in China from 2005 to 2011

Source: EntGroup

Figure 11: Number of Screens and Cinemas in China from 2005 to 2011

260 300

402 406456

526

791

23%

15%

34%

1%

12%15%

50%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011

NumberNo. of film production in China Growth Rate

1325 1427 1545 16872000

2800

30343527

40974723

6256

9200

0%

10%

20%

30%

40%

50%

0

2000

4000

6000

8000

10000

2006 2007 2008 2009 2010 2011

Units No. of Screen

No. of Cinema

No. of Screen Growth Rate (%)

No. of Cinema Growth Rate (%)

CAGR13.3%

CAGR20.3%

4.15

3.563.30

2.80

2.17 2.091.88

1.59

1.13

0.54

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Visiting Frequency

6

Film Industry Development Fully Supported by Chinese Government: As stipulated in the 12th five- year plan, the Chinese government fully supports the development of the local film industry for the first time. Besides encouraging the expansion of the scale and financial structure of cultural enterprises in 2010, other major supportive policies include 1) RMB1mn - 10mn subsidies to those domestic films with highly technical production; 2) Encouraging cinemas to screen domestic-made films. 3) Encouraging the development of 3D technology, wide screen format production etc.. On February, 2012, the Chinese government agreed to increase 14 import-quota of foreign movies from 20 movies to 34 movies, on conditions that the movies must be using 3D or IMAX technologies. With the support from government, we believe that the domestic filming industry will grow rapidly in the next 5 years. Major supportive policies for China‘s film industry are shown in the followings (see Figure 12).

WWW.EMPERORCAPITAL.COM

National Arts Holdings Limited

Emperor Securities Limited

The Chinese government fully supports the devel-

opment of film industry by measures including 1)

Subsidies of RMB1mn - 10mn to those domestic

films with highly technical production; 2) Encourag-

ing local cinemas to show domestic-made films. 3)

Encouraging the development of 3D technology

and wide screen format production.

Source: Websites

Figure 12: 12th Five-year Plan : Major Supporting Policies in China Film Industry

Year Policy Description

2010-01

Guideine on promoting

the prosperity and

development of the

film industry

The government releases the f irst f ilm industry

guidelines and the specif ic policy measures to promote

the prosperity and development of the f ilm industry.

2010-04

Guideline on f inancial

support for the

revitalization and

development of the

cultural industry

To encourage the expansion of cultural enterprises

using direct funding.

2011-11

Guideline on

encouraging the

coordination and

development of f ilm-

making distribution

and sharing

1. With reference to the international practice, there

should be no more than 50% revenue split ratio

betw een cinema and filmmakers on the f irst round of

the screening.

2. Recommendeds rent is less than 15% of the cinema

income.

3. The contract period of a franchise cinema must be

over three years.

4. Filmmakers cannot advertise during the screening,

the cinema w ill control the advertising during the

intervals.

2012-02

China and the US

reached agreement

on issues related to

WTO movies memo of

understanding

China and the US have reached some agreements.

China agreed to import additional 14 foreign movies, on

conditions that the movies must be produced in 3D or

IMAX format; the revenue split w ill rise from 13% to

25%. In the foreseeable future, there w ill be more 3D

and IMAX movies brought to public, and w ill give more

opportunity to the small f ilm producers to publish their

f ilms in China.

7

Chinese Film Industry Industrial Chain: The film industry chain mainly consists of film production (producers), film distribution (distributors), circuits, and cinemas (see Figure 13).

▓ Film Producers: Responsible for financing, film shooting and post-production.

Film producer owns the film patents and sells the screening rights to the film distributors and other distributors within a certain period of time.

▓ Film Distributors: responsible for films‘ marketing and promotion activities and

negotiation with circuits. Distributors either acquire the patent or act as an agent of film distribution rights for film producers, distributors then negotiate with circuits regarding split Mostly, film producers and distributors are in the same company.

▓ Circuits: It is usually formed by a group of cinemas to form an alliance to

centralize price, operation and management as well as to provide film promotion for cinemas.

▓ Cinema: The place where movies are screened for audience. The box office

revenue of the cinema will be split with film producers, distributors as agreed. Orange Sky Golden Harvest Entertainment (Holdings) Ltd. (01132.HK) is a typical cinema operator.

According to the ―Guideline on the adjustment of the distribution of domestically produced films profits‖ released by SARFT dated December 19, 2008. In principle, the box office revenue after deducting for the movie special funds 5% and business tax 3.3%, will be distributed to producers and distributors with (43%), circuit (7%), and cinemas (50%). In reality, not all film producers and distributors can receive 43% of the box-office profit. However, only those movie directed by famous directors such as Zhang Yimou, Feng Xiaogang, can received the maximum 43% box-office revenue and the rest only receive between 38% and 43%. Under the current system, a cinema has to form an alliance with a circuit in order to get the screening rights. At the end of 2011, there are 43 circuits in China. To increase bargaining power of circuits with film distributors, circuit acquires as many cinemas as possible under their alliance system. As a result, most of the circuit box-office sharing is less than 7% mainly due to substantial increase of cinemas under the alliance.

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National Arts Holdings Limited

Emperor Securities Limited

After deducting the movie special funds 5% and

business tax 3.3%, the box office revenue will be

distributed to producers and distributors with (43%),

circuit (7%), and cinemas (50%).

Source: Emperor Securities Research

Figure 13: China Film Industry Business Model

Film production (Producers)

Film Distribution (Distributors)

Cinema Circuits Cinema Audience

Film Film Film Film

Proceed

Proceed Proportion 43% 7% 50%

ProceedProceedProceed

8

Company Highlight

A Future Leader in Providing Film Shooting Base in China: National Arts (8228.HK) (NAHL) is currently engaged in film production and artist management businesses. NAHL‘s businesses had transformed from network infrastructure and electromechanical devices services to film production and the company renamed from Vertex Group Limited to ―National Arts Holdings Limited‖. As the film production industry in China has substantial development potential, NAHL is gradually expanding upstream by building the Xiqiao Mountain Dream Work Project in Foshan City, Guangdong Province. The project includes a film shooting bases and the supporting facilities such as a 5 star resort hotel and a multifunctional performance stadium. The objective is to build an integrated tourist zone comprising a film shooting base, a 5-star hotel, and a performance stadium. We believe NAHL will be a leader in film shooting base provider. Good Prospectus in Film Production: NAHL has produced three movies, namely ―The Legend is Born –IP Man‖(2010), ―The Woman Knight of Mirror Lake‖ (2011), ―Ip Man: The Final Fight‖(2013) (see Figure 14).

The management indicates that ―Ip Man: The Final Fight‖, is the first movie produced in the Xiqiao film shooting base, and will be released in 2Q/2013. The management believes that ―Ip Man: The Final Fight‖ story is well publicized and has confidence on the box office. To ensure that the street view of the Xiqiao firm production base makes its maiden appearance to the public through this movie, third party film party bookings for the shooting base are only available in 2Q 2013. According to the management, future movie production will depend on the availability of suitable scripts and investors. NAHL has shifted its core business focus to the film shooting base and hotel businesses. Furthermore, to facilitate vertical integration of the Group‘s movie business, NAHL has established a joint venture company in Zhuhai City, Guangdong province in Dec 2012 to operate the cinema business. The first cinema under planning will consist of 8 screens and more than 730 seats, the commencement date will be in 2Q 2013.

Artist Management Business: NAHL has three major artists, Mr. Dennis To, (杜宇航先

生)Miss Rose Chan (陳嘉桓小姐), and Mr. Chow Da Yu (周定宇先生). They will take

part and perform in different movies and TV shows and participate in advertising shooting in the future. Continuous training will be provided to artists in order to enhance their visibility and popularity.

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National Arts Holdings Limited

Emperor Securities Limited

As the film production industry in mainland China

has substantial development potential, NAHL is

gradually expanding growth upstream by building

the Xiqiao Mountain Dream Work Project. The

objective is to build an integrated shooting base and

tourist zone including a film shooting base, a 5-star

hotel, and a performance stadium. We believe

NAHL will become one of the leading film shooting

base providers.

To facilitate vertical integration of the Group’s movie

business, NAHL has established a joint venture

company in Zhuhai City, Guangdong province in

Dec 2012 to operate the cinema business. The first

cinema under planning will consist of 8 screens and

more than 730 seats. The commencement date will

be in 2Q 2013.

Source: National Arts Holdings Limited

Figure 14: Three Movies Produced by NAHL

9

Developing a Premium Film Shooting Base in China: In 2010, NAHL began to develope the Xiqiao DreamWorks Project, which is located in Xiqiao in Guangdong province, and is listed as one of the 20 vital tourism culture projects and a national 4A tourist attraction. The area of the project amounts to 1,017mu, including land area of 837mu and lake area of 180mu. The complex includes a film shooting base for movies and TV programs, 5-star and 3-star hotels, and supporting facilities such as indoor movie studio and multi-functional performance stadium etc. (see Figure 15). The expected total investment of the project is approximately RMB800m. In 2012, The first phrase of the film shooting base was completed , which includes the Hong Kong zone (see Figure 16). The construction of the other scenic spots namely the Shanghai zone, Guangzhou zone, Imperial garden, Beijing‘s historical old streets, Traditional Chinese quadrangle courtyard, foreign countries, Jiangnan region of rivers and lakes, Palaces of Qing and Ming dynasty, Riverside at Qingming Festival etc. are expected to be completed before the end of this year. These zones will be opened to tourists upon completion.

Mong Kok Streetscape

Yau Ma Tei Streetscape

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National Arts Holdings Limited

Emperor Securities Limited

The first phrase of the film shooting base, which

includes the Hong Kong zone was completed. The

construction of other scenic spots namely the

Shanghai zone, Guangzhou zone, imperial garden,

Beijing’s historical old streets, traditional Chinese

quadrangle courtyard, foreign countries, Jiangnan

region of rivers and lakes, palace of Qing and Ming

dynasty, Riverside at Qingming Festival etc. are

expected to be completed before the end of 2013,

These series zone will be opened to tourists in due

course.

Source: National Arts Holdings Limited

Figure 15: Guangdong Province Xiqiao DreamWorks Project Plot Figure

Source: National Arts Holdings Limited

Figure 16: Hong Kong Zone : Mong Kok & Yau Ma Tei Streetscape

10

Film Shooting Bases in China Film shooting bases in China can be divided into two categories: 1. Film and television industrial parks which provide sites for professional film and television shooting and production, equipment, services and rental of sites. 2. Tourist attractions, which provide leisure travel services in film and television content. The Xiqiao DreamWorks Project is the combination of two. Currently, there are four large-scale famous film shooting bases

in PRC including Hengdian World Studios, Wuxi Movie/TV Base, Nanhai Movie and TV

Town and Xiqiao Dream Works Project. The characteristics of the shooting bases are as below: Hengdian World Studios: Located in Hengdian, Dongyang city with an area of 4,962 mu, it is a national 5A tourism zone, which is 160 kilometers away from Hangzhou and within four hours of transportation in the Jiangsu-Zhejiang-Shanghai-Fujian-Jiangxi-tourism economic circle. Built in 1996 with a total investment of approximately RMB3b, main scenic spots include Guangzhou streets, Hong Kong streets, palatial garden of Ming and Qing dynasties, Qin palace, Riverside scene at Qingming Festival, Dreamsville, the Rocky Cave, Dazhi Temple, Ming and Qing dynasties expo city etc. As the biggest shooting base in Asia, it is regarded as ―the Hollywood in China‖ by USA‘s ―Hollywood‖ magazine. It is owned by Zhejiang HengDian Co., Ltd Wuxi Movie and TV Base: Situated in Wuxi city, Jiangsu province with a land area of 1500mu and a 3000mu lake, Wuxi Movie and TV Base is a national 5A tourist attraction. Established in 1987, it is the first large-scale film shooting base and cultural and tourist spot in the PRC. Major scenic spots are Tang city, European city, the Three Kingdoms city, Water Margin city. It is owned by a direct subsidiary of China Television Media

Company (中視傳媒)(600088).

Nanhai Movie and TV Town: Constructed in 2004, this1500mu Nanhai Movie and TV Town is based in Shishan town, Nanhai district, Foshan city, Guangdong province. The

main scenic spots are Tianwangfu area, regions of rivers and lakes, Hong Kong,

Macau, Jinggang battle on the sea and battle with horses. It is one of the four shooting bases directly owned by CCTV.

Xiqiao Dream Works Project: Situated in Xiqiao Shan, Guangdong province with a

land area of 837mu and a 180mu lake, the project is around 70km away from Guangzhou Baiyun airport and Guangzhou Nan Railway Station (High speed railway station) and traveling time is only 45 minutes. The project is expected to complete at the end of 2013. Main scenic spots include Hong Kong streets, Guangzhou streets, Shanghai streets, ancient mansion, historical commercial streets, Shanghai, Guangzhou imperial garden, Beijing historical streets, Chinese traditional quadrangle courtyard, foreign countries, Jiangnan region of rivers and lakes palace of Qing and Ming dynasties, Riverside at Qingming Festival. The shooting base is owned by NAHL (8228.HK). Compared to other major shooting bases in China such as Hengdian World Studios,

Wuxi Movie and TV Base, Nanhai Movie and TV Town, the competitive advantages of

the Xiqiao project are:

▓ Convenient Transportation: Xiqiao shan in Guangdong province has a superior

geographical location. Hengdian World Studio is far from the airport, adversely affecting the flexibility and efficiency of film and TV production.

▓ Calmer Weather: Compared to Hengdian World Studios, Xiqiao Shan has calmer

weather all year, which should help increase the efficiency and speed of film production.

▓ Abundant Supporting Facilities: when compared with the shooting bases in

Wuxi and Nanhai, Xiqiao project provides advanced supporting equipments, and quality catering and accommodation services.

▓ Emphasis on Later-stage Production: Many film shooting bases in China only

focus on the rentals and ticketing, but Xiqiao project focus on later-stage production and has a multi-functional performance stadium which can host concerts on a regular basis, attracting various types of tourists.

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Source : Emperor Securities Research

Figure 17: Famous Film Shooting Base in China

Film Shooting Base Xiqiao Dream Works Project Hengdian World Studios Wuxi Movie and TV Base Nanhai Movie and TV Town

Location Xiqiao Shan, Guangdong province Hengdian, Dongyang city Wuxi city, Jiangsu provinceShishan town, Nanhai district,

Foshan city, Guangdong province

Total area a land area of 837(mu)and

180(mu) lake4962 (Mu)

a land area of 1500 (Mu) and a

3000 (Mu) lake1500Mu

Traffic

70 kilometers and 45 minutes

away from Guangzhou Baiyun

airport and Guangzhou Nan

Railway Station

160 kilometers away from

Hangzhou and within four hours of

transportation in the Jiangsu,

Zhejiang, Shanghai, Fujian, jiangxi

tourism economic circle.

Located in the junction of

Guangzhou, Foshan, Huadu,

Sanshui

Completion Date 2013 1996 1987 2004

Projects

Hong Kong streets, Guangzhou

streets, Shanghai streets, ancient

mansion, yamen (government

office in ancient China), historical

commercial streets, Shanghai,

Guangzhou imperial garden,

Beijing historical streets, Chinese

traditional quadrangle courtyard四

合院, foreign countries, Jiangnan

region of rivers and lakes江南水鄉

,palace in Qing and Ming

dynasty, Riverside at Qingming

Festival

Guangzhou streets, Hong Kong

streets, palatial garden of Ming

and Qing dynasties明清宫苑, Qin

palace, Riverside scene at

Qingming Festival, 夢幻谷

Dreamsville (you typed 穀 ), The

Rocky Cave 屏岩洞府, Dazhi

Temple大智禪寺, Ming and qing

dynasties expo city etc明清民居

博覽城等.

Chinatown, European City, Three

Kingdoms City and Water Margin

City, the scenic spot with Wu

palace, Kanroji, H & Q, Cao Ying

flood and drought Village, the

Royal Palace, the great Temple,

zishi Street, Millennium Ho

Street, Liangshan, Imperialgarden,

Tanggong

Palace area (天王府區), River

Delta, Hong Kong and Macau

landscape composition, Jinggang

water war, and the war horse

Tourism Zone national 4A tourist attraction. National 5A tourism zone National 5A Tourism Zone

Superiority

Convenient transportation,

moderate weather, and abundant

supporting facilities

The world's largest film and film

shooting base and a national film

and TV industry experimental

zone

Wuxi film base was built near the

mountain and enjoys Taihu lake

delicacy. Taihu Lake is the third

largest freshwater lake in China,

with an area of 2250 sq km.

Frost-free all around the year , the

annual average temperature of

21.9 ℃, Unspoilt natural

conditions in the Pearl River Delta

and tourist resort without pollution

Ownership Natioanl Arts Holding Limtied Zhejiang HengDian Co., Ltd.Direct subsidiary of China

Television MediaCCTV

Famous Movies and Drama ProduceIp Man: The Final Fight

"Hero", "The Promise" and "Curse

of the Golden Flower", "The

Warlords", "Painted Skin",

"Detective Di Renjie", "seven

items sesame official," War and

Beauty "," Grand Eunuch "

"Romance of the Three

Kingdoms" and "Outlaws of the

Marsh", "Swordsman", "Family",

"The Eagle Shooting Heroes"

"Romance of the Three

Kingdoms" and "God Bless

America", "Studios tycoon",

"Sun", "Ghost Story"

Ticket prices RMB 180 per visitor RMB 150 per visitor RMB 390 per visitor RMB 45 per visitor

Major Scenic Spots

12

Rental Income of the Shooting Base and Ticketing will be the Future Earnings drivers of NAHL: Film Set Rental Business: Upon the completion of the shooting base, there will be 10 difference scenic zones. The management indicates that each zone can accommodate 4 groups of film production units at one time, each unit consists of 100-120 people, each unit will use the zone for 1-2 months on average. As such, each unit will bring in an average future revenue of about 600k. Currently, up to 50 units are negotiating with NAHL on rental arrangement. The management expects to see up to 20 and 40 units renting the base in 2013 and 2014 respectively. In order to attract international film production companies to use the shooting base, NAHL will construct an in-door movie production studio in 2014. Entrance Fees Business: According to the tourism board in Foshan city, the government will invest around RMB70m to upgrade Xiqiao shan to a 5A national tourist attraction. The 5 major upgrading include the construction of the Shannan and Shanbei exit, Jiulongyan, Baiyun Caves Scenic Area improvement work, the modernization of Huanwei waste treatment facilities installment of more direction and tourism instructions logos etc., the targeted completion date of these upgrading works is June this year. The Xiqiao tourism department is planning to integrate the tourism resources, the region including Xiqiao Shan scenic area, West coast scenic area, Songtang cultural ancient village, dreamworks scenic area, and Mona Lisa Art museum, to enhance the town‘s tourist business. Furthermore, according to Secretary of Nanhai West Promotion of

Cultural Tourism, Lianghuiyan (梁惠顏), an all-day travel scheme among the three

townsship (Xiqiao, Jiujiang, Danzao) in Nanhai west will be launched for the purpose of integrating the tourism resources in the three towns, aiming to lengthen tourists‘ stay from 0.5 day to 1 day. Xiqiao tourism department revealed that there is around 2mn visitors arrivals per year in Xiqiao Shan, visitor arrivals hit 150k in the recent gold week holiday.. Furthermore, there are various tourist attraction industry such as Wong Tai Sin temple

and 地藏王 etc. Meanwhile, to enhance the attractiveness of the shooting base, NAHL

will regularly arrange celebrities visits and, host concerts in the multi-functional performance stadium starting 2015 and onwards. The management reckoned that between mid-2013 and 2014, the entrance fee of the shooting base will be RMB100 and RMB180 respectively. Upon the completion of the scenic spots, visitors will increase remarkably. On the conservative side, visitor arrivals in 2013 and 2014 are estimated to reach 125k and 380k respectively (19% of Xiqiao Shan‘s). With the full support the local government, the number of visitors number will increase steadily, rentals and ticketing revenue will become key earnings drivers for NAHL in the future.

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The management expects to see up to 20 and 40

film production units renting the base in 2013 and

2014 respectively. In order to enhance supporting

facilities to attract international film production

companies to use the shooting base, NAHL will

construct an in-door movie production studio in

2014.

Source: National Arts Holdings Limited

Figure 18: Various Temples in the Shooting Base

13

Hotel contribution commences in 2013: Developed over a 70,000 sqm site, a 6-storey, 353-room, five-star hotel with a total GFA of 48,191 sqm will be completed in 2Q/2013. The design of the hotel will be based on the modern and gorgeous style that incorporates the Greek elements (see Figure 19 & 20). The hotel will have 335 business grade rooms, 9 artist suites, 8 super-star suites, and 1 presidential suite. The hotel will have a total of 9 restaurants including a Chinese restaurant, Western restaurant, Japanese cuisine, cafes, tearooms and bars. There are also a 1,085 sqm International Ballroom, two multi-function meeting rooms, three multi-function combination halls and four function rooms in the hotel complex.

Room Rate: Upon the completion of the hotel in 2Q 2013, the initial average room rate will be RMB 550, 18-20% higher than other hotels in the same region. The room rate adjusted upwards to RMB 600 in 2014 (see Figure 21). As the construction of the entire film shooting base completes at the end of 2013, we believe the number of film production teams and visitors will steadily increase, which in turn, will bring in stable income for the hotel business.

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Source: National Arts Holdings Limited

Figure 19: Xiqiao Mountain DreamWorks 5-star Hotel in Front View

Source: National Arts Holdings Limited

Figure 20: Xiqiao Mountain DreamWorks 5-star Hotel in Rear View

Source: National Arts Holdings Limited

Figure 21: Room Rate of Other Hotels Near National Arts Hotel in 2012

華夏新中源 樂從財神 高明碧桂園 恒安瑞士 皇冠假日 保利洲際

328 408 337 234 415 445

53% 52% 49% 71% 51% 57%

355 415 235 560 535 665

Project

No. of rooms

Aver.occupancy rate

Aver. room rate

14

Earning Forecast

The Group's revenue and earnings forecast in 2012–2014 are shown as follows (see Figure 22):

▓ Film Business: ―Ip Man: The Final Fight‖ will be released in the second quarter

this year. After deducting advertising and marketing costs, the total box office revenue will be about $40mn in FY13.

▓ Film Production Team Rental Business: We assume that 20 and 45 film

production teams will rent the shooting base and each production team will generate an average revenue of $0.6mn and $0.66mn in 2013 and 2014 respectively. We expect that the film production rental business will generate a total revenue of $12mn in FY13 and $29.7mn in FY14, respectively.

▓ Film Production Crew Dormitory Business: The Group operated a 224-beds

dormitory for film production crew. Assuming 20 and 45 film production teams will rent the shooting base; each production team with 70 staff will occupy the dormitory; bed rate for each staff is 65 and 70; as well as the occupancy rate is 51% and 90% in 2013 and 2014, respectively. We expect that the film production crew dormitory business will generate revenue of $3mn in FY13 and $5.9mn in FY14, respectively.

▓ Entrance Fees Business: As the construction of shooting base will be completed

at the end of 2013, we assume that the number of tourists‘ arrival will be 13mn in FY13 and 38mn in FY14; and the ticket price will increase from RMB30 in FY13 to RMB180 in FY14. We expect the entrance fees business will generate revenue of $8.13mn in FY13 and $67.5mn in FY14 respectively.

▓ Dining and Gift Business: We assume that each tourist will spend about 20 for

food and beverage in the shooting base and 5 for temple worship. We expect the dining and gift business will generate revenue of $3.10mn in FY13 and $9.38mn in FY14, respectively.

▓ Hotel Business: Upon the completion of the Hotel in 2Q/FY13, we assume that

the occupancy rate will be 37% and 76% and the average annual room rate will be 550 in FY13 and 600 in FY14 and expect Hotel business will generate revenue of $43.20mn in FY13 and $96.81mn in FY14, respectively.

▓ We expect the Group’s revenue to grow to $8.6mn, $119mn and $240mn,

respectively in FY12-FY14 with a CAGR of 146% Operating Margin: The Group‘s operating expense will increase to HKD44.70mn in FY13 and HKD73mn in FY14, mainly attributed to the rise of direct cost, rental expense, and general expense from both shooting base business and the hotel business. We expected operating margin in FY13 remain negative but will turnaround in FY14 mainly due to the operating expense such as staff cost and direct cost relatively stable, but the number of both film production crew renting the shooting base and the tourist arrival increasing substantially.

Net Profit:

We assume that the effective tax rate of NAHL will remain 25% in FY12-FY14. We forecast that earning per share will also grow to HKD-0.01, HKD-0.006, and HKD0.020, respectively during the same period with a CAGR of 47%.

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Figure 22: National Arts’ Operational Forecast Data

Film Production Income 2012E 2013E 2014E

Gross Box Receipts in HK HKD in mn 0 6 0

Gross Box Receipts in the PRC HKD in mn 0 18 0

Total Royalties HKD in mn 1.25 16 0

Total Revenue HKD in mn 1.25 40.00 0

Artiste Management fee income 2012E 2013E 2014E

Number of Artist Person 3.0 3.0 4.0

Average Performance of Each Artist HKD in mn 1.0 1.1 1.2

Total Revenue of Artiste Management HKD in mn 3.0 3.3 4.8

Dream Work 2012E 2013E 2014E

Tousit Entrance Fee Income

Opening Date 12/2013

No. of Tourist Million 0.05 0.125 0.375

Price per Ticket RMB 30 65 180

Total Revenue -Tickets RMB in mn 1.50 8.13 67.50

Joss Sticks Business

Opening Date 06/2012

No of Tourist Million 0.05 0.13 0.38

Spending per tourist -Joss Sticks RMB 5.00 5.00 5.00

Total Revenue Xiqiao Wong Tai Sin Temple RMB in mn 0.25 0.63 1.88

Retail Shops and Restaurants

Opening Date 06/2012

No of Tourist Million 0.05 0.13 0.38

Spending per Tourist RMB 20 20 20

Total Revenue - Retail Shops and RestaurantsRMB in mn 1.00 2.50 7.50

Total Revenue from Tourist in Dream Work RMB in mn 2.8 11.3 76.9

Total Revenue from Tourist in Dream Work HKD in mn 3 14 95

Revenue from Film Production Team

Films Shooting Base

Fully Operation Date 12/2013

No. of Production Team Units 2 20 45

Average Spending per Production Team RMB in mn 0.40 0.60 0.66

Total Revenue -Film Shooting Base RMB in mn 0.80 12.00 29.70

Hostel for Film Shooting Crews

Fully Operation Date 12/2013

No. of Production Team Unit 20 35

No. of beds Unit 224 224

Average rate per bed RMB 65 70

Occupancy rate % 51% 90%

Revenue - Hostel RMB in mn 2.73 5.11

Revenue - Others (Necessities, F & B) 15% RMB in mn 0.27 0.77

Total Revenue - Hostel RMB in mn 3.00 5.88

Total Revenue from Film Production RMB in mn 0.80 15.00 35.58

Total Revenue from Film Production HKD in mn 0.99 18.52 43.92

Total Dreamwork Revenue RMB in mn 3.6 26.3 112.5

Total Dreamwork Revenue HKD in mn 4.4 32.4 138.8

Hotel Operation Unit 2012E 2013E 2014E

National Arts Hotel

Opening Date 06/2013

No of room Unit 353 353

Occupancy Rate (%) 37% 76%

ARR (RMB) RMB 550 600

Revenue for Rooms RMB in mn 26.22 58.75

Revenue for F&B (35%) RMB in mn 9.18 20.56

Revenue for Other Services (10%) RMB in mn 2.62 5.88

Total Revenue RMB in mn 38.02 85.19

Total Revenue HKD in mn 43.20 96.81

16

Financial Position

The Group recorded net cash of $85.05mn in 1H/FY12 (FY11: $213mn). In September 2012, the Group recorded unsecured loan of HKD35mn and related-company loan of HKD13.4mn. The Group has declared a 4 for 1 rights issue raising and the subscription price for the rights shares is HK$0.10 per share, with 81.13% discounted from the closing price and the total net proceeds from the rights issue is HKD311mn. The total number of shares of the Group increased from 811mn shares before the right issue to 40.56mn shares after the rights issue. The shareholding structure changes are as follows (see Figure 23). The Group use HKD171mn to reduce the liabilities including i) Repayment of convertible bonds of HKD121.5mn; ii) the loan from director of HKD1.17mn; iii) related-company loan of HKD13.40mn; iv) other borrowings of HKD35mn. The Group‘s net debt-to-equity ratio was reduced to about 2% in FY12. Financial situation is positive and healthy .

Capital expenditure

After finishing the fund raising from rights issue in FY12, the Group had net proceeds of HKD311mn, which HKD141mn will be used as general working capital including i) HKD39.35 mn for the film shooting base in ―Xiqiao Mountain Dream Work‖ project, ii) HKD87.84mn for a 5-stars hotel construction and iii) HKD14.27mn for general working capital. Management indicated that the capital expenditure are HKD50mn in FY12 and HKD400mn in FY13 (HKD160mn for film shooting base and HKD235mn for hotel). As the Group's has cash on hand of about HKD160mn and the film shooting base and hotel projects will be completed before the end of 2013, management indicate that the remaining approximately HKD240mn will be financing through other channels or private funding.

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Figure 23: The Shareholding Changes Before and After the Rights Issue

No. of shares % No. of shares %

Sin Kwok Lam 195,598,000 24.11 976,390,000 24.07

Law Po Yee 6,672,000 0.82 33,360,000 0.82

Tse Young Lai 161,868,000 19.95 805,068,000 19.85

Subscribers procured by Underwriter 200,945,019 4.95

Public Shareholders 447,116,139 55.12 2,040,507,676 50.31

Total 811,254,139 100 4,056,270,695 100

Before completion of Rights Issue After completion of Rights Issue

17

Valuation The current price of NAHL is HKD0.108, a 36% discounted to estimated NAV of HKD0.168 in FY12, the significantly discounted is mainly due to:

▓ Currently NAHL lacks reputation and has no any star artists;

▓ Market classifies the Group as film producer only, while ignoring its profit potential

from film shooting base and the hotel business;

▓ The Group was listed on the GEM board for a short period of time, without any

track record We foresee great prospects for NAHL in the future, mainly attributed to

▓ NAHL‘s potential to become one of the leading film shooting base companies in

China;

▓ The rising earning potentials of both the entrance fees and film set rental;

▓ The Group‘s hotel business benefitting from the increasing number of tourists;

▓ Comparing the NAHL‘s current price with estimated NAV of HKD0.168 in FY12, a

significant 36% discounted. With the completion of shooting base and the hotel at the year end of 2013, the Group will enter into harvest period and the investment properties will have a significant increase in fair value. As the stock gradually gains more recognition in the market, the discount to NAV will be narrowed down.

We set our target price at $0.25, which is equivalent to 12.5x PER in FY14, representing an upside potential of 131%. We initiate with ‗Buy‘ recommendation.

Major Risk

▓ Longer-than-expected construction time and higher-than-expected budget cost of

completion of film shooting base.

▓ The development of new technology in film production may cause greater impact

on the traditional film shooting base

▓ The fierce competition among other film shooting base in China

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HKD(million)

Year Ended 31 Dec2010 2011 2012E 2013E 2014E

CF from Operating Act. (54.1) (24.7) (121.6) 54.2 125.2

CF from Investment Act. (18.0) (114.4) (52.4) (157.1) (85.8)

CF from Financial Act. 226.6 (0.5) 189.3 149.5 49.5

Cash & CE at beg. of year 6.3 160.8 21.3 36.6 83.2

Inc./(dec.) in Cash & CE 154.5 (139.7) 15.2 46.6 88.9

Exchange gains / loss 0.0 0.2 0.0 0.0 0.0

Cash & CE at end of year 160.8 21.3 36.6 83.2 172.0

Source: Bloomberg/ Emperor Securities Research

Cash Flow Statement

HKD(million)

Year Ended 31 Dec2010 2011 2012E 2013E 2014E

Film products 36 4 30 0 0

Trade & Other Rec. 3 7 11 6 7

Inventories 0 1 1 2 3

Prepay. & other rec. 4 24 100 97 94

Fin. asset at fair value 2 12 0 0 0

Cash & Cash Equ. 161 21 37 83 172

Total Current Assets 205 69 179 188 276

PPE 17.2 59.4 39.4 189.5 183.2

Investment prop. 0.0 440.8 480.8 640.8 660.8

Land lease prepay. 0.0 92.8 90.5 88.2 85.9

Others 9.0 9.0 9.0 9.0 9.0

Total Non-cur Assets 26 602 620 927 939

Total Assets 232 671 799 1116 1215

Trade Payables 2.1 0.3 0.7 2.4 4.8

Other Payables 7.3 29 33 20 18

Bank borrowings 3.7 3.2 0.0 0.0 0.0

Others 0.0 6.1 36.9 201.9 201.9

Current Liabilities 13 38 71 224 225

Convertible Bond 0.00 85.3 0.0 0.0 0.0

Deferred tax liab. 0.00 32.3 32.3 32.3 32.3

Finance lease liab. 0.00 15.4 15.4 15.4 15.4

Non-current Liab. 0 133 48 48 48

Total Liabilities 13 171 118 272 272

Equities 218 500 680 844 943

Source: Bloomberg/ Emperor Securities Research

Balance Sheet Financial Ratio

Year Ended 31 Dec 2010 2011 2012E 2013E 2014E

Profitability (%)

Gross Margin N/A NA NA NA NA

EBITDA Margin N/A -359% -185% 19% 65%

EBIT Margin N/A -407% -335% -6% 52%

Pre-tax profit margin N/A 359% -473% -20% 45%

Net Profit Margin N/A 158% -473% -20% 34%

Growth Rate (%)Revenue 21785% 53% -46% 1277% 102%

EBITDA N/A N/A N/A N/A N/A

EBIT N/A N/A N/A N/A N/A

Net Profit N/A N/A N/A N/A N/A

EPS N/A N/A N/A N/A N/A

OperationCurrent Ratio (X) 15.69 1.82 2.54 0.84 1.23

Quick Ratio (倍) 15.69 1.82 2.54 0.84 1.23

GA Exp/ Sales (%) 129% 139% 211% 31% 16%

A/R (Day) 213 109 385 26 10

Financial RatioDiv. Payout Ratio (%) 0% 0% 0% 0% 0%

Net debt/equity (%) -72% 13% 2% 14% 3%

Sales / total assets (x) 0.05 0.02 0.01 0.11 0.20

Total assets / equity (x) 1.06 1.34 1.17 1.32 1.29

Return on Asset (%) -26% 6% -6% -2% 7%

Return on Equity (%) -29% 7% -7% -3% 9%

Source: Bloomberg/ Emperor Securities Research

HKD(million)

Year Ended 31 Dec2010 2011 2012E 2013E 2014E

Revenue 11 16 9 119 240

Cost of film production (26.6) (39.1) 0.0 (40.0) 0.0

Depreciation of PPE (1.1) (2.0) (7.3) (24.5) (26.0)

Employe Benefit Exp. (12.5) (20.5) (11.0) (12.1) (13.3)

Amort. of land lease 0.0 (5.7) (5.7) (5.7) (5.7)

Other Oper. Inc. 0.5 4.2 1.0 1.0 1.0

Other Oper. Exp. (6.5) (18.6) (14.6) (44.7) (72.6)

Operating Profit (36) (66) (29) (7) 124

Chge in Fair Value IP 0 129 0 0 0

Finance Cost (0.39) (8.21) (11.89) (16.24) (15.94)

Profit before tax (36) 58 (41) (23) 108

Income tax exp. 0 (32) 0 0 (27)

Net Profit (36) 26 (41) (23) 81

EPS (0.03) 0.01 (0.01) (0.01) 0.02

DPS 0.00 0.00 0.00 0.00 0.00

Source: Bloomberg/ Emperor Securities Research

Income Statement

19

Appendix:

Company Background

National Arts (8228.HK) (NAHL) is currently engaged in film production and artist management businesses. NAHL‘s businesses had transformed from network infrastructure and electromechanical devices services to film production and the company renamed from Vertex Group Limited to ―National Arts Holdings Limited‖. As the film production industry in China has substantial development potential, NAHL is gradually expanding upstream by building the Xiqiao Mountain Dream Work Project in Foshan City, Guangdong Province. The project includes a film shooting bases and the supporting facilities such as a 5 star resort hotel and a multifunctional performance stadium.

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Source : National Arts Holdings Limited; Emperor Securities Research

Figure 24: 2010-2012 National Arts’ Chronicle

Source : National Arts Holdings Limited; Emperor Securities Research

Figure 25: National Arts Shareholder Structure

Year Chronicle

2010/05 Vertex Group Limited changed its name to the National Arts Holdings Limited

2010/06 The Legend is Born – IP Man movie released

2011/10 The Woman Knight of Mirror Lake movie released

2011/03 NAHL acquired 51% stake of Xiqiao Mountain Dream Work Project

2011/07 Xiqiao Mountain Dream Work Project lay a foundation

2012/08 Xiqiao Mountain Dream Work Project: Hong Kong Scene Area has been

completed and opened for filming for the movie of Ip Man: The Final

Fight

2012/12 Topping-out ceremony of the National Arts Hotel

2012/12 Established a joint venture for the development of cinema business in Zhuhai

Chairman,Mr. Sin Kwok Lam

Public Holding

National Arts (8228.HK)

24.89% 55.26%

Mr. Tse Young Lai

19.85%

20

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Figure 26: National Arts’ Management Profile

Name Age Position Relevant work experience and qualifications

Mr. Sin

Kwok Lam

55 Chairman of

the Board &

the

Executive

Director

- was appointed as theof the Board on 31 May 2010.

- has over 20 years' banking experience in various

departments including Internal Audit, Finance, Risk

Management and Business.

- an associate member of the Chartered Institute of Banker,

and he holds a master degree in Business Administration

from Oklahoma City University, USA, a Certified Diploma in

Accounting and Finance from the Chartered Association of

Certified Accountants and a Graduate Diploma in Law Course

from City University, London, UK.

- the Chairman and Executive Director of First Credit

Holdings Company Limited (stock code: 8215).

Miss Law

Po Yee

33 Executive

Director

- was appointed as the Vice Chairman of the Board on 26

October 2010.

- has extensive experience in entertainment, artiste

management and film production industries and E15has

years of banking experience, specializing in risk

management.

- the spouse of Mr. Sin.

Mr. Chow

Kai Weng

28 Executive

Director

- joined the Group in January 2010.

- holds a bachelor degree of Business Administration with

previous experiences in media and financial industries.

- was appointed as Executive Director on 25 March 2011.

Miss Sin

Ho Yee

28 Executive

Director

- joined the Group in March 2011.

- holds a diploma of Communication from the Melbourne

Institute of Business and Technology.

Mr. Lam

Kwok

Hing,

53 Non-

executive

Director

- JP, was appointed as the Non-executive Vice Chairman of

the Board on 5 August 2010. He was re-designated from an

Independent Non-executive Director to a Non-executive

Director in February 2010. Prior to the re-designation, Mr.

Lam has joined the Group since May 2009 as an Independent

Non-executive Director.

- holds a Bachelor's degree in Law with honours from the

University of Hong Kong. He is a practising solicitor in Hong

Kong and is a consultant lawyer of WT Law Offices.

- an executive member of the liaison association of the

Chinese People's Political Consultative Conference,

Guangdong Province.

- an executive director and group vice president of Hong

Kong Resources Holdings Company Limited (stock code:

2882); a non-executive director of The Hong Kong Building

and Loan Agency Limited (stock code: 145); an independent

non-executive director of Value Convergence Holdings

Limited (stock code: 821) and PME Group Limited (stock

code: 379), the aforesaid companies are listed on the Main

Board of the Stock Exchange.

Mr. Li Sin

Hung

Maxim

41 Non-

executive

Director

- joined Cathay Pacific Airway Limited in early 1990's. After

resigned from Cathay Pacific, Mr. Li continued his education

in Boston and started food and beverage business and

plastic resin trading business in United States.

- returned to Hong Kong in 2000 and had been worked in

HSBC, Federal Express Pacific Inc. and Midland Holdings

Limited. Mr. Li is a current holder of Estate Agents Licence

(Individual).

- was re-designated from an Executive Director to a Non-

executive Director in May 2011. Prior to the re-designation,

Mr. Li was an Executive Director since May 2009.

21

The information contained in this report has been compiled from sources believed to be reliable and has been compiled with high integrity, but Emperor

Securities Limited (“Emperor Securities”) or any member of Emperor Capital Group (“ECG”) does not make any representation or warranty as to its accuracy,

completeness or correctness. The information and opinions contained in this report are or may be subject to change or revision without any notice. This report is

for information purposes only. No representation, warranty or guarantee whatsoever, whether expressed or implied, is made as to its accuracy or completeness

and should not be construed as an offer to buy or sell or the solicitation of an offer to buy or sell the securities mentioned. Emperor Securities and ECG do not

accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use in whole

or in part of this report or any of its contents.

The research analyst(s) who prepared this report hereby confirm the views expressed in this report only reflect the personal views of the research analyst(s) about

the subject company(ies) and their securities. The research analyst(s) also confirm the research analyst(s) were not, are not, and will not be receiving any direct or

indirect compensation or other benefits for expressing the specific recommendation(s) or view(s) in this report. Emperor Securities and ECG and their respective

directors, officers, partners, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this

report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as agent

or in any other capacity for or on behalf of another person.

Copyright protection and other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or

reproduced in any manner without the express consent of Emperor Securities.

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Disclaimers & Disclosures

National Arts Holdings Limited

Emperor Securities Limited

Emperor Securities Limited, Research Department

Mr. Andrew To

Executive Research Director

Tel : (852) 2836 2733

Email : [email protected]

Ms. Chelsey Tam

Research Analyst

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Senior Research Analyst

Tel : (852) 2836 2797

Email : [email protected]

22

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