Morgan Stanley: Damai Entertainment (1060.HK) - Near-term Margin Pressure, Long-term Potential Intact

Morgan Stanley maintains an Overweight rating on Damai Entertainment (1060.HK) but lowers the target price from HKD 1.2 to HKD 0.9, driven by a SOTP valuation assigning 15x EV/EBITA to the core Damai business and 20x EV/EBITA to the IP business. The stock has fallen roughly 40% from its February peak, reflecting an IP valuation de-rating, weak box office dynamics, and margin pressure. However, analysts argue the market has overreacted. The cinema segment is projected to achieve positive profitability in F2H26, compared to substantial losses in F2H25 and F1H26, supported by reduced content investments. Furthermore, Sanrio-related IP revenue exposure remains capped at no more than 30% of total IP revenue, keeping risks manageable. Revenue forecasts for F26-28 were trimmed by 4-9%, and normalized net profit estimates were lowered by 10-17%. Despite these cuts, valuation appears attractive, trading at 15x F27e P/E, which corresponds to a 28% three-year net profit CAGR. Re-rating catalysts include deeper collaborations with top-tier IPs via the Aliyu platform, incremental overseas revenue contributions starting in F2H27, and AI-driven features enhancing domestic ticketing market share. The primary downside risk remains margin compression from aggressive overseas expansion and sustained IP or AI investments.