Pacific Online (543.HK)                BUY (TP: HK$4.11 (from HK$3.01))

Potential realised. Time for re-rating.

We have raised our revenue forecasts for Pacific Online (PO) by 7.3% and 2.8% for FY10F and FY11F respectively, as we anticipate better-than-expected earnings from the PConline and PCauto portals.  The company issued a positive Profit Alert last week for its 1H10 results, and after speaking with management, we are confident that (1) PCauto portal will continue its strong momentum in the near term and (2) China’s strong online advertising growth remains intact (+85.4% YoY in 1Q10).  Shares of PO has had a terrific run since our initiation in July 2009 (+82.3%) and our last report in April 2010 (+27.4%), and we believe investors have come to realise the potential of the company.  Turnover for shares of PO have also picked up, and judging from investor interest in our recent Corporate event, we contend that it is time for rerating.  We reiterate our Buy rating for shares of PO, and upgrade our TP to HK$4.11 based on a target 12-month forward PER of 18x implying an upside of 24.5%.

Positive profit alert. PO issued a positive profit alert last week for its 1H10 earnings without indicating any specific level of change.  After speaking with management, we forecast 1H10 revenue of Rmb214.4m (+51.2% YoY), and net earnings of Rmb67.0m (+51.1% YoY) with growth coming from PCauto and Others portals which we estimate to grow 89.1% and 152.3% YoY, respectively.  Management also noted that they estimate PConline’s growth to be better than expected.

Share price catalysts? 1H10 results is scheduled to be announced on 30 Aug, and management expects PCauto to be the main growth contributor.  Revenue from PConline may also provide surprises (est +9.7% YoY) along with further news flow of continuing strong growth in domestic online advertising (+85.4% YoY in 1Q10).

Time to re-rate. As one of the dominant players in domestic vertical portals (for IT and Auto), shares of PO has outperformed the HSI over 12 and 24 months period by 83% and 126%, respectively.  We contend that investors have come to realise the potential of PO (net earnings CAGR of 26.3% for FY09-12F), and the fact that it is one of the few listco’s in the HK bourse benefiting from the strong domestic online advertising growth.  We reiterate our Buy rating on shares of PO and upgrade our TP to HK$4.11 based on a target 12-month forward PER of 18x.