21% Upside Seen In Phoenix New Media Shares

JPMorgan assumed coverage of Phoenix New Media Ltd ADR FENG with an Overweight rating and $4.30 price target, saying that the market is not considering the potential upside from Yidian, an interest-based news and information app invested in by FENG.

Despite the shift in PC traffic to mobile, FENG's online ad revenue has generally stabilized in 2016 and is expected to gradually recover from 2017 as the company is raking in more mobile revenues. JPMorgan expects mobile to account for 44 percent/52 percent of total ad revenue in 2016/17.

"Although FENG is still experiencing some short-term hurdles due to the structural challenges faced by legacy businesses (i.e., online ads and paid services), we believe the worst has generally passed for its online ad business and expect a mild recovery from 2H16," analyst Alex Yao wrote in a note.

In addition, Yao said potential consolidation of Yidian could bring 20-30 percent upside to his price target. Yidian achieved 30 million DAU as of July, but monetization capability has yet to fully unleash.

"We expect Yidian to continue to enlarge its active user base on the back of its interest-based recommendation technology, as well as the close partnership with major handset channels (e.g.,Xiaomi and OPPO)," Yao noted.

Meanwhile, the analyst expects Yidian to ramp up monetization quickly in 2016 and generate over Rmb600 million/Rmb1.5 billion in revenue in FY16/17.

However, Yao sees the company's margin to witness near-term pressure but will likely bottom out from 2017 as revenue growth picks up.