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Foster note this morning below.

May 2016

MOKO SOCIAL MEDIA LIMITED (MKB.ASX, $0.013, Market Cap $21.5m, Cash $6m) – Recapitalised and relaunched!

**SALES DESK COMMENTARY**

RECENT EVENTS:

• Rationalisation in products and staff leads delivers material reduction in overhead costs.
• Change in leadership team installed with a track record in sports marketing and digital media expertise.
• $8.2m Entitlement Issue closed fully subscribed resolves balance sheet issues.
• REC*IT User & Engagement Update demonstrates 40% uplift in college students using the app with over 700,000 active users.
• Successful paid pilot for National Marketing Program with a Global Restaurant Group.

INVESTMENT THESIS:

• Turn-around strategy sets up recovery for the company: Over the past 3 months we have witnessed a number of initiatives undertaken to rectify the MKB share price and mitigate against a potential financial disaster. Key strategies include:
  1. the rationalise the number of products MKB was operating (and funding) and recognise REC*IT as the platform for monetisation today;
  2. the reduction in head count in the US and sub-let of office space (down to 10 from 40) delivers a material reduction in cash burn;
  3. a change in leadership with new CEO appointed with a track-record of digital media and sports marketing; and
  4. successful recapitalisation of the balance and focus on costs.
• Cash burn significantly reduced through rationalisation of operations and staff:sensibly the number of products now supported by the technical and marketing teams now focus purely around the REC*IT app. This includes REC*IT Fitness and BigTeams. All other products that were a drain on cash resources have been shelved and/or packaged up for sale. This has resulted in a material decrease in US head count by ~30 leaving a team of 10. We now estimate that monthly working capital costs are down to US$600/mth that includes a reduction in other overheads (vs run-rate of circa. US$1m/mth during 2015).
• New CEO appointed with a track record in sports marketing and digital media:The recent appointment of Shripal Shah to the CEO (previously COO) comes with significant success at sports marketing to major US and global brands while serving as Chief Strategy Officer of the Washington Redskins NFL team and Chief Digital Strategist for Catalyst Public Relations (acquired by IMG). In our conversations with Shripal we are seeing a focus on delivering marketing programs with global brands that can re-build the credibility of REC*IT being a ‘unique platform’ for advertisers and a platform that can be monetised.
• Successful $8.2m entitlement issue removes any solvency issues & new focus on cash burn: The recently announced $8.2m entitlement issue at $0.01/sh was a success after a successful underwriting by key shareholders and take up by loyal shareholders. We highlight the stock had been trading in the 3-5c range before flagging the need for additional capital to be made via a discounted rights issue. We now view the stock as sufficiently capitalised to repay all outstanding creditors and move forward on a leaner strategy to monetise the REC*IT platform.
• Departure from focus on user numbers at any cost – to demonstrating REC*IT can generate marketing revenue today for major brands: we have previously heard from management that a build towards 10m users across multiple political/sport/student/social media platforms was the goal before we would see success with major advertisers. Now the strategy is to refocus on REC*IT 700,000 users and demonstrate to global brands the value of its platform and reach into a very large 18-24yo student market. We think this is sensible approach that can attract new investors (and some old) to the stock. We anticipate further updates on new brands signed the platform over the next two quarters.
• REC*IT completes maiden national marketing program with a global restaurant group: The company has flagged the completion of a successful paid pilot marketing program with a Global Restaurant Group. The pilot only touched on 180 of the 1,250 colleges available. The success of this pilot, together with increased user engagement, has kicked off discussions with a pipeline of global brands across multiple verticals for products targeting college students. We expect to see these launch in the Fall semester and with announcements of new deals to be announced to the market as they are signed. It is our understanding that initial revenues from the pilots will be modest, however each program can grow in value to six figure deals over time each campaign extends to a larger reach across the colleges and user base.
• REC*IT successful growth to +700,000 students and +1,250 colleges: the first quarter of 2016 has delivered a 10% growth in the number of colleges now live on the platform and a 40% increase in student users. Credit to the growth has been three-fold:
  1. app enhancements to the REC*IT platform;
  2. the re-alignment and engagement with the partnership with IM Leagues who have control to data access for the majority of the major populated colleges; and
  3. fresh approach to the engagement with Rec Centre management to gain their buy-in to pushing REC*IT on campus.
• So what can this be worth? While it is early days in the operational changes taking effect longer term, we should recognise the stock was trading in a range of 10-12c to October 2015 when the market became aware of the balance sheet issues, increasing cash burn and shareholders lost confidence in management and the strategy. From here we now see the stock can recover back to the 5c level on basis it can demonstrate multiple global brands are utilising the REC*IT platform, user growth continues and cash burn remains at contained levels.
• We rate MKB a SPEC BUY.