Product: Sina Finance listed Company Research Institute

Author: Sean

Introduction: as China's economic and social development has entered a new development stage of paying more attention to high-quality and sustainable development, social equity and people's livelihood and well-being, the standards of capital market investment and corporate value evaluation need to keep pace with the times. To this end, Sina Finance will tap the value of the company with new ideas and new perspectives, and look for good Chinese companies that promote scientific and technological progress, prosper the market economy, and facilitate people's lives. Share new momentum and investment opportunities in the new economy with readers.

As a leading enterprise in the domestic network literature industry, China Literature has the best resources and competitive advantages in content, distribution and production. After nearly 20 years of development, China Literature has become a comprehensive cultural industry group based on digital reading and with the cultivation and development of IP as the core. It has successfully exported IP adaptation masterpieces in animation, film and television, games and other fields, including "Qingyu years", "superfluous son-in-law", "Ghost blowing Lamps", "Nirvana in Fire" and "full-time Master".

Under the background of the slowdown in the growth of network literature user traffic, China Literature, through the advantages of platform traffic and governance, attracts more great writers to produce more high-quality content, train more IP, and open up new growth space for them through IP development into games, comics, movies and other forms to meet the people's more diverse cultural and entertainment needs.

The head writer Yunji Inc has a reserve of 14.5 million works.

Tencent in 2002 by Wu Wenhui and others in the "China fantasy literature association" on the basis of the integration of the starting point Chinese network, QQ Book client, Shanda literature, etc., to form the current China Literature, and the company was successfully listed on the Hong Kong Stock Exchange in 2017.

China Literature is a typical "Internet +" industry. through the empowerment of the Internet, literature has the field of network literature, and has greatly changed the production, distribution and extension of traditional literary content. so that literature and related business has been greatly developed.

China Literature's business model is that content creators are upstream, content provision platform is mid-stream, readers and information audiences are downstream, and IP is derived to become a value-added realization point.

According to the China News in 2021, China Literature still maintains a leading position in the field of content production. By the end of June, the platform had accumulated 9.4 million writers, accounting for more than 80 per cent of the country's digital readers. Head writer Yunji Inc and 90 per cent of T0P50 writers were on the China Literature platform. As of last year, China Literature had 428 platinum writers. The total reserve of works has reached 14.5 million, covering more than 200 content categories, reaching 233 million monthly active users, compared with 300 million monthly active users of online literature in China. In other words, one in six people uses China Literature's products, and eight out of 10 monthly active users of online literature are China Literature users.

According to the China News, the MAU of the company's own platform and Tencent product self-support channel was 233 million, an increase of 3.7% from the previous month. The payment rate is 4%. The price of ARPPU is 36.4 yuan, an increase of 6.7% over the same period last year.

Source: company announcement, Wind

It was closely followed by Palm Technology and Book Flag, with MAU of 160 million and 11 million respectively. The writer and user Yunji Inc China Literature platform makes it a super giant in the field of domestic network literature, with obvious network effect. This kind of network effect is a kind of network effect between Metcalfe network effect and bilateral market effect, which has strong stickiness and barrier.

The prevailing mode of the Internet is to form a market barrier on the basis of huge user scale and stickiness. On the basis of a large number of users and writers, China Literature continues to attract more excellent writers and sign contracts and train them. a complete system of signing, sharing, training, motivation and retention of writers has been formed. A hierarchical system of high-quality writers is introduced to score high-quality content in terms of work quality, payment, popularity index, serial times and so on. Vigorously promote the process of legalization of network literature, make a positive revision of the author's income, and form a positive cycle, so as to improve the output of high-quality content.

In addition, the massive library of works ensures the chance of the birth of head works. According to the June data of Baidu, Inc. 's novel list, 17 of the top 20 online literary works came from China Literature platform.

Relying on Tencent's top quality paid content is the mainstream.

As of mid-2021, Tencent China Literature has a 59.18% stake, with Ma Huateng as the actual controller. China Literature is one of the few investments directly controlled by Tencent. With the update of management, the synergy between China Literature and Tencent is expected to be further enhanced. In Tencent's alliance empire, Pinduoduo, JD.com, KE Holdings Inc., Bilibili Inc. and Kuaishou Technology have all received great support in terms of flow, and have achieved extremely rapid development.

China Literature's distribution end relies on Tencent, uses Tencent products to distribute content, covers a large number of users, and relies on its own large number of content libraries to develop a corresponding reading platform for readers with different reading tendency. to meet personalized needs. At present, China Literature owns well-known brands in the industry, such as QQ Book, Qiqi Chinese Network, Xiaoxiang Academy, Xinli Media, lazy people, etc., which is one of the important core sources of China's IP industry.

According to Quest mobile data, by the end of 2020, the number of monthly active users of Qiqi Chinese website and QQ Book were 23.04 million and 33.33 million respectively. In addition, the channels backed by Tencent are mainly distributed through Tencent News, QQ Browser and so on.

On the one hand, China Literature's own platform channel increased the efficiency of content delivery after increasing the distribution mode, and the revenue of online reading business on its own platform showed a step-by-step climb. In 2020, the company's own platform online reading business revenue reached 3.903 billion yuan, an increase of 60.96% over the same period last year, and CAGR reached 18.19% since it went public in 2017. In the first half of this year, with a high base in the same period last year, it basically maintained stability.

Source: company announcement, Wind

On the other hand, income contributed by Tencent channels continued to decline after 2017, mainly due to the impact of free reading driven by Baidu, Inc. 's seven cats and byte tomatoes in recent years. In response to the impact, China Literature mainly put free reading products on Tencent, while China Literature's own platform is the main source of the company's online paid subscription business.

Therefore, the income created by China Literature's own platform has opened the gap again after being fiercely chased by Tencent channels for a few years. In this process, it illustrates two problems: first, Tencent's traffic performance is very rapid between 2014 and 2017; second, the paid reading business has not been fundamentally impacted by free reading. In fact, although free reading has a brief impact on the market ecology of online literature and slightly slows down the growth of the paid reading market, free reading will not have a significant impact on the paid reading market in the long run.

The difference between free and paid business model leads to the difference between "flow" operation or "retention" operation. From the perspective of the content industry, the highest quality content tends to give priority to the paid model, and this view has been verified by the video, game and music industries. The greater value of the online article industry lies in IP, and the deeper binding between high-quality literature IP and paid-based China Literature is the value of the company.

According to iResearch, the proportion of revenue in China's digital reading industry has not changed significantly since 2017, and the proportion of advertisements, the main means of cashing out free reading, has hardly changed, with only a very low level of around 1% and 3%. On the contrary, subscription revenue still accounts for more than 80%, followed by copyright operating revenue of about 12%. Free reading and paid reading do not overlap with users.

Holding a number of top IP to form a virtuous circle of content production and back-feeding.

From the above-mentioned data, the current network literature industry user scale has reached a high level, the previous step-by-step growth of the number of users has been difficult to replicate. And the waves caused by free reading have subsided, and the growth of the number of users will enter a bottleneck period. The future growth mainly lies in the improvement of ARPPU value and the back-feeding effect after the ecological cultivation and development of IP.

Before completing the acquisition of Xinli Media, China Literature's main revenue was subscription revenue and copyright licensing income respectively. After taking Xinli Media, the IP strategy changed from authorization to production, officially opening the period of independent adaptation of IP. This is why the company calls itself a comprehensive cultural industry group based on digital reading and with IP cultivation and development as the core.

On the basis of Xinli Media's head Media Company, China Literature's cash operation ecology is far ahead and mature in the same industry. A business cycle of "content side", "distribution side", "production side" and "content side" has been established, and it has become the only company with the whole industrial structure from output to commercial realization in China.

In addition, China Literature is expected to coordinate with Tencent in the upstream and downstream of the content, which has been clearly defined as the production mode of Tencent Film, Xinli Media and China Literature Film and Television "troika" for the film and television layout of the network IP. There are 56 projects covering films, dramas, anime and other forms of expression, including the platform's popular IP adaptation of "the World" and "Qingyu years 2". Comprehensively enhance the influence of IP, continue to increase its heat and life.

Taking the adaptation of the finished works "superfluous son-in-law" and "Common Girl Strategy" in 2021 as an example, after its TV series were widely praised, the average number of daily readers of "superfluous son-in-law" increased tenfold, and the number of daily readers increased by 46 times after the adaptation of "Common Girl Strategy" into "Beautiful Heart".

Since the formation of the new business model in 2017, copyright operating revenue has increased significantly, making it the company's second largest source of revenue. The feedback of IP cultivation and development on the content side is also very obvious. In 2020, the company's MAU and monthly ARPPU reached the highest level since 2016, and continued to improve in the first half of this year.

Source: company announcement, Wind

At present, the operation of domestic IP is in its infancy, which is limited by the level of domestic film and television production. At this stage, China Literature does not have the ability of large-scale adaptation of fantasy online literature by international top film and television companies such as Netflix Inc and Walt Disney Company, and many IP are presented in the form of cartoons or animation.

However, the reader holds a large number of high-quality writers and IP, with the further maturity of the industry, the realization of IP operations will become China Literature's main source of income.