Incident: On March 27, the company stated on the investor interactive platform that “the company's overseas products, ChatGPT, and MyEscape are already being tested for integration into ChatGPT. Applications in story creation and generation, script generation and adaptation, and user-AI interactive chat can greatly reduce costs, improve creative efficiency and story diversity. At the same time, AI interactive chat allows users to have a better sense of immersion and emotional experience.”

Comment: AIGC disrupts traditional production models, lowers the entry threshold for creativity, and greatly frees up productivity. The company continues to collect a steady stream of good content through its diverse online original novel platform, and has now accumulated more than 5.1 million types of digital content resources. On February 16, the company announced that it is cooperating with Lanzhou Technology in the AIGC field; the AI-assisted creation function has been launched online for 17K novels, and the writing efficiency and quality of a large number of writers below the waist will be significantly improved, which will help the platform deposit high-quality Chinese digital content resources and bring fertile ground for cultivating and screening potential big IPs.

AIGC boosts the release of production capacity and the monetization of massive IPs across modes. Chinese Online extends downstream with Internet language IP as the core, and has comprehensively laid out fields such as audiobooks, animation, and the metaverse. In the past, due to limited production capacity, many of the company's high-quality IPs were not developed, or it was difficult to solidify the attention of the work due to insufficient update frequency. AIGC has accelerated the development of production capacity and boosted the release of IP value: 1) As of 22H1, the company's total audiobook inventory time reached 450,000 hours. AI anchors have been used to increase audio production capacity and promote the efficient recording of novels into audiobooks; 2) AI painting has been used in overseas products, and a large number of background images have been generated using AI; 3) Metaverse space RESTART, which uses “Wandering Earth” based on a worldview, was officially launched on February 21. The company owns Liu Cixin's “Wandering Earth”

Digital copyright and AVG's global full-language game adaptation rights. The scenes, characters, props, and soundtrack in this space were all created with AIGC's participation, and RESTART is expected to become a new hit.

There are already mature interactive application products from overseas, connecting to ChatGPT to enhance the sense of immersion and interaction, and promote product innovation and upgrading. The total revenue of the overseas APP Matrix reached 100 million US dollars in '21. Among them, the interactive reading product Interactive has been running in major countries and regions around the world for many years, ranking among the top in the global AVG field.

ChatGPT is highly compatible with the company's overseas products, and has greatly changed the attributes of Narrative. Previously, the story on this product was realized manually, and in the future, ChatGPT will be applied to story creation, script generation and adaptation, and interactive chat between users and AI to provide users with richer choices and interactive experiences. My Escape, a virtual dating interactive story game product, is also being tested for integration into ChatGPT, which is expected to become a new growth point.

Profit forecasting, valuation and ratings: According to the company's 22-year performance forecast, some businesses were affected by macroeconomic and international conditions. We lowered our revenue forecast for '22 to $1.20 billion (-26% compared to the previous forecast). Considering that online education platforms could not be commercialized in '22 to fully account for asset impairment losses, fluctuations in the fair value of transactional financial assets held, and the company increased its investment in the metaverse, and the company lowered its net profit forecast to -3.1 billion yuan (previous forecast of 140 million yuan). Cross-modal IP monetization has brought about additional volume. After overseas products are integrated into ChatGPT, it is expected that users' willingness to pay will be greatly increased, and the 23-24 revenue forecast will be maintained. Considering that the company continues to increase investment in innovative businesses such as the metaverse and AIGC and international businesses, the net profit forecast for 23-24 was lowered slightly to 174/211 million (-8%/-9% from the previous forecast). Whereas: 1) Having massive amounts of genuine digital content that can be used for large model pre-training corpus is expected to obtain value revaluation; 2) ChatGPT has brought about major changes in overseas application products, boosting the number of medium- to long-term paying users and APRRRU. Upgraded to “Buy” rating.

Risk warning: AIGC technology development is uncertain, market competition is intensifying, and industry regulation is becoming stricter