Incidents:
The company announced that it achieved operating income of 1,180 million yuan in 2017, an increase of 49.79% over the previous year; it achieved net profit of 193 million yuan, an increase of 7.53% over the previous year; the performance fell short of expectations.
Main business revenue increased dramatically, and asset impairment affected performance
1) The company's TV drama business achieved revenue of 1,120 million yuan in 2017, a sharp increase of 42.13% over the previous year; the revenue increase was mainly due to the confirmation of Taiwanese network revenue from the main control programs “The Legend of Ba Qing”, “The Flower and the Far Side”, and “The Midterm Plan”, as well as split revenue such as “That Year the Flowers Blossomed in full bloom” and “Emergency Doctor”. Among them, the total contract amount for “The Legend of Ba Qing” reached 1 billion, the sale price of the Internet broadcasting rights was confirmed at 7.5 million/episode, and the total price of the TV station was about 6.45 million per episode (the total contract price between Jiangsu TV and Oriental TV).
2) There are two main reasons why the company's net profit growth rate is lower than the revenue growth rate: a) the “Good Voice of China” project calculated asset impairment preparations of 141 million dollars, which greatly offset the company's profits; b) The company's comprehensive gross margin in 2017 was 47.52%, a year-on-year decrease of 5.6pct. We expect the company's overall drama investment cost to decrease in 2017. At the same time, we expect the company's overall drama investment ratio to decrease under high investment, and the gross margin level remains above the industry average after the decline.
Out of thin air, the 18-year film and television reserve project is worth looking forward to
1) The company has fully calculated and prepared for impairment on the copyright matter of “The Sound of China”. Furthermore, the company recently announced that with respect to actor-related risks, the company will take necessary legal measures to recover the company's losses in accordance with the protective clauses in the actor employment agreement signed by the two parties; at this stage, the downside is gradually being exhausted.
2) Looking ahead to 2018, the company has abundant reserves of high-quality film and television projects, and continuous growth in performance can be expected. In terms of TV dramas: “The Law of Deep Space”, “In the Name of the Law”, and “My Early Girlfriend” has been completed, and the TV drama “Donggong” based on the novel of the same name has already entered post-production, all of which are expected to be confirmed as suitable for later entry within the year; in terms of movies: “The Law of Deep Space” and “The Diary”
Five films, including “Blade,” have entered the preparation stage; in terms of variety shows: “Building a Dream in China: Plan C” and “The Awakening of an Idol” are continuing to advance.
Profit forecasting and investment advice
EPS for 2017-19 is predicted to be 1.07/1.37/1.69 yuan respectively, corresponding to 17/13/11 times PE. I am optimistic that the company will gradually release high-quality movies and TV series projects in the future. Currently, the company's valuation is in a low position, maintaining the “increase in holdings” rating.
Risk warning
The progress\ ratings\ box office of film and television projects fell short of expectations, and policy supervision risks.
