Results for the first three quarters of 2020 are in line with previous forecasts

Ciwen Media announced 1-3Q20 results: revenue of 338 million yuan, a year-on-year decrease of 60.3%; Guimu's net loss of 18.28 million yuan; net loss of non-return mother of 21.64 million yuan; 3Q20 revenue of 278 million yuan, a significant increase from 23.94 million yuan in the same period last year; Guimo's net loss of 12.07 million yuan; net loss of Fugimo of 12.57 million yuan, falling into the early forecast range.

Development trends

It was confirmed that there was a recovery in film and television business projects in the third quarter, and revenue improved month-on-month. During the 3Q20 period, the company confirmed revenue from multiple rounds of distribution of the existing series and the revenue from the joint production projects “Rebooting the Extreme Sea: Listening to Thunder”, “Chance of Success”, and “The Voice of the Chinese Dream: Our Song”. The company recorded revenue of 278 million yuan in 3Q20, a significant increase from 23.94 million yuan in the same period last year. Furthermore, the company's game business continues to decline due to a clear trend of concentrating game products on leading companies. We believe that the filming progress of some of the company's key film and television projects has been delayed due to the impact of the pandemic, and its film and television business is still recovering.

Profit margins have declined somewhat due to increased production and promotion costs, and medium- to long-term competitive advantage has not changed.

The company's 3Q20 gross margin was 10.7%, a year-on-year decrease of 29.6ppt. We expect it to be mainly due to the lack of influence from major S-level film and television projects, while the variety show “Voice of the Chinese Dream? “Our Song”

Gross margin is relatively low, so the company's returns fluctuate in a single quarter. The company's operating expenses ratio was steady. The 3Q20 sales expense ratio was 8.8%, down 8ppt from the previous year, up 3.4 ppt from the previous year; the management expense ratio in 3Q20 was 4.9%, down 51.2ppt from the previous year, and down 12.8ppt from the previous month. We judge that because of the low revenue confirmation in 3Q19, the 3Q20 expense rate declined significantly year on year, and the company as a whole was operating steadily. We believe that fluctuations in profit levels in a single quarter do not change the company's medium- to long-term competitive advantage in focusing on blockbusters.

Looking ahead to the fourth quarter, if projects such as “End of the World”, “Killing the Wolf” and “Two Conjectures of Marriage” are settled as scheduled, it is expected that 4Q20 revenue will continue to improve on a month-on-month basis. Affected by the COVID-19 pandemic, the production and distribution of the company's film and television business basically came to a standstill until May 2020, and the production and distribution cycle of the film and television drama production and distribution cycle caused certain quarterly fluctuations in revenue recognition. The company's film and television business confirmed less revenue and profit for the first three quarters of 2020. Judging from the current project reserves, projects such as the TV series “A Frozen Heart in the Jade Pot”, “The End of the World”, “Killing the Wolf”, “Two Conjectures of Marriage”, “City of Flowing Light”, and “Summer Bones” have started filming or have already gone viral. In terms of leading copyrighted dramas, projects such as “Zichuan”, “Deboned Incense”, and “Airport” are being actively prepared. We anticipate that projects entering the latter stages of the production cycle, such as “End of the World,” “Killing the Wolf,” and “Two Conjectures of Marriage,” are expected to confirm revenue in 4Q20, driving the company's performance to improve month-on-month.

Profit forecasting and valuation

We kept our 2021 net profit forecast unchanged. Due to the low number of confirmed film and television projects in 2020, we lowered our 2020 net profit by 28.2% to 150 million yuan. The current stock price corresponds to 22.4 times the 2020 price-earnings ratio and 11.1 times the 2021 price-earnings ratio. Maintaining an industry rating that outperforms the industry, but considering that the company's film and television projects confirm high volatility, we lowered our target price by 22.3% to 8.95 yuan, corresponding to 14 times the price-earnings ratio in 2021, with an upward margin of 26.2% compared to the current stock price.

risks

Key projects have fallen short of expectations; downstream demand has weakened; and regulations have become more stringent.