22H1 achieved revenue of 4,087 billion yuan (YoY -5.9%), of which online reading/copyright operating revenue was 23.307/1,731 billion yuan respectively, -9.2%/-0.5% year-on-year; and achieved non-IFRS net profit of 666 million yuan (YOY +0.2%). As a leading company in the online reading industry, Reading Text Group is actively expanding the IP visualization and commercialization derivative business based on the online literature ecosystem, which is expected to enter a new chapter. We have long been optimistic about the potential and space for Reading Text Group to grow into a leading company in the IP industry and maintain its “buy” rating.

22H1 The company's revenue declined slightly, and adjusted profit increased year-on-year against the backdrop of reduced costs and increased efficiency. The total revenue of the company 22H1 was 4,087 billion yuan (YoY -5.9%), of which the online reading/copyright operation/other business revenue was 23.07/17.31/049 billion yuan respectively, -9.2%/-0.5%/-21.2% year on year. The 22H1 company's comprehensive gross profit margin was 52.5% (YOY-0.2PCT); the 22H1 company's sales/management expenses ratio was 27.2%/13.6%, respectively, compared to -3.9/-1.0pct. The company promoted the optimization of operating efficiency and cost structure in the context of cost reduction and increased efficiency in the Internet industry, and the sales and management expense ratio improved markedly. The 22H1 company achieved net profit of 229 million yuan (YoY -78.9%). The weak year-on-year performance was mainly due to: 1) 21H1's sale of shares to confirm the high base of investment income formed by lazy people; 2) some of the projects in which the company participated were affected by fluctuations in the capital market to confirm changes in fair value. 22H1 achieved non-IFRS net profit of 666 million yuan (YOY +0.2%), corresponding to an adjusted net interest rate of 16.3% (YOY+1.0PCT). 22H1 Xinli Media contributed 209 million yuan in net profit (YoY -28.4%), mainly due to the relatively low investment share of Xinli participating projects in the first half of the year. We expect cost reduction and efficiency increase in the second half of the year will still be an important operating goal for the company. Compared with revenue-side indicators, we will pay more attention to the company's adjusted profit performance.

Online reading MAU achieved rapid growth, and the number of paying users declined year-on-year due to the diversion of free reading and the crackdown on piracy. On the revenue side, 22H1 Reading achieved online reading revenue of 2,307 million yuan (YoY -9.2%), of which: 1) revenue from its own platform products was 1,763 million yuan (YoY -6.3%). The decline was mainly due to a reduction in user purchases under the cost reduction and efficiency strategy; 2) Tencent's self-operated channel revenue of 347 million yuan (YoY -1.7%). The decline was mainly affected by the advertising market slump to a certain extent; 3) Third-party platform revenue of 196 million yuan (YoY -35.8%), the sharp decline was mainly due to the sharp decline in the advertising market Distribution cooperation with some platforms has been suspended. On the user side, 22H1 Reading has a MAU of 265 million (YoY +13.8%), of which 1) its own product channel MAU is 120 million (YoY +4.5%). The increase is mainly driven by its own high-quality content; 2) Tencent's product channel MAU is 145 million (YoY +22.7%). The sharp increase is mainly driven by the rapid growth of users in the free reading business. In terms of the payment situation, the average MPU for the company's own platform products and self-operated channels is 8.1 million (YoY -12.9%), and the corresponding payment rate is 3.1% (YOY-0.9 PCT); single-paying users pay an average of 38.8 yuan (YoY +6.6%) per month. The decline in the number and payment rate of the company's paying users is mainly due to: 1) the expansion of the free reading business (22M6 free reading DAU reached 14 million, +7.7% year on year), and the commercialization form of some paying users changed from payment to advertising. Looking ahead to the second half of the year, the company's investment in the free reading model will depend on the popularity of the advertising market. It will weigh the promotion of free and paid models based on input-output efficiency, and MPU is expected to steadily pick up; 2) The company stepped up its crackdown on piracy in the first half of the year. Banning some accounts may affect the number of paying users in the short term, but is beneficial to the industry ecology and is expected to attract more paying users in the long term.

The first series blossomed a lot, and the animation and comics performed excellently. 22H1 Reading achieved revenue of 1,731 million yuan (YoY -0.5%) from the copyright operation business, of which: 1) Shinri Media achieved revenue of 967 million yuan (YoY +44.9%), mainly due to confirmed revenue from many key series and movies in the first half of the year; 2) the non-Xinli copyright operation business achieved revenue of 765 million yuan (YoY -28.7%). Among them, the company's IP licensing and animation business revenue grew steadily. The decline was mainly due to the company's proprietary game “Sindou Dali” being in the latter part of the product life cycle, and a significant decline in flow. Looking at specific projects, in terms of comics, Reading Wen has jointly carried out online comic reform plans with companies such as Tencent Animation and Quick Watch Animation. More than 170 works have already been registered on Tencent Animation; in terms of animation, the IP-adapted animations “How the Stars Change” and “Wudong Qiankun” ranked in the top 1 of Tencent Video's new animated series launched in the first half of the year; 11 of Tencent's top 20 domestic animation works by Tencent in the first half of the year came from Reading IP; in terms of series, “The World of Life” and “Heart of Life” produced by Reading Text were on the 22th data list The H1 series effectively played the top 10 blockbusters, and in addition, “ “Rise of Longxi” and “Please Call Me the Director” also received high popularity; in terms of movies, Xinli participated in the production of the film “This Killer Isn't Calm”, which achieved a box office of 2.6 billion yuan, ranking second in the 2022 Spring Festival box office. Looking ahead to the subsequent content pipeline, the dramas “Battle of the Rose”, “Even When the Wind Rises”, “The Daily Life of Shinkawa”, and “The Lurker” produced by Shinri are expected to be released in the second half of the year. The company mentioned in the performance exchange conference call that in the second half of the year, Xinli's shareholding ratio in the film and television project was high, and the annual profit is expected to be close to the upper limit of the profit target of 500 million yuan for gambling.

IP derivative development links expand, and systematically explore the copyright value of online documents. The company is deeply involved in IP derivative development, broadening the number of IPs and product forms, and optimizing various aspects such as theme, style, and design. The company launched the “Breaking the Sky” Medusa statue with a GMV of 5 million yuan. It is expected that in the future, it will link IPs such as “Celebrate the Years After”, “Master of Secrets”, “Master of Secrets”, and “The Full Time Master” to develop various types of derivatives, and promote them in tandem with the progress of related movies, TV, animation, games, etc. According to the company's performance exchange conference call, Reading Text placed equal emphasis on self-development and licensing in the development of derivatives. Currently, it has laid out figures, blind boxes, and software peripherals. We expect that in 2022, the company will further consolidate its relevant capabilities in the derivatives business, and the value of the company's IP derivative link is expected to be realized at an accelerated pace starting in 2023.

Risk factors: Risk of loss of core authors and editors; free reading progress falls short of expectations; risk of decline in paid reading business; IP adaptation series or game performance falls short of expectations; weakening demand for content from downstream channels such as video sites creates a downside risk in series pricing; and IP licensing requirements fall short of expectations.

Investment advice: As the source of the content industry, online literature is an important source of IP for content forms such as film, television, animation, and games. As a leading company in the online reading industry, Reading Text Group is actively expanding its IP operation business based on the online literature ecosystem, and is expected to enter a new chapter. We expect that as the company matures in IP commercialization and derivation, the value of the IP long chain is expected to be realized at an accelerated pace. We have long been optimistic about the potential and space for Reading Text Group to grow into a leading company in the IP industry. Based on the company's 22H1 mid-term results, the filming progress of some of the company's film and television projects was slower than expected due to the pandemic, and the consumer market sentiment recovery process was weaker than expected. Due to careful consideration, we lowered the company's 202E-24E revenue forecast to 86.47/97.41/10.800 billion yuan (previous forecast was 95591/103.26/110.39 billion yuan), and the company's non-IFRS net profit forecast was lowered to 1,328/15.27/1,784 billion yuan (previous forecast was 15.25/16.41/ 1,826 million yuan). The company's current stock price corresponds to adjusted PE 21x/18x/15x. In terms of valuation, 1) in the online reading business, with reference to comparable companies to determine the valuation level of technology (202E PS~3.0x), considering the premium position of leading companies in the reading literature industry, the target PS 3.2x was given; 2) In the copyright operation business, reference was given to the valuation levels of Disney, Bandai Namco, and Bubble Mart, which are representative companies in the IP industry (202E average PE~28x). According to the SOTP valuation method, the company was given a target price of HK$41 to maintain the “buy” rating.