Core views

2Q23 The company's creative business is growing at a strong rate. Of the 5 films that have grossed over 1 billion dollars in the national box office, 4 are produced by the company; the distribution and screening business has benefited from the recovery of the film market.

Looking ahead to the second half of the year, 1) Creative Business: 2 participating films from the summer program are in the top 5 at the box office. The main control film “Volunteers: Soldiers Attack” has been scheduled for the National Day and is expected to contribute a lot of box office revenue. At the same time, 60 projects are being created and developed, and the high growth rate is expected to continue in the first half of the year;

2) Distribution and screening business: At the same time, it has benefited from a recovery in the movie market that has exceeded expectations since the summer season and the resumption and introduction of imported films to establish a basic performance market;

3) Technology business: The company is the only leading company in the film industry with a deep layout in the field of film technology. The construction of the CINITY cinema continues to advance, and exploration of new technologies such as artificial intelligence is expected to accelerate implementation.

occurrences

According to the company's semi-annual report for 23 years, operating income was 2,857 million yuan (YoY + 87.95%), net profit of 360 million yuan (YoY +1684.56%), net profit after deducting non-return net profit of 323 million yuan (YoY +759.93%).

In the second quarter, the company achieved operating income of 1,412 million yuan (YoY +146.08%), net profit of 179 million yuan (YoY +286.78%), net profit of 162 million yuan (YoY +222.66%) after deduction of net income of 1,412 million yuan (YoY +222.66%).

Brief review

1. The creative business is growing at a strong rate, and high-quality films are being produced frequently. In the first half of 2023, the company's creative business revenue was 659 million yuan, an increase of 218.23% over the previous year, accounting for 23.07%, an increase of 9.44 pct over the previous year. It became the fastest growing business segment of the company, mainly driven by the number of participating films and outstanding box office performance:

In the first half of 2023, the company led or participated in the production and marketing of a total of 20 films, an increase of 12 over the previous year. Many films performed brilliantly, such as “Wandering Earth 2” (4,029 billion yuan), which the company mainly produced, ranked 2nd in the Spring Festival program; “Manjianghong” (4.544 billion yuan) and “Are the Bears Rise?” Accompany Me “Xiong Xin” (1,495 million yuan) ranked 1st and 3rd in the Spring Festival program respectively, and “Life Is Unfamiliar” (1,184 million yuan) won the 51st box office title.

2. The distribution and screening business also benefited from the recovery of the film market and the resumption of the introduction of imported films 1) Distribution business: In the first half of 2023, the company's distribution business revenue was 1,278 billion yuan, an increase of 105.74% over the previous year, far higher than the total box office growth rate of films in the country during the same period of 52.91%, accounting for 44.75% of revenue. In terms of domestic films, the company led or participated in the distribution of 234 domestic films, with a cumulative box office of 16.307 billion yuan, accounting for 89.31% of the total box office of domestic films in the same period, an increase of 19.07 pct over the previous year; in terms of imported films, it distributed 62 imported films, an increase of 27 over the previous year.

2) Screening business: In the first half of 2023, the company's screening business revenue was 540 million yuan, an increase of 48.15% over the previous year. The company controlled the total box office of 6,472 million yuan, accounting for 24.64% of the country's total box office during the same period, the same as the previous year. Among them, the total box office of controlled cinemas was 472 million yuan, accounting for 1.98% of the country's total current box office, which was the same as the previous year.

3. The film technology layout continues to deepen

Actively embrace AI technology and promote the implementation of CINITY technology. In the first half of 2023, the company's technology business revenue was 254 million yuan, an increase of 8.58% over the previous year.

The company is actively promoting the implementation of new technology. 1) AI frame insertion technology research and development has made a breakthrough; 2) CINITY: CINITY custom cameras have been officially delivered; as of mid-2023, 131 CINITY cinemas have been opened in China, an increase of 16 compared to the end of 2022. At the same time, 11 movie theaters have been installed and 207 CINITY movies have been screened; 3) CINITY projectors: 494 new screens sold in the first half of 2023, accounting for 58% of the market share of the country's new screens. Consolidate.

4. Financial analysis

1) The sharp increase in gross margin was driven by the distribution and screening business. 2Q23 The company achieved gross profit of 370 million yuan (YoY 4313.72%), with a gross profit margin of 26.21% (compared to the same period last year), mainly due to an increase in the share of revenue in the distribution sector with high gross margin, and an increase in gross margin of 33.52 pct to 15.22% in the screening sector.

2) The cost rate for the period dropped sharply year on year, mainly due to an increase in revenue scale. 2Q23 The company's cost rate for the period was 8.33% (year-on-year -13.59 pct), of which the sales expense rate was 2.28% (year-over-year -2.42 pct) and the management expense rate was 7.49% (year-on-year -9.82 pct), mainly because the absolute value of expenses was basically flat year-on-year, and the revenue scale increased dramatically.

5. The performance of the summer program is outstanding, and I am optimistic about the company's film reserves. The summer festival company participated in the production and marketing of a total of 6 films. As of 12:00 on August 26, the total box office was 7.062 billion yuan, accounting for 35.57% of the box office for the same period. Among them, “Desperate and Throw” and “30,000 Mile of Changan” ranked 2nd and 5th in the summer box office respectively; the overall box office of the summer program has also reached 20 billion dollars, a record high, driving the company's screening sector performance. Subsequently, according to the company's announcement, the company is currently creating and developing nearly 60 projects, including more than 40 original projects, including “Volunteer Force: Attack of the Soldiers”, “Do Not Disturb 3,” and “Legend of Conjuring Heroes: The Lord of Knight”, etc. Meanwhile, “The Volunteers: The Soldiers Attack”, which is controlled by the company, has been scheduled for the National Day. Directed by Chen Kaige, and featuring Zhu Yilong, Wei Daxun, and Zhang Songwen, is expected to contribute a lot of box office revenue.

Investment suggestions: In the first half of 2023, the company's creative business grew at a strong rate; the distribution and screening business benefited from the recovery of the film market and built a basic performance market.

The summer program performed well in the third quarter, and the creative and screening business is expected to fully benefit. Looking ahead to the fourth quarter, the main control film “Volunteers: Soldiers Attack” is scheduled for the National Day and is expected to contribute to box office revenue; the distribution and screening business is also expected to benefit from the film's box-office growth trend. Also, in terms of technology business, the company is the only leading company in the film industry with a deep layout in the field of film technology. The construction of the CINITY cinema continues to advance, China Film and Baco projectors have a stable leading position, and new technologies such as artificial intelligence are expected to be implemented at an accelerated pace. In 2023-2024, we expect the company to achieve operating income of 7.685 billion yuan, 8.747 billion yuan, 163.19% and 13.83% year-on-year, and net profit of 1,089 million yuan and 1,244 billion yuan, reversing losses and increasing 13.86% year-on-year. The closing price on August 25 corresponds to PE 25.36 and 22.27x.

Risk analysis

The risk of the resumption of imported films falling short of expectations, the risk of the film not being released as expected, the risk of the film not being released as scheduled, the risk of script killing and competition from other offline entertainment activities, the risk of movie theaters being suspended due to repeated outbreaks of the epidemic, the risk of film filming being delayed due to falling short of expectations, risk of content supervision, risk of development of generative AI technology falling short of expectations, risk of technology monopoly, risk of increasing the difficulty of supervision, risk of generative AI technology monopoly, risk of increasing the difficulty of supervision, risk of generative AI laws and regulations falling short of expectations, risk of copyright ownership, risk of in-depth falsification, artists Moral risks, risks affecting the ecological health and safety of Internet content, risks of insufficient enterprise risk identification and management capabilities, and risks of changes in the aesthetic orientation of users.