Event: The 2023 Interim Report was published online in Chinese. In the first half of 2023, the company achieved operating income of 651 million yuan, an increase of 34.54% over the previous year; net profit attributable to the mother - 37 million yuan, net profit after deducting non-return net profit - 108 million yuan. In Q2 2023, the company achieved operating income of 363 million yuan, an increase of 43.45% over the previous year; net profit of 163,800 yuan, turning a year-on-year loss into a profit; net profit of 49 million yuan after deducting non-attributable net profit.
The core business grew rapidly in the first half of 2023, and profits were under pressure due to increased channels and promotion costs.
1) Revenue side for the first half of 2023: ① Cultural business revenue was 643 million yuan, up 35.51% year on year, accounting for 98.76% of total revenue; ② Revenue from education products was 0.5 billion yuan, down 11.57% year on year, accounting for 0.76% of total revenue. 2) Cost and expense side for the first half of 2023: The company's gross margin for the first half of 2023 was 45.33%, a year-on-year decrease of 5.71 pct; the sales expense ratio was 42.62%, an increase of 15.99 pct over the previous year, mainly due to an increase in promotion expenses over the same period of the previous year; the R&D expense rate was 7.80%, a year-on-year decrease of 6.00 pct; and the management expense ratio was 9.64%, a year-on-year decrease of 6.65 pct.
Building a foundation for digital content, spin-offs, movies, TV dramas, and animation. Content platform: The company has accumulated more than 5.5 million digital content resources and 4.5 million resident authors; cooperated with more than 600 copyright agencies and signed more than 2,000 well-known writers and best-selling authors. Content derivation: The company upgraded its IP derivative incubation chain and realized the evolution from the production and management of a single online text to the production and operation of literary IP throughout the life cycle. In terms of movies and TV dramas: “Provocation” set a record for the highest popularity of a Tencent short, breaking 15 million yuan in cumulative accounts. On the anime side: In May, “Chaos Sword God” topped Tencent's Video Animation List and Bone Dynamic Anime List for many days, steadily ranking in the top 10 of the list. Content channels: The company has extensive cooperation with payment and free sales channels in the industry. Sales channels cover key Internet reading platforms such as WeChat Reading, Internet application platforms such as Meituan, etc., mobile operators such as Migu Reading and Wo Reading, manufacturers such as Huawei Reading, Vivo Browser, and Xiaomi, as well as audio platforms such as Himalaya and Dragonfly FM.
Rooted in massive amounts of genuine data, fully embracing AIGC, the metaverse continues to gain strength. 1) Massive amounts of genuine data: The company holds over 60TB of genuine data, a high-quality database with high accuracy and wide coverage. 2) AIGC layout: The company has launched AI anchors, AI painting, and AI text-assisted creation. In June, the company and MangaToon reached a partnership to promote a series of AI-assisted comic works to overseas markets. 3) The metaverse continues to gain strength: RESTART restarts the universe to release the core NPC, Nu Wa's artificial intelligence system, which is connected to Baidu's “Wenxin One Word”. 4) Rich IP reserves and diversified monetization: The company bought Luo Xiaohei, the leading original animation IP, and added “Winning IP”
Strategy. The extra part of the VR animation of “Spirit Cage” is expected to be broadcast online soon.
Profit forecast: In the first half of the year, the company's core business grew rapidly, and profits were under pressure due to increased channels and promotion costs. Optimistic about the long-term layout of the company's AI and metaverse is expected to bring new possibilities to the content industry.
We maintain our profit forecast. We expect the company's net profit to be 172/222/278 million yuan from 2023-2025. PE corresponding to the current stock price (August 31, 2023) will be 67.7/52.3/41.7 times, respectively, maintaining the “increase in holdings” rating.
Risk warning: The risk of increased competition for high-quality copyrights, the risk of pirated works, the risk of collection of accounts receivable, and the risk that the development of the metaverse business will not meet expectations, etc.