The optimization of gross margin in the baby products business drove the company to turn a loss into a profit. Maintaining the “buy” rating company 2023H1 achieved revenue of 130 billion yuan, a year-on-year decrease of 2.30%, a year-on-year net profit of 60.45 million yuan, a year-on-year increase of 6.45 million yuan, a year-on-year increase of 5.24%, and a year-on-year net profit of 44 million yuan, an increase of 1039% over the previous year. The increase in net profit for Kima's net profit was mainly due to falling shipping prices and expenses during the reporting period, leading to gross margin optimization in the baby products business, up 10.91 pct. 2023Q2 36% 2023H1's gross margin was 36.77%, an increase of 6.22 pct over the previous year, and a net profit margin of 4.53%. We maintain our profit forecast for 2023-2025. We expect the company's net profit to be 181/3.24/508 million yuan respectively in 2023-2025, the corresponding EPS is 0.12/0.22/0.34 yuan respectively, and the PE corresponding to the current stock price is 73.4/41.0/26.1 times, respectively, maintaining the “buy” rating.

The content matrix has strong vitality, and the toys and baby products business fully restored the company's IP content matrix is strong. The animation “Super Flying Man 14”, which was launched in May, won the Children's TV ratings on the first day it was launched, and the movie “Super Flying Man: Speed Up” released in July had a total box office of close to 70 million. In the second half of the year, it will also launch high-quality content such as “Super Flying Man 15” and the classic IP movie “Becken Bear: Mission to Mars” to continuously enhance the influence of the company's IP content. High-quality IP clearly drives the toy business. The 2023H1 toy sales business achieved revenue of 518 million yuan, an increase of 9.07% over the previous year, and gross margin of 42.47%, an increase of 7.91 pct over the previous year. Toys such as Sword Spinner and Super Flying Man are highly sought after. The baby products business in 2023H1 achieved revenue of 577 million yuan, a year-on-year decrease of 9.39%, but the company continued to innovate products, reduce costs and increase efficiency, and significantly optimized gross margin. In the second half of the year, with the gradual release of the company's animation and film production capacity, the influence of the animation IP matrix further increased, and the operating efficiency of the entire industry chain was further improved, which is expected to drive continued growth in toys and baby products performance.

Fully explore the commercial value of IP resources, and the industrialization of “AI+IP” continues to advance the industrialization of the company “AI+IP”. In May, a strategic cooperation agreement was signed with Xiaobing to jointly create virtual digital people and smart toys for well-known IPs. In July, AI digital people strategic cooperation agreements were signed with Dolphin Media and other companies, which will explore and cooperate on projects such as “Artificial Intelligence and IP Activation for Children”. Furthermore, the company recently connected the Xiyangyang AI twin digital human function to the applet and will explore more application scenarios such as dialogue. The company continues to empower IP resources or further open up commercial space through AIGC technology.

Risk warning: The return on IP investment is declining, market competition is intensifying, AI applications are progressing less than expected, etc.