Core viewpoints

The impact of epidemic situation and content regulation on the supply of movies and TV dramas has basically subsided, and the market has gone through a trough. It is expected that the future film and television production cycle will return to normal, fixed files and online return to marketization, so the company's supply side will gradually resume. At the same time, the better-than-expected performance of the film market has also enhanced the company's bargaining power in digital rights distribution.

Digital rights distribution as an important part of the dissemination of films and TV dramas, the company, as the leader in this field, is also the core beneficiary of the film market performance exceeding expectations. Judging from the results of previous quarters, the company's performance elasticity lags behind the peak season by one quarter. Therefore, in the summer, a number of domestic films exceeded expectations, the future supply of films and TV series steadily released the market environment, we expect the company's performance will continue to pick up.

We estimate that from 2023 to 2025, the company will achieve a net profit of 7.81max 8.93 / 1.004 billion, an increase of 49.98%, 14.38%, 12.44% and 12.44%, corresponding to a PE of 16.90, 14.78 and 13.15x on September 19, 2023.

Brief comment

It is expected to benefit from a substantial recovery in supply in the film and television industry. Since the end of 2022, the supply side of the film and television industry has recovered significantly:

1) the start-up and production of film and TV drama projects are formal. In the TV drama industry, for example, there were 18 fewer episodes in 2022 than in 2021 due to the launch of 301 episodes. Among them, due to the epidemic situation, the leading TV series producer Huatze Film and Television broadcast a total of 10 episodes in 2022, a decrease of 9 shows compared with the same period last year; the impact remained in the first half of 2023, according to a half-yearly report, affected by the low start-up number of TV series projects in 2022, only three projects realized revenue recognition in the first half of the year.

2) content regulation is relaxed. A number of backlog films in previous years have been released in theaters this year. For example, the realistic film "endless", starring Bai Ke and Zhang Songwen, was shortlisted for the Venice International Film Festival in mid-2020 and announced its domestic schedule in February this year. Solid Rock, a crime film produced by Light Media and directed by Zhang Yimou, issued a preview in mid-2020 and is now confirmed to be released on National Day.

3) the film filing returns to marketization. In 2022, due to the control of the epidemic, cinemas in various places were often temporarily closed, so the film filing was greatly affected.

For example, the box office champion of 2022 National Day and the runner-up "thousands of miles Home" and "Square Hero" are both scheduled for September 23 and September 30, only seven days in advance.

However, since 2023, the promotion cycle from filing to release has been greatly lengthened. From mid-August to the end of the month, a number of films such as "Goldfinger" and "twinkle" have been scheduled for the New year on December 30, grabbing the core schedule ahead of schedule.

China TV NetJu, a core subsidiary, is the leader of copyright distribution of domestic films and TV dramas:

1) supply side: the market share of digital copyright distribution of film and TV series is the first. According to the 2023 semi-annual report, the company has accumulated more than 50,000 hours of film and television, animation and program copyright content in cooperation with more than a thousand domestic and foreign production companies, such as China Film, Wanda, Huayi, Xingmei, Pentium, Warsaw, Huatze and so on.

By the end of 2022, among the company's intangible assets, the book value of film and TV series copyright at the end of the period reached 10.854 billion yuan, a net increase of 840 million yuan over the same period last year.

2) demand side: downstream customers cover the omni-channel leading platform. In China, the company has reached long-term content cooperation with video Internet, operators, digital TV / IPTV/OTT and other multi-screen partners, covering all mainstream film and television content broadcasting channels, mainly Internet video channels including Tencent Video, Youku, iQIYI, Inc., Huawei Video, Migu Video, TV channels including Digital TV, IPTV, OTT, etc., and the new short video platform of Kuaishou Technology and Toutiao. Overseas, the company has established cooperative relations with TV stations, cable TV stations, operators and video websites in more than 200 countries and regions.

The company's performance is highly related to the supply of movies and TV series, and it usually lags behind the peak season by one quarter. Film and television rights are usually the most valuable in the first year after premiere / release. According to the audit report, the sales law of film and TV series copyright is usually that the sales revenue in the first year accounts for about 50% of the total copyright revenue, the second year accounts for about 20% of the total copyright revenue, and the sales revenue in the third-fifth year accounts for about 30% of the total copyright revenue. On this basis, the company amortizes the copyright of movies and TV dramas in intangible assets every year.

This rule is usually reflected in performance. Affected by the epidemic in 2020, cinemas across the country did not gradually resume business until July 20, so the film supply was interrupted, and the company's performance was greatly affected. Operating revenue in the first, second and third quarters fell by 33.54%, 11.57% and 32.01% compared with the same period last year.

At the beginning of the third quarter, the film supply began to return to normal. Since films are usually released in theaters before landing on various networks and television channels, the company's performance began to recover in the fourth quarter. According to the 2020 semi-annual report, on the one hand, the company is looking for multiple ways to realize cash in difficult times, such as the company's joint operation with Huawei and the signing of a three-year cooperation agreement with Mobile Migu. But at the same time, benefiting from the recovery of film supply, in the fourth quarter, a number of summer and National Day films such as "eight hundred", "Jiang Ziya", "Kumachuan", "I am waiting for you at the end of time" and "will be home at one o'clock" were launched in the new media in the fourth quarter of 2022. As a result, business revenue increased by 26.26% in the fourth quarter of 2022 compared with the same period last year.

With the resumption of film supply in 2023, the company has made an eye-catching performance in the second quarter. According to the 2023 semi-annual report, the company launched new media during the reporting period, including "wandering Earth 2", "Manjianghong", "unfamiliar Road of Life", "Deep Sea", "nameless", "King of the Sky" and other movies; as well as satellite TV prime-time dramas such as "Happy lights", "smiling Mother" and "Generation of craftsmen". Affected by this, in the second quarter of 2023, the company achieved operating income of 818 million yuan, an increase of 11.79% over the same period last year, an increase of 22.14% over the same period last year, and a net profit of 194 million yuan, an increase of 70.79% over the same period last year and 23.15% over the same period last year.

A number of high-quality domestic films in the summer are higher than expected, and the company is expected to continue to benefit. The number of moviegoers has recovered significantly since the Dragon Boat Festival at the end of June. A number of films, including "the Vanishing her", "Changan 30,000 miles", "Octagonal Cage", "Fengshen I" and "put all your eggs in one basket", exceeded expectations, driving the comprehensive box office in 2023 to break the historical record of 20.6 billion yuan, crossing the 20 billion yuan mark for the first time, and the number of moviegoers reached 504 million, also exceeding the 502 million in 19 years. We believe that the company's digital rights distribution business is expected to benefit from the company's performance, which is usually one quarter behind the peak season, and with a substantial recovery in the supply of domestic films in the summer; at the same time, the comprehensive box office of domestic films is higher than expected. it also gives the company more bargaining power when distributing the right to spread through the network.

Non-core assets have been basically stripped, and goodwill is left only core assets such as China TV net gathering. According to the 2023 semi-annual report, the end-of-term balance of the company's goodwill is 3.726 billion yuan, mainly including 2.928 billion yuan of China TV net gathering, and 789 million yuan of Star era, a subsidiary engaged in film and television content production. 100% owns the subsidiaries of the two major Chinese-language TV stations, Guangshi World, with a final balance of 9 million yuan.

In terms of AI, the company reached a cooperation with Huawei Pangu. According to the Daily Business News, on July 8, the company formally signed a cooperation agreement with Huawei Pangu to become an ecological partner of Pangu Model. The two sides will carry out in-depth cooperation in the field of AIGC to jointly explore the application and innovation of AI model in the field of film and television content production.

In addition, the subsidiary Shiyou Technology is also steadily promoting the layout of AI+ digital people. Shiyou Technology, a 19.86%-owned subsidiary of the company, is a virtual human technology solution service provider dedicated to creating meta-cosmic avatars for government enterprises, brands, stars, celebrities and everyone. At present, it has provided products or services to nearly 1000 customers, including CCTV, China Mobile Limited, Huawei, BABA, Haier Group, and has created more than 1000 digital people. In the first half of 2023, the company launched a self-developed small model "Shiyou BOTA". By accessing this model, Shiyou AI digital live broadcast system can create "smarter" AI digital people, input text or upload audio files and output live / short video content immediately.

Investment advice: the impact of the epidemic and content regulation on the supply of films and TV dramas has basically subsided, and the market has gone through a trough. We expect that in the future, the shooting time and production cycle of films and TV dramas will return to normal, and the film files and episodes will return to marketization, so the supply side of the company will gradually resume. At the same time, the better-than-expected performance of the film market has also enhanced the company's bargaining power in digital rights distribution. In the summer period, the box office of a number of domestic films exceeded expectations, the future supply of films and TV dramas steadily released the market environment, we are optimistic that the company's performance continues to pick up. We estimate that the company will achieve a net profit of 7.81 million yuan from 2023 to 2025 with a year-on-year increase of 49.98%, 14.38% and 12.44%, corresponding to the closing price of PE 16.90, 14.78 and 13.15x on September 19, 2023.