Main points of investment

Event: the third quarter report of 2023 was released online in Chinese. In the first three quarters of 2023, the company realized operating income of 1.02 billion yuan, an increase of 12.19% over the same period last year; the net profit of returning to the mother was 2 million yuan, turning losses into profits over the same period last year; and deducting the non-return net profit of-109 million yuan. In 2023, the company's Q3 realized operating income of 369 million yuan, down 13.26% from the same period last year; the net profit returned to the mother was 39 million yuan, turning losses into profits compared with the same period last year; the non-return net profit was-334700 yuan, and the loss narrowed by 99.31% compared with the same period last year.

Operating income declined in the third quarter of 2023 compared with the same period last year, and net profit returned to profit compared with the same period last year.

1) the revenue side of the third quarter of 2023: the company's Q3 realized operating income of 369 million yuan in 2023, down 13.26% from the same period last year. 2) the cost side of the third quarter of 2023: the gross profit margin of the company in the third quarter of 2023 was 36.44%, a decrease of 12.6pct compared with the same period last year, mainly due to the increase in channel costs corresponding to the increase in revenue from paid video series derived from copyright in the third quarter; the rate of sales expenses was 29.04%, down 13.42pct from the same period last year; the rate of R & D expenses was 4.57%, down 3.27pct from the same period last year; and the rate of management expenses was 8.03%, down 1.51 pct from the same period last year. The investment income was 72 million yuan, an increase of 3035.09% over the same period last year, mainly due to the fact that CMS, the overseas company of the original holding subsidiary, was no longer included in the scope of the merger.

Solid promotion of core business, focus on the layout of overseas short dramas. 1) Digital content: the company continues to consolidate high-quality content, and its work "Eternal World" in October was on the list of the influence of Chinese online literature in 2022.

2) in terms of movies and TV dramas: "provoking" created the record of the highest popularity of Tencent skits, with a cumulative score of 18 million yuan; "Shura Wu Shen" won the hot search TOP7 in Tencent video station on the first day of broadcasting, and the list of popular anime broadcasts TOP2, with a heat value of more than 20000. 3) Animation: in May, "chaos Sword God" topped the Tencent video animation list for many days, firmly in the top 10. 4) AI model: in September, Chinese online signed a cooperation agreement with Huawei Cloud; in October, it released the world's first large-scale model of ten thousand character creation, "Chinese Xiaoyao".

5) overseas business: the launch of ReelShort's short play App, which has a considerable flow; reached a cooperation with MangaToon to promote a series of comic works assisted by AI to overseas markets.

With the simultaneous development of content creation and distribution and sales, AI+ meta-universe has achieved fruitful results. 1) give full play to the advantages of legitimate data:

The company has authentic data of super 60TB, high-quality database with high accuracy and wide coverage. 2) content distribution and sales: the company carries out extensive cooperation with head reading platform, audio platform, three major operators and other channels for distribution. 3) AIGC in-depth layout: the company has launched AI anchors, AI drawings, AI cartoons and AI text-assisted creation. 4) in-depth promotion of meta-universe: RESTART restart cosmos release core NPC-- "Nuwa artificial intelligence system" in the future AIGC will be more deeply involved in the construction of RESTART and speed up the evolution of meta-space.

Profit forecast: the company's core business has made steady progress, and the layout of cutting-edge technology has opened up space. It is optimistic that the company's AI and meta-universe business will continue to advance and open up room for future growth. We maintain our profit forecast and expect the company's 2023-2025 net profit to be 1.28176Universe. The PE of the previous share price (October 23, 2023) is 37.7 times the previous share price, and the overweight rating is maintained.

Risk hints: high-quality copyright competition aggravates the risk, the risk of works being pirated, the risk of collection of receivables, the risk that the development of meta-universe business is not up to expectations, and so on.