Incident: Yingyuan revealed the 2023 Mid-Year Report. In H1 in 2023, the company achieved operating income of 3.126 billion yuan, a decrease of 23.0% over the previous year; net profit of 193 million yuan, turning a loss into a profit.
Deeply involved in pan-entertainment, the short drama business has become a new bright spot. Affected by the external environment and market competition since last year, the company's original business structure has been adjusted. The revenue scale for the first half of 2023 decreased by 23.0% year-on-year. However, on a month-on-month basis, the company actively developed innovative projects such as skits and completed initial commercial verification, and the revenue situation from external competition improved markedly. Looking at it by business:
1) Revenue from value-added services was 2,315 billion yuan, a year-on-year decrease of 40.8% and an increase of 20.0% over the previous year. The company continues to improve the “Yingke Live” platform ecosystem, optimize operating strategies, enrich scenarios and gameplay, and further optimize the profit margin of the live streaming business; continuously explore diverse application scenarios, expand the social product matrix, and dig deeper into user needs in more vertical segments. Social user stickiness has increased significantly; in the blind date business sector, “super likes” focus on post-90s single youth, accelerating offline store expansion and offline activities, further reaching users and enhancing brand potential.
Considering that the live streaming industry has entered a mature period of development and changes in the company's strategic investment in the company's business, we expect the company's value-added service sector to remain generally stable and profit levels continue to be optimized.
2) Content service revenue was 472 million yuan, mainly contributing to the short drama business. The company began laying out a short drama circuit in the second half of 2022. Relying on a mature and efficient middle and back office system, the company quickly sorted out the industry chain and quickly launched multiple products. With its first-mover advantage and strong promotion and marketing capabilities accumulated earlier in live streaming and social networking services, the company quickly entered the first tier of the industry, enjoying the dividends of the rapid growth in the market volume and user size of the short drama market since 23 years.
According to the “Short Drama Market Report for the First Half of 2023”, there are 481 new micro short dramas on video platforms such as Tencent, Youku, Mango TV, Douyin, Kuaishou, etc., surpassing 454 in 2022. The industry is still developing rapidly. With increased investment in innovative businesses such as short dramas and the expansion of short drama launch channels, the company's content service business revenue is expected to maintain rapid growth.
Gross margin is stable, and sales expenses may continue to expand. In H1 in 2023, the company's gross profit margin was 42.6%, the same as in the same period in 2022. Affected by the development of the short drama business, H1 had sales expenses of 962 million yuan in 2023, and the sales expense ratio increased by 9.5 pcts to 30.8% year on year. Since the current short drama business is heavily dependent on buying volume and the company's short drama business is still in a period of rapid development, we expect the company's sales expenses scale and sales expense ratio to increase further. In H1 in 2023, the company's management expense ratio was 3.2%, a year-on-year decrease of 12.0pcts. Mainly due to the impact of impairment on goodwill in the same period last year, the company's R&D expense ratio remained stable at 4.6%.
Explore new markets and technologies, and actively expand overseas and AIGC. With the continuous improvement of infrastructure such as mobile payments, there is more room for development in overseas markets. Relying on genes accumulated over the years in the field of audio and video social networking, the company accelerates the export of products overseas, focusing on core social networking and skit drama business. At the same time, the company grasped technological innovation, reached a cooperation with Kunlun World Wide, actively explored development directions such as interactive social networking, AI music, AI scripts, AI operations, digital live streaming, and the metaverse, and broadened diverse interactive entertainment scenarios, which are expected to promote the expansion of business boundaries and become new growth points.
Investment advice: The company is deeply involved in the field of pan-entertainment and has accumulated strong product delivery capabilities and promotion and marketing capabilities in China and Taiwan. We are optimistic about the company's potential to continuously explore and advance new opportunities in the industry with deep industry insight. The company's revenue for 2023-2025 is expected to be 66.8/73.7/79.2 billion yuan, an increase of 5.7%/10.4%/7.4% over the previous year, net profit of 3.6/4.7/6.0 billion respectively, a year-on-year increase of -/ 32.0%/26.9%, corresponding to PE of 3.5/2.7/2.1 times, covering the first time, giving it an “increase in holdings” rating.
Risk warning: Macroeconomic recovery falls short of expectations, consumption falls short of expectations, and technological progress falls short of expectations.