Key points of investment:
An established state-owned film enterprise with strong business recovery in 23 years. The actual controller of the company is the Shanghai State Assets Administration Commission. The largest shareholder, Shanghai Film Group (holding 69% of shares), formerly known as Shanghai Film Studio, was founded in 1949. It is one of the oldest comprehensive film culture groups in China and is rich in resources. Among them, Shanghai Film Studio, Shanghai Fine Arts Film Studio, and Shanghai Translation and Production Company have a large number of IP copyrights, and the company is the only listed company under Shanghai Film Group. The company's current revenue and profit mainly comes from the film business. The revenue growth rate in '23 outperformed the movie market, and profitability increased markedly under cost reduction and efficiency; in March '20, the three strategies “quality content, big IP development, and digital transformation” were defined, and progress was positive in '23. In May this year, the acquisition of 51% of Shanghai Film Yuan Culture's shares was completed, and the Shanghai Film New Vision Private Equity Fund, which was jointly established and launched in June, completed product filing, focusing on cutting-edge fields such as AIGC and VR/AR/MR.
The film industry is clearly picking up, and the company has a location advantage based in Shanghai. According to the Cat's Eye Pro edition, the total box office for the first 11 months of 23 years totaled 51 billion yuan, recovering to 85% of the same period in '19; the performance of the key schedule was outstanding, ranking second in the history of Spring Festival movies and number one in summer film history. The summer program has a long-term impact on bringing young moviegoers back to cinemas. As an affordable way to enjoy their consumption, it is expected that the movie box office will maintain a relatively good boom in the medium term, gradually recovering and surpassing historic highs. Shanghai is an important box office and promotion base for domestic films, leading the box office share ahead of other first-tier cities. The Shanghai International Film Festival is the only international category A film festival in China. The company's direct-run cinema and cinema market share is relatively stable; direct-run cinemas are mainly distributed in the core areas of Tier 1 and 2 cities. The market share in the first three quarters of 23 increased compared to the same period in '21 and '22; and the share of Lianhe Cinemas was in the top three in the country. Film distribution is a potential highlight. The company's current distribution business is small. In the future, it will continue to utilize the superior resources of the controlling shareholder, Shanghai Film Group, to increase participation in the promotion of leading films; the Shanghai Film Group's participation in leading films has increased markedly this year.
IP has accumulated a lot, blossomed in many places, and started quickly. Shanghai Film Yuan Culture was founded in October '22 and has received free transfers of 60 classic IPs from Shanghai Film Group and the American Film Company, including “The Big Cuckoo”, “The Hulu Brothers,” and “Sergeant Black Cat”. Since May '23, it has been incorporated into listed company reports. In terms of content, the company refreshed the old IP, such as opening an account on a short video platform to add new content. Currently, the number of fans and likes on Huluwa's Douyin account is significantly higher than that of classic cartoon IPs of the same type. In terms of monetization, multi-dimensional promotion, 1) IP licensing and multi-industry cooperation, popular clothing, food and lodging such as KFC and the National Jewelry Inspection, games such as “Egg Party”, and promotional videos for the JD brand; 2) cultural and creative products. The flagship store on Tmall has over 300+ SKUs, and the maximum sales volume of a single product exceeds 10,000; 3) game development, authorized WeChat games and app games have all been launched one after another; 4) Comprehensive layout of IP+AIGC. Revenue and profit for the first five months of Shanghai Cinema 23 increased significantly compared to 22 years. In November, Shanghai Film Group announced the launch of three major plans. It will continue to expand the IP matrix in the future, and the growth of the company's IP business is highly visible.
Profit forecast and valuation: We expect the company's total operating income from 2023-2025 to be 821/10.32/1,258 million yuan, and net profit of 1.56/2.18/287 million yuan. Considering the company's future strategic changes, we divided the company's business into two parts for valuation: film and IP development. The film business uses the PE valuation method, and the IP business uses the single IP valuation method, giving a target market value of 141 billion yuan for 2024. The first coverage gives a buying rating.
Risk warning: The movie market fell short of expectations, the company's film business market share fell short of expectations, and the company's IP development progress fell short of expectations.