Maintaining a “buy” rating, the target price is HK$2.50. We use relative estimates based on EV/EBITDA ratios. We gave China Confucius 17.2 times the adjusted EV/EBITDA ratio for 2023, with a target market value of HK$29 billion.

China's Ruyi will become Wanda Film's new controlling shareholder. On December 12, 2023, Wanda Film announced that its controlling shareholder, Beijing Wanda Cultural Industry Group and its wholly-owned subsidiary, Beijing Hengrun, signed an agreement with Wang Jianlin, the actual controller of Wanda Film, to transfer 51% of Beijing Wanda Investment Co., Ltd.'s shares to Shanghai Ruyi Investment Management Co., Ltd., at a total cost of RMB 2.55 billion. After the transaction is completed, Ruyi Investment will hold 51% of Wanda Investment's shares, and Ke Liming, the controlling shareholder of Ruyi Investment, will indirectly control 20% of Wanda Film's shares. Wang Jianlin will indirectly control 10.9% of Wanda Film's shares through multiple entities.

The price of the Chinese Confucian acquisition of Wanda movies was a huge discount compared to the market value. From a transaction perspective, China Ruyi spent a total of RMB 4.417 billion to acquire 20% of Wanda Film's shares in July and December 2023, which is equivalent to 435,873,762 shares; this is an 18% discount compared to the market value of approximately RMB 5.391 billion of Wanda Film's shares held by China Ruyi as of December 26, 2023 (calculated at the closing price of RMB12.37).

Wanda Films will bring significant business synergy effects to Confucius in China. Wanda Film is deeply involved in the film industry and is expected to bring its rich experience and resources in film creation and distribution to Confucian China. The company's current IP reserves include series such as “Detective Chinatown,” “Accidental Murder,” “I Want to See You,” and “Folding City.” In addition to film production, Wanda Film's 877 offline cinema and cinema assets are a strong and stable source of revenue for the company, as well as a reliable way to distribute already produced films.

China's Ruyi acquisition of Wanda Films has great potential to create value. We have adjusted our 2023-2025 revenue forecast for Confucian China. The draft on online game management may have an impact on the game industry, causing us to lower our game revenue forecast. After these adjustments, we raised China's Ruyi earnings per share forecast for 2023-2025 by 6.7%, 1.9%, and 2.2%, respectively. Therefore, we ultimately forecast earnings per share of RMB 0.022, RMB 0.062, and RMB 0.078 for 2023-2025, respectively.

China's Ruyi will eventually become Wanda Film's new controlling shareholder. On December 12, 2023, Wanda Film Co., Ltd. (“Wanda Film”), listed on the Shenzhen Stock Exchange and with stock code 002739, announced that its indirect controlling shareholder, Beijing Wanda Cultural Industry Group (“Wanda Culture”) and its wholly-owned subsidiary, Beijing Hengrun Enterprise Management and Development Co., Ltd. (“Beijing Hengrun”), and Wang Jianlin, the actual controller of Wanda Film, and Shanghai Ruyi Investment Management Co., Ltd. (“Ruyi Investment”) signed the “Share Transfer Agreement on Beijing Wanda Investment Co., Ltd.” According to the agreement, they intend to transfer 51% of their total shares in Beijing Wanda Investment Co., Ltd. (“Wanda Investment”) to Ruyi Investment at a total cost of RMB 2,155 billion. As early as July 20 of this year, Wanda Film announced that its indirect controlling shareholder, Wanda Culture, will transfer 49% of Wanda Investment's shares to China's Confucius, at a consideration of RMB 2,232 billion. After the equity transfer in July, China's Ruyi indirectly held 216 million shares of Wanda Film, accounting for 9.8% of the total share capital.

If the above deal is finally realized, Ruyi Investment will hold 51% of Wanda Investment's shares, and Coliming, the actual controller of Ruyi Investment, will indirectly control 20% of Wanda Film's shares through Wanda Investment. Wang Jianlin indirectly controlled 10.9% of Wanda Film's shares through Wanda Culture, Shenxian Rongzhi Industrial Management Consulting Center, and Lin Ning.

The acquisition of Wanda Films was mainly funded by Ke Liming, the majority shareholder of Confucius in China. According to the announcement, Coliming will use his own capital to invest RMB 882 million, and the remaining amount will be supplemented by bank loans applied for by Confucian Investments. Coliming will retain the management rights of Wanda Films as the new actual controller. After the equity transfer agreement is reached, Wanda Culture and its co-actors will push for more than half of Wanda Film's directors to resign and be replaced by candidates recommended by Confucian Investment. The directors recommended by Ruyi Investment will serve as the chairman and legal representative, while Wanda Culture has the right to reserve two seats in the new board of directors.

Wanda Film has been deeply involved in the film and television industry for many years and has accumulated rich experience in producing blockbuster IPs. The “Chinatown Detective” series, which was previously incubated within the Wanda system, was entirely composed of domestic elements and was a huge success. The series grossed over RMB 8.743 billion, making it the highest-grossing film series in China. Additionally, the series is a mix of web dramas and anime. The company's current IP reserves include series such as “Detective Chinatown,” “Accidental Murder,” “I Want to See You,” and “Folding City.” In the first three quarters of 2023, Wanda Film achieved revenue of RMB 11.348 billion, an increase of 46.98% over the previous year, and achieved net profit of RMB 1,128 billion, reversing the previous loss situation. In terms of film production, many films such as “Space Exploration Editorial Office”, “Wandering Earth 2”, “Enthusiasm”, and “Give It All”, which Wanda Pictures participated in production or investment, were screened in the first half of 2023 and received good reviews in the market.

In addition to its outstanding film production capabilities, the cinema assets owned by Wanda Films are a strong source of revenue. According to Wanda Film's report for the third quarter of 2023, Wanda Films operates 877 theaters in the country, with a total of 7,338 screens. Among them, there are 709 direct-run cinemas with 6,159 screens; 168 asset-light cinemas with 1,179 screens.

Notably, Wanda Film's cumulative market share in the first three quarters of 2023 was 16.5%, reflecting the continuous improvement in operating efficiency and its stable position in the industry.

During this period, the company's domestic cinemas achieved box office revenue of RMB 6.22 billion (excluding service fees), a year-on-year increase of 67.6%, and an increase of 5.2% over the same period in 2019. The number of movie viewers also increased to 150 million, a year-on-year increase of 68.7%, and an increase of 3.7% over 2019. It is worth noting that from July to September 2023, domestic cinema box office revenue reached RMB 2.57 billion (excluding service fees), a year-on-year increase of 102.1%, an increase of 21.2% over the same period in 2019, exceeding the industry average. Furthermore, Wanda Film achieved a profit of RMB 690 million in the third quarter of 2023, a sharp increase of 1341% over the previous year. From this perspective, whether in terms of content IP or cinema facilities, Wanda Film is a high-quality asset that can bring great synergy effects to China's Confucianism.

China's Confucian acquisition of Wanda Films raised a significant premium on the company's valuation in terms of trade concessions and operational synergy effects. From a transaction perspective, China Ruyi spent a total of RMB 4.417 billion to acquire 20% of Wanda Film's shares in July and December 2023, which is equivalent to 435,873,762 shares; this is an 18% discount compared to the market value of approximately RMB 5.391 billion of Wanda Film's shares held by China Ruyi as of December 26, 2023 (calculated at the closing price of RMB12.37). From an operational perspective, we expect China's Ruyi acquisition of Wanda Films to have significant synergies at both levels. First, with Wanda Film's accumulated industry resources in content production, China's Ruyi's future film production quality and return on investment are expected to improve dramatically. Second, Wanda Film has the largest cinema assets in the country, creating a strong moat and competitive advantage for China's Confucian film production and distribution business.

Taking into account the significant synergy between the acquisition of Wanda Films on China's Ruyi future film distribution and content production, we adjusted our revenue expectations for 2023-2025. However, the State Press and Publication Administration issued the “Measures for the Administration of Online Games (Draft for Comments)” on December 22, 2023. We believe that it will have a certain impact on the operation of the game industry, particularly on impulse consumption. Accordingly, we adjusted our forecast for the company's 2023-2025 gaming revenue by 20%, 23.1%, and 40%, respectively. After these adjustments, we raised China's Ruyi earnings per share forecast for 2023-2025 by 6.7%, 1.9%, and 2.2%, respectively. Therefore, we ultimately forecast earnings per share of RMB 0.022, RMB 0.062, and RMB 0.078 for 2023-2025, respectively.

Main risks: 1) The progress of the company's film and television projects fell short of expectations, and film production was not completed as planned; 2) policy risks related to the Chinese film and television industry may affect the company's operations; 3) the development of the game business may be affected by policy factors such as game approval and uncertainty in the company's development team.