Forecast net profit of 200 to 300 million yuan to mother, turning a year-on-year loss into a profit

The company announced its 2023 performance forecast. The net profit expected to be 200 to 300 million yuan, turning a loss into a profit over the previous year; net profit after deducting non-return to mother is 80 million yuan to 120 million yuan, turning a year-on-year loss into a profit. Among them, the company expects a net loss of 171 to 271 million yuan in 4Q23, a net loss of 216 million yuan to the mother for the same period of the previous year; a net loss of 280 to 320 million yuan after deduction of non-return to mother; and a net loss of 310 million yuan from non-return to mother for the same period of the previous year. The company's performance fell short of our expectations and that of the market. We determined that it was mainly due to credit impairment losses and the higher-than-expected cost of the film “The Volunteer Army: Attack the Soldier”.

Key points of interest

The film industry recovered steadily in 2023, and the screening sector was adjusted and optimized. In 2023, the national movie box office was 54.915 billion yuan, a sharp increase over the previous year, and the company's main businesses also recovered steadily. Creation and distribution sector: In 2023, the company produced and screened 37 films, with a total box office of 26.889 billion yuan, accounting for 58.45% of the total box office of domestic films; it led or participated in the distribution of 570 films, and settled over 41,397 billion yuan, accounting for 82.93% of the country's total box office. Screening sector: By the end of 2023, the company had 127 cinemas in operation, a year-on-year decrease of 9; the number of screens was 957, a year-on-year decrease of 79 blocks. We judge that during the recovery phase of the industry, the company attached importance to operating efficiency, and the channel testing layout was optimized to a certain extent.

The company's performance in investing in domestic films in the fourth quarter was relatively lackluster, and credit impairment losses dragged down profits. Affected by many factors such as limited content innovation and long vacation trips, the 2023 National Day box office performance was lackluster. Among them, the company's main film “Volunteers Attack” (released on September 28, 2023) ranked third in the box office. According to Cat Eye Pro, as of January 26, 2024, it had a cumulative total of 866 million yuan in box office, and the performance was relatively lackluster. We judge that the cost of “Volunteer Army: Attack of the Soldiers” is high and may have a certain impact on the company's profit in the fourth quarter. Furthermore, the company stated that based on the overall situation of the industry and changes in customer economic conditions, credit impairment losses are calculated according to the expected credit loss rate in accordance with the principle of prudence; at the same time, the company calculates individual impairment preparations for abnormal situations such as deteriorating credit conditions and inability to pay payments for some debtors. The company expects to accrue impairment preparations of 200 to 250 million yuan in 2023. We determine that credit impairment losses also dragged down profit levels in the fourth quarter.

In 2024, pay attention to the schedule for films such as “The Legend of Condou Heroes: The Master of Heroes”. Looking ahead to 2024, the owner of the company produced “The Legend of Condor Heroes: The Master of Heroes” (directed by Xu Ke). According to the Maw Eye Pro Edition, it was officially announced on the concept poster on May 7, 2023. It is recommended to pay attention to its subsequent schedule and box office performance.

Profit forecasting and valuation

Due to higher than anticipated film costs and credit impairment losses, we reduced our 2023-25 net profit by 60.8%/7.5%/7.1% to $246/659/720 million yuan. The current price corresponds to 34.3/31.4 times 2024/2025 P/E. Maintaining an outperforming industry rating, the target price was lowered by 4.6% to 12.4 yuan due to lower profit forecasts, corresponding to 35/32 times the 2024/2025 P/E and 2.4% upward space.

risks

The schedule and box office of key films fell short of expectations, the introduction of imported films fell short of expectations, and competition in the industry intensified.