2H23 performance outlook: We expect the company's 2H23 to achieve operating income of 3,759 million yuan, an increase of 6% year on year, and adjusted net profit of 550 million yuan, a 36% year-on-year decrease.
Channel adjustments continued, and revenue from the online reading business declined. The company 2H23 continues to reduce costs and increase efficiency of various distribution channels, and the overall channel scale and corresponding revenue have shrunk accordingly. The company's 2H23 online reading business revenue is estimated to be 1,875 billion yuan, down 9% from the previous year.
Due to the schedule of episodes, revenue from copyright operations fell short of expectations. We expect 2H23's copyright operation and other business revenue to be 1.8 billion yuan, an increase of 27% over the previous year. Due to the delay in the release of the drama “With the Phoenix” and the company's lack of scheduled releases in 23 years, the copyright business revenue is lower than our previous expectations.
Looking ahead to 24 years, the company's key film and television projects are expected to be launched, including the series “With the Phoenix”, “Celebrating the Years 2”, “Dafeng Gaining People”, and “Rose Story”, as well as the movies “Hot and Hot” (the Spring Festival program has already been screened; according to Cat Eye, it had a total box office of 3 billion yuan as of February 20), “Customs Front”, and “Under a Stranger”.
In terms of other IP formats, the commercialization efficiency of animation content is expected to improve after the company acquires Tencent Animation; in terms of skits, the company released the “Short Drama Galaxy Incubation Plan” and will launch 100 IP-adapted skits within the year.
Continue to explore the application of AI in content creation and IP development. At present, the AI application scenarios that the company has implemented include (1) incorporating the online writing model “Magic Pen” into the writing product “Writer's Assistant”; (2) using AI to translate online texts to improve the efficiency of online texts going overseas; and (3) the AI virtual human chat application “Dream Island”.
Currently, the company's AI applications are still in the exploration and development stage, and the increase in related R&D investment will have a certain impact on profits.
Profit forecast and investment advice: The company's revenue for 2023/2024/2025 is expected to be $7.5/7.8 billion, -8%/+7%/+3% YoY; adjusted net profit (Non-Gaap) of $10/12/1.3 billion, -23%/+13%/+9% YoY, maintaining a “buy” rating.
Risk warning: Series production progress falls short of expectations, AI technology application development falls short of expectations, cost control falls short of expectations, policy supervision risks.