Revenue and profit expectations for 2023 were lowered. We expect Reading Group's revenue for the full year of 2023 to be 7 billion yuan (same below), a year-on-year decrease of 8%, mainly due to adjustments in online business channels and delays in some key IP projects. Considering the decline in revenue and investment in AI personnel/computing power, we expect adjusted net profit of 1.1 billion yuan for the whole year, down 20% year on year, and corresponding profit margin 15%, down 3 percentage points year on year.
Online business revenue was reduced by 8% in 2023, and the number of users of key reading platforms has been rising steadily. According to point data and QuestMobile data, free reading platforms have limited impact on the number of users of key reading platforms under Reading Text. Starting Point Reading/QQ Reading/WeChat Reading MAU/DAU is still rising steadily over the same period last year, and the flow rate is also relatively stable. However, considering the contraction of distribution channels, we expect online business revenue of 3.98 billion yuan in 2023, down 9% year over year.
Based on delays in some projects, the 2023 IP operating revenue forecast was lowered by 8%; the main control films performed well in 2024, and the reserves of popular IP adaptation series were abundant. Shiny's projects launched in the second half of 2023 include “Fight the Sky”/“Hot Sun Accompany Me”/“Stalker”, the broadcast of “With the Phoenix” was delayed, and the net profit forecast for 2023 was lowered to 400 million yuan. Considering the abundant reserves of key IP adaptations in 2024 (pre-orders for “Celebrating Years 2” have surpassed 10 million) and the Spring Festival box office for the main control film “Hot and Hot” has reached 3 billion yuan (cat's eye, as of February 20, 2024), we maintain Shinih's net profit forecast of over 500 million yuan for the full year of 2024. Reading Wen's core IP operations still have potential for growth, mainly due to: 1) It was announced in December 2023 that it will acquire assets related to Tencent Animation, which is expected to further enrich IP reserves and strengthen diversified IP development collaboration. 2) Exploring skits or bringing incremental opportunities. According to ADXray data, the fantasy short drama “Mandao Dragon Emperor”, produced by Reading Wen, surpassed 10 million yuan within 72 hours of launch. Short drama investment is low and loss is fast. Once the model is launched, the adaptation of long-tail content in the platform may be accelerated to expand commercialization potential.
Valuation: Considering AI investment and the contraction of online business channels, we lowered our 2023/2024 adjusted net profit forecast by 28%/19%. Refer to comparable premium content and copyright companies, give 20 times the 2024 price-earnings ratio, and reduce the target price from HK$36 to HK$29. In the short term or in part, AI investment has dragged down the core profit growth of reading articles, but in the long term, it will bring room for imagination in production capacity expansion, cost optimization, and product innovation. The current price corresponds to 1.2 times the 2024 PEG, which is 1.0 times the average compared to entertainment content companies, and remains neutral.