Incidents:

On March 7, Hengdian Film and Television released its 2023 annual report, with 2023 revenue of 2,349 million yuan (YOY +64.62%), net profit of 166 million yuan (YOY +152.25%), net profit of non-return mother of 74 million yuan (YOY +116.76%).

Investment highlights:

Costs and expenses are well controlled, and profitability is significantly enhanced:

(1) The company's revenue in 2023 was 2.35 billion yuan, YOY +64.6%, up 2.9% from 2021; net profit to mother was 166 million yuan, YOY +152.25%, up 1113.2% from 2021; net profit after deducting non-return to mother was 74 million yuan (2022 - 440 million yuan), an increase of 265.6% over 2021; non-recurring profit and loss of 92.03 million yuan, including 25.17 million yuan in government subsidies and 12.19 million yuan in depreciation of accounts receivable. The gross profit margin in 2023 was 14.0%, up 1.2pct from 2021 (20.65% in 2019); the period expense ratio was 7.99%, down 2.34pct from 2021; and the net profit margin was 7.06% (11% in 2019). The company's net operating cash flow in 2023 was $746 million (YOY +138.7%, up 28.5%/14.3% from 2019/2021).

(2) 2023Q4 revenue of 396 million yuan (YOY +96.6%, QOQ -49.4%), net profit to mother of -0.7 billion yuan (YOY +66.8%, QOQ -156.9%), net profit of non-return to mother -98 million yuan (YOY +66.1%, QOQ -200.2%). According to Cat Eye, the national box office for 2023Q4 was 9.34 billion yuan (QOQ -51.7%, YOY +118.6%), and 2023Q3 was 19.31 billion yuan; corporate film voting room was 298 million yuan (QOQ -53.1%), with a market share of 3.51% (down 0.1 pct from 2023q3).

Cinemas continue to optimize operations, increase profitability, and steadily increase market share:

(1) In 2023, the company's cinema screening business revenue was 2.13 billion yuan (YOY +73.41%); gross profit margin was 11.55% (-17.97% in 2022, -4.69% in 2019). The expansion of cinema investment gradually slowed down, operating efficiency improved, and gross margin changed from negative to positive. In 2023, the company's directly-managed cinemas achieved box office revenue of 1,805 billion yuan (YOY +82.0%); single cinema box office of 4.262 million yuan (up 5.3% from 2021, returning to 68% in 2019); single-screen box office of 669,000 yuan (up 4.3% from 2021, returning to 67.2% in 2019). According to Cat Eye, the company's film investment market share was 3.61% in 2023, up 0.01/0.25pct from 2022/2019, respectively.

By the end of 2023, the company had opened 432 theaters/screens at 2,757 units respectively, an increase of 17 or 116 blocks over the end of 2022 (23 new ones opened and 6 shut down), and 3 or 22 more in 2023Q4.

(2) The 2024 New Year's Day and Spring Festival movies both reached record highs, with a voting room of 300 million yuan (+26.5%/+11.5% YOY for the same period in 2023/2021, respectively); market share 4.1% (0.3/0.4pct increase over the same period in 2023/2021). The company's market share is expected to increase steadily, and I am optimistic that the recovery of the box office will drive the growth of the company's film investment business.

Film investment and production capacity were gradually released, and the Spring Festival program participated in the production of 4 core films:

(1) In 2023, the company's film and television investment, production and distribution business revenue was 150 million yuan (YOY -6.72%), with a gross profit margin of 9.74% (26.0% in 2022). The films produced/distributed by the company in 2023 include 19 movies including “Wandering Earth 2” and “The Bear Cries Me”. In 2024, the Spring Festival program participated in the production of 4 core films (“Bears Raid: Reversing Time and Space”, “Article 20,” and “Speeding Life 2,” and co-produced “Hot and Hot”). According to Cat's Eye, as of March 8, the total box office was over 10.9 billion yuan; the 2023 Spring Festival program produced “Bears Haunted · Accompany Me Bear Heart” and co-produced “Wandering Earth 2”, which grossed 5.5 billion yuan.

(2) The company has reserves of “Let's Shake the Sun Together” (scheduled for March 30), “Kidnapping Game”, “The Legend of Condor Heroes”, and “Jiro God: The Deep Sea Dragon”, etc. In the future, it plans to participate in more than 10 high-quality films every year, accounting for 20%-30% of the total box office in the country.

Profit forecast and investment ratings: The 2024 New Year's Day and Spring Festival program both reached record highs. Further verifying that the supply of high-quality content can create demand for movie viewing, it is optimistic that the recovery of the box office market and the increase in the company's film investment market share will drive the growth of the company's film investment business. Based on the principle of prudence, we adjusted the company's profit forecast. The net profit for 2024-2026 is expected to be 3.03/30/427 million yuan, the corresponding EPS is 0.48/0.57/0.67 yuan, and the corresponding PE is 32.28/26.83/22.92X, maintaining the “buy” rating.

Risk warning: There are risks such as increased market competition, insufficient supply of high-quality films, changes in movie viewing habits, competition in other forms of entertainment, declining valuation center, falling short of expectations in film development process and box office performance, falling short of expectations, loss of inventory and asset values, and insufficient funding.