Investment highlights:

The main business of the drama was taken lightly, and the financial burden was reduced.

(1) The drama's main business barriers are deep, and the overall pace is improving. Since its establishment in 2000, the company has insisted on putting equal emphasis on quality originals and IP development, enriching the themes of the play and improving the quality of production. It has produced more than 100 series such as “The Legend of the Divine Hero”, “A Thousand Bones”, “Old Nine Gates”, and “The Legend of Chu Qiao”. Since 2023, the company has continued to advance the drama project, confirming the distribution revenue of series such as “The Three Masters of Light”, “King of Light”, and “Kunpeng Strikes the Wave”, etc., and “Zichuan's King of Light”, etc., which passed the review. “The Amazing Us” went live in June 2023, “Proper Defense”, “Dark Tide”, and “Partner” went live at the end of 2023, and “Deep Sea 1950” was launched in early 2024.

(2) Cooperate with Tencent to develop key Gulong IPs. In August 2023, the company and Tencent signed a strategic cooperation framework agreement. The two sides will develop long-term strategic cooperation around Gulong's key martial arts IP in the fields of film and television project development, film and television derivative content, and cultural tourism consumption. The company has a lot of experience in producing classic martial arts series, and has produced the Gu Long series “Little Fish and Flowers” and Jin Yong's drama “God Carver”.

(3) Financial burdens have been reduced, and receivables have improved. As of the end of the 2023Q3, the book value of the company's accounts receivable and notes receivable was 218 million yuan (down 20.92 million yuan from the end of 2022 and remained below 500 million yuan since 2021), inventory of 360 million yuan (a decrease of 336 million yuan from the end of 2022, a decrease of 820 million yuan from the end of 2021 Q1), and cash on accounts (monetary capital and transactional financial assets) of 328 million yuan, with no long-term or short-term loans.

Businesses such as games, AR, and skits are expected to upgrade. In terms of games, the company signed a strategic cooperation agreement with Jiangxi University Press at the end of 2023. The two sides will cooperate in game publishing business around IPs that have the potential to link movies and games. On the AR side, in September 2023, the company's wholly-owned subsidiary and Jiangxi Wenxin-1 Cultural Industry Development Investment Fund and others jointly invested in Rokid (Hangzhou Linghan), a leading AR smart glasses company, to develop an AR content ecosystem around “video games+technology.” In terms of short dramas, the company has been efficiently promoting the development and production of five short dramas (all of which have already been registered), including “A History of the Martial Arts”, “Love Swordsman: Ruthless Sword”, and “Full Moon Scissors” in August 2023.

State-owned shares are backed by Jiangxi Publishing and Media Group, which has extensive resources. In 2019, Huazhang Investment, the controlling shareholder, increased its shareholding of 9.95%/5%/5.1% of the company's shares through transfer/secondary market/transfer (total holding 20.05%). The consideration was 13/9.21/13 yuan/share (average price 12.06 yuan/share), respectively, for a total consideration of 1.15 billion yuan, and obtained 29.79% of the voting rights at the time. Huazhang Investment is a wholly-owned subsidiary of Jiangxi Publishing Group (a wholly state-owned company in the cultural sector funded by the Jiangxi provincial government). The investment area spans various fields such as cultural tourism, science and innovation, import and export, etc., and has strong resources.

Risk warning: Increased market competition, downward valuation center, regulatory risk, competition in other forms of entertainment, drama development process and performance falling short of expectations, cost control falling short of expectations, risk of inventory and asset impairment, risk of credit impairment, insufficient funding, falling short of expectations, falling short of expectations in new business development, and risk of information disclosure.