Brief performance review
On March 18, 2024, the company announced its 2023 annual results. In 2023, the company achieved revenue of 7.012 billion yuan, -8% year-on-year, and non-GAAP net profit of 1.13 billion yuan, or -16.2% year-on-year.
Management analysis
AI is empowering all aspects of the IP ecosystem, and IP commercialization and overseas platforms are expected to benefit.
1) Writer level: AI-assisted creation has increased the penetration rate among writers. In 2023, the company launched the “Writer's Assistant Wonderful Pen Edition” based on the Big Pen Reading Model, and the weekly usage rate of the AI function has reached 30%. 2) IP commercialization level: AI applications will improve the efficiency of IP value release and shorten the path of IP from vision to commercialization. The company plans to enable AI technology to animate novels, and more works may obtain adaptation opportunities due to AI applications. 3) Overseas platforms: The company's overseas reading platform WebNovel has benefited from the efficiency improvements brought by AI translation. In December 2023, 21 of WebNovel's top 100 best-selling works were AI translated, which will help drive the company's literary works to the international market on a large scale. 4) TOC application: Testing the “Dream Island” function began in August 2023 to enhance user interaction with IP characters and help strengthen IP and user stickiness.
Online reading: Channel optimization continues, paying users increase. In 2023, the company focused on optimizing distribution channels and improving operational efficiency, and revenue was under pressure. In 2023, the company's online business revenue was 3.95 billion yuan, -9.5% year-on-year, of which revenue from proprietary platform products was 3.41 billion yuan, -2% year over year, Tencent product channel revenue was 340 million yuan, -42.2% year on year, and revenue from third-party platforms was 190 million yuan, or -33.6% year on year. Implementing effective anti-piracy measures has led to an increase in the number of the company's paying users. In 2023, the company's average monthly paying users reached 8.7 million, +10% over the same period last year. The operating efficiency of core products improved, and the revenue of starting books increased 40% year over year.
Copyright operation and others: There was little revenue pressure on the launch of series in '23, and the acquisition of Tencent Animation's IP library was further enriched, and the pipeline was rich in '24. In 2023, the company's copyright operation and other revenue was 3.06 billion yuan, or -30.1% year-on-year, of which copyright operating revenue was 2.97 billion yuan, or -31.3% year-on-year. The low number of Shinih series released in 2023 has led to a significant drop in copyright operating revenue. In 2024, the box office of Shini-Li's main film “Hot and Hot” has broken 3.4 billion, and “With the Phoenix” has already started broadcasting. TV dramas and movies such as “Celebrating the Years 2,” “The Story of Roses,” and “Dafeng Fights More People” are yet to be screened.
Profit Forecasts, Valuations, and Ratings
We expect the company's 2024/2025/2026 revenue to be 75/80/8.4 billion yuan, respectively, and NONGAAP's net profit to mother will be 13.0/14.4/1.55 billion yuan, respectively. The current stock price corresponds to 2024/2025/2026 PE at 19.6/17.7/16.4X, maintaining a “buy” rating.
Risk warning
Risk of film and television projects falling short of expectations; risk of AIGC's business empowerment falling short of expectations; risk of declining number of online reading users and payments; risk of IP operation business falling short of expectations