The 2023 results are in line with expectations. Revenue for the full year of 2023 was $7 billion, in line with our/market expectations, down 8% year-on-year, mainly due to the contraction of online business channels and a decrease in Shinih's online projects. Adjusted operating profit of 1.05 billion yuan, down 23% year on year, basically in line with our expectations. The corresponding profit margin was 15%, down 3 percentage points from 2022, mainly due to lower profit margins in the copyright business and investment in AI. Adjusted net profit fell 16% to 1.1 billion yuan, which is basically in line with market expectations.
Performance Overview: 1) Online business revenue fell 10% in 2023, mainly due to distribution channel optimization and content distribution focusing on core paid products affecting advertising revenue. Private channel payers continued to maintain a healthy growth trend (in the second half of the year, self-owned MPU increased 11% year over year). Benefiting from continued content ecosystem construction and effective anti-piracy measures, the payment rate increased 0.8/0.2 percentage points month-on-month to 4.3%. Monthly per capita charges ranged from -13% to 32 yuan, affected by low-priced products. Revenue from the core reading product Starter Reading in 2023 increased 40% year-on-year. 2) Revenue from copyright operations fell 6% year on year in 2023, mainly due to a decrease in the number of Shinih series launched (6, compared to 8 in 2022). Reading text's core IP operating revenue was +11% year-on-year, benefiting from increased revenue from copyright licensing, proprietary games and animation.
Outlook: 1) Online business revenue is expected to stabilize month-on-month, falling slightly by 2% throughout the year, mainly considering the strength of core payment platforms and the gradual easing of the impact of channel contraction. 2) Reading's core IP business is expected to maintain its growth trend, with a year-on-year increase of 22%, mainly due to an increase in the number of copyright licenses and a strong production project pipeline. Mobile games such as “Battle for the Sky”/“Dafeng Fight More People” have already received editions. 3) Shinih is expected to broadcast 6-7 series plus 2-3 movies. Highlights include the series “With the Phoenix” (released on March 18)/“Celebrating the Years 2” (12.46 million reservations)/“Rose Story”/“Dabong Dazen”, and “Hot and Hot” (3.4 billion yuan). We expect Shinih's net profit for the full year of 2024 to be 560 million yuan.
Valuation: We maintain our 2024 revenue and adjusted net profit expectations, with reference to comparable premium content and copyright companies, and maintain a target price of HK$29 based on 20 times the 2024 price-earnings ratio. AI investment is manageable, dragging down profit growth in the short term, but in the long term, it brings room for imagination in production capacity expansion, cost optimization, and product innovation. Since February, the company's stock price has risen 30%, which we believe has basically reflected the market's expectations for an increase in the number of licenses and a strong project pipeline in 2024. The current price corresponds to 1.2 times PEG in 2024 (based on a compound profit growth rate of 16% in 2023-25), which is 1 times higher than the average of key content companies, and remains neutral.