Incident: In 2023, the company achieved revenue of 7.02 billion yuan, a year-on-year decrease of 8.0%, and achieved adjusted net profit of 1.13 billion yuan, a year-on-year decrease of 16.2%. The gross profit margin in 2023 was 48.1%, down 4.7 pcts year on year. Among them, the gross margin of copyright operations and other businesses fell 11.8 pcts year over year to 45.9%. In 2023, the sales expense ratio was 24.5%, down 1.8 pct year on year; the management expense ratio was 16.6%, up 0.4 pct year on year.
The online business continues to optimize distribution channels, and core payment platforms are developing healthily. In 2023, the company's online business revenue was 3.95 billion yuan, down 9.5% year on year. Among them, its own platform products achieved revenue of 3.41 billion yuan, a decrease of 2.0% year over year. The main reason was that the company continued to optimize distribution channels and monetize more content through paid reading products with high return on investment, leading to a decrease in advertising revenue. Among them, reading revenue from flagship products increased by about 40% year on year. As the company reduced customer acquisition expenses and optimized distribution channels for its own platform products and Tencent products, the number of monthly active users of its own platform products and Tencent products decreased 15.7% year over year to 206 million, and the number of monthly paying users increased 10.1% year over year to 8.7 million. Among them, monthly paying users of its own platform increased by more than 20% year on year, reflecting the positive progress made by the company in continuing to effectively combat piracy, enhance product operation capabilities, and continuously export high-quality content. We believe that the company continues to strengthen the online business content ecosystem and focus on investing in premium paid content, which is expected to further enhance users' stickiness and willingness to pay.
Shinih Media confirmed that the pace fluctuated due to the series, and was concerned about the launch of key products in the future. In 2023, the company's copyright operations other than Shinih Media increased 10.1% year-on-year to 1.80 billion yuan, mainly driven by increased revenue from copyright licensing, proprietary games and animation. Due to the decline in the total number of movies and TV series launched, Shinih Media's revenue decreased by 22.4% year-on-year to 1.26 billion yuan. The company continues to promote the IP visualization and commercialization business, and has launched many TV series such as “Through the Wind” and “The Path to the Ordinary”, as well as sequels such as the classic IP adaptations “Fighting the Sky” and “The Stars Change.” The acquisition of Tencent animation assets in the comics field will include well-known national comic IPs such as “Under One Person” and “The Little Matchmaker,” to further enrich leading IP reserves. At the same time, it will consolidate cooperative production lines for comic book reading, and supplement animation production capacity. Furthermore, the company actively explored emerging forms of content, entered the boutique skit market, and achieved initial results. The company has rich reserves of visualization projects. Among them, the number of pre-orders for the second season of “Celebrating the Years” has surpassed 12 million, making it the first series with over 10 million pre-orders on the entire network. The remaining works include “With the Phoenix” and “Dabong Fight People”. We believe that as visual content is launched one after another, it is expected to bring about a recovery in the company's copyright operating business revenue and profits.
The content ecosystem continues to prosper, and AI fully empowers the creative and IP ecosystem. In 2023, about 380,000 writers and 670,000 novels were added to the company's online reading platform. The number of new writers with total revenue exceeding 100,000 yuan increased by 60% over the same period last year. Of the new books with revenue exceeding 1 million yuan, works by new writers accounted for nearly 1/3. The expansion of works and the team of creators promoted the continuous improvement of content quality. The company launched the industry's first large-scale online writing model “Reading Pen” and the application product “Writer's Assistant Wonderful Pen Edition”, and has opened it to all contracted writers. The weekly usage rate of the AI function in Writer Assistant has reached 30%.
Profit forecasting and valuation analysis. We expect the company's adjusted net profit for 2024-2026 to be $1,349 million, $1,633 billion, and $2,012 billion, respectively. We consider the company's Internet media attributes with digital reading and derivation as its main business and digital payment. Referring to comparable companies, we gave the company a PE valuation of 25-28 times in 2024, corresponding to a reasonable value range of HK$35.6-39.9 per share based on the exchange rate of “1 yuan = HK$1.08”, corresponding to a reasonable value range of HK$35.6-39.9 per share.
Risk warning. The growth rate of paid reading users has declined, and the growth in monetization of free reading has fallen short of expectations.