2H23 review: Maoyan Entertainment released 2H23 results. Revenue surged 127% year-on-year to 2.56 billion yuan, and adjusted net profit was 573 million yuan, all in the previous profit forecast range. Ticketing revenue increased 161% year over year to 1.24 billion yuan, thanks to industry recovery (according to Wind data, 2H23 movie/performance box office revenue increased 125%/87% year over year, respectively). We estimate that Maoyan Entertainment's share in the movie market has increased year over year. 2H23 Entertainment content service revenue increased 107% year over year to RMB 1.20 billion. In 2023, a total of 54 domestic films were screened in which Maogan Entertainment participated, a record high. At the same time, the company has always been committed to increasing the depth of participation in the film. The company controlled and distributed a total of 30 domestic films in 2023 (compared to 14/18 in 2019/21, respectively). According to company information, the market coverage of Cat Eye Entertainment continues to increase. The net profit margin corresponding to 2H23 adjusted net profit of RMB 573 million was 22.4% (-0.1%/+20.7% compared to 2H22/ 1H23).
We are more cautious about the growth of the Chinese film industry. From January to January 2024, the total box office of Chinese films decreased by 2%/6% compared with the same period in 2023/19, respectively. We believe that the weak performance of the film market is due to the decline in the box office contribution of top films (as consumers now demand more film content) and the slow macroeconomic recovery. We noticed a strong content reserve for 2024 movies, including “Chaoyuan Alley,” “Li Na,” and “Declassified.” However, given the uncertainty of release dates, these challenges, and last year's high base, we are still cautious about the Chinese film industry and expect a slight 4% year-on-year increase in Chinese box office revenue in 2024.
We believe Maoyan Entertainment will continue to lead the industry. We forecast that Maoyan Entertainment's total revenue will grow 10% year over year in 2024:
1) Entertainment content services increased 11% year over year. 1H23 Maogan Entertainment's market coverage has reached 80% (latest presentation data), and we expect Maogan Entertainment to gain more market share with proven film selection capabilities, leading promotional products, and growing production capacity. Furthermore, management said during the earnings call that the company will increase investment in leading films to seize the potential of box office revenue. 2) Ticketing revenue increased 8% year over year. Among them, the growth rate of movie box office revenue is likely to be basically the same as the Chinese box office growth rate; performance box office revenue is expected to maintain a rapid year-on-year growth rate of more than 30%, thanks to cooperation with more leading singers and geographical expansion. Shareholder return: Maogan Entertainment did not pay a dividend in 2023, mainly due to the company's plans to expand content investment and the company only regained profits from the second half of 2022. We believe that stable profitability in 2024 may prompt Cat Eye Entertainment to pay dividends this year.
Reiterating the “Buy” rating, the target price was lowered to HK$13.60 (previously HK$13.90): We will slightly reduce our 2024/25 revenue by 3%/2% to reflect the weakening outlook for China's box office in 2024. We have kept the adjusted net interest rate basically unchanged. We are switching our valuation base year to 2026. Considering that the growth rate was not as high as before the pandemic, we gave Maoyan Entertainment 11 times the 2024 P/E (previously 13 times the 2023 P/E), which is lower than the average dynamic price-earnings ratio before the pandemic. Our price target also takes into account the company's net cash. Risk warning: Content investment failure; competition.