China's Confucianism is speeding up the development of a cultural and entertainment ecosystem. The company's core business is content production, online streaming, and games. 1) In 2023, the content production business was the company's main source of performance, achieving revenue of 2.2 billion yuan, accounting for 61% of revenue; contributing 720 million yuan in operating profit.

The number of films the company participated in the production and distribution of in '23 increased dramatically over the same period last year, reaching a total box office of 7.554 billion yuan. The films “Exchanging Lives”, “Keep You Safe”, and “Enthusiasm”, which are controlled by the company, have all received good reviews; “The King of the Sky,” “The Girl Who Disappeared,” and “Can't Stop the Annual Meeting”, which were co-produced, also achieved impressive box office results. In terms of TV dramas, “Love Meets Nine Bends” and “My Fireworks on Earth” have had both good reviews and ratings. In '24, the company had a good start. The films “Article 20,” “Life at Speed 2,” “Hot and Hot, Hot and Hot,” and “Bears Came... Reversing Time and Space” occupied the top 4 of the Spring Festival box office in '24. 2) Online streaming long video platform — Pumpkin Movies. The Pumpkin Movie came out in 2015. The Pumpkin Film AI Technology Laboratory was established in 2023. Through the deep application of AI technology, it has achieved technological innovation in various areas such as script creation, character modeling, scene design, special effects generation, and music creation. 3) Online gaming business.

Jingxiu Jingxiu is the company's gaming business brand. In the future, it will focus on developing leading IP cooperation projects. In '23, the company's game business revenue was 450 million yuan, an increase of 703% over the previous year. In 2023, the online streaming media and game business contributed 620 million yuan in operating profit.

The combination of Ruyi and Wanda is expected to have a major chemical reaction. 1) Increased voice in the film industry chain: Ruyi is good at film and television content production. For movies produced by Ruyi, Wanda has been an investment and promotion partner. The two sides will achieve resource sharing and complementary advantages through multi-faceted cooperation to give full play to synergy; 2) IP empowerment, Wanda Cinema, as a high-quality offline channel, will vigorously develop the derivative product business and increase the share of non-ticket revenue; Ruyi's IP reserves are rich, and the cooperation between the two sides in IP derivatives is expected to further deepen. 3) AI movies: Ruyi plans to commercialize AI movies in the future, and Wanda Cinemas can provide all-round support. 4) As a scarce online streaming platform, Pumpkin Movies can be combined with offline cinemas to further explore new models of online and offline collaborative development of film and television. 5) Industry talent development. Movies and TV dramas are rich in content: the war film “Reinforcements Arrive Tomorrow”, with Liu Heping as the chief producer; “White Snake: Floating”, the third animated IP film “White Snake: Floating”; “My Altay”, the first long-form Chinese-language series to be shortlisted in the Cannes TV Festival main competition; Xu Zheng as the director and star, and the reality-themed film “Retrograde Life” starring Xin Zhilei are all underway.

Backed by Tencent, the game is expected to build a second growth curve. Tencent is an important strategic shareholder of China's Ruyi. In recent years, Tencent has repeatedly increased its holdings in China and provided resource support in various areas such as video libraries and games, and cooperation between the two sides continues to deepen. China's Ruyi 24-year game project reserves are abundant: “Ragnarok: Love Is Like First Seeing” was launched at the end of March, and the civilized genuine IP mobile game “World Qiyuan” (developed by Tencent's Northern Lights Studio) distributed by the company has opened full-platform reservations. Both “Battlefield” and “Wilderness Country” products have obtained version numbers and are expected to be launched within 24 years.

Pumpkin Film is actively embracing the wave of AI technology. The company established an AI technology laboratory in 23 to enable film and television content production in multiple dimensions: 1) script creation and improvement; 2) character modeling and actor selection; 3) learning and simulating actors' performance styles to generate performance data for virtual characters to provide reference for directors. 4) AI generates music; 5) Film and game linkage: It is planned to launch one or more narrative interactive movie games incorporating reality TV within 2024, and use AI technology to create some content, and collaboratively create games, movies, and AI through interactive game products.

The first coverage gave a buying rating: the company's overall revenue for 2024-2026 is expected to be $52.8/72.6/9.06 billion yuan, corresponding to a year-on-year growth rate of 46%/38%/25%; adjusted net profit of 12.3/18.3/2.23 billion yuan, corresponding to a year-on-year growth rate of 27%/50%/22%. The 2024 target PE was given 24x, with a target market value of 29.3 billion yuan. For the first time, coverage was given a purchase rating.

Risk warning: Risk of marginal changes in industry regulatory policies, risk of game and film projects delaying/underperforming as expected.