Incidents:

On March 27, the company announced its 2023 results. The company's revenue was 1.22 billion yuan (YOY +28.4%), adjusted net profit of 227 million yuan (YOY +60.4%), and an adjusted net profit margin of 18.6%. In 2023, it is proposed to pay dividends of $0.218 per share, totaling $78.58 million, accounting for 36.8% of net profit.

Investment highlights:

In 2023, revenue increased 28% year over year, profitability increased dramatically, and there was a breakthrough in overseas business.

(1) In 2023, the company's revenue was 1.22 billion yuan (YOY +28.4%), of which overseas revenue was 38.81 million yuan (accounting for about 3.2%, an increase of 1 pct over the previous year). Ning Meng International was established as an overseas business entity platform to focus on overseas distribution and localized production of dramas, and expand market opportunities in Chinese and Thai. The Thai version of the drama “Just Thirty” is out, and the Thai version of “The Illustrated Guide to Crime Hunting” is in production.

(2) The gross profit margin for 2023 was 39.4%, up 0.1 pct from the previous year; adjusted net profit of 227 million yuan (YOY +60.4%), and the adjusted net profit margin was 18.6% (up 3.7 pct from the previous year).

The sales expense ratio was 7.6%, down 3.5 pct from the previous year, mainly due to the low number of episodes broadcast; the management expense ratio was 16.9%, down 12.6 pct from the previous year, mainly due to a decrease in listing expenses and employee incentive payments.

(3) As of the end of 2023, cash on account (including term deposits) was 1.3 billion yuan (1.27 billion yuan at the end of 2022), with sufficient cash; net operating cash flow was 354 million yuan, which was positive compared to the previous year.

The long drama business continues to export sales, and production capacity is expected to increase.

(1) In 2023, the long-drama business revenue was 1.17 billion yuan (YOY +24.3%), and gross margin reached 39.7%, an increase of 0.3 pct over the previous year. In 2023, the 3 episodes of “Just Love”, “Asking Heart”, and “One Mind Guanshan” were broadcast for a total of 116 episodes, a net increase of 11 episodes compared to 2022 (105 episodes of 4 episodes in 2022); the revenue for a single episode was 10.12 million yuan (based on the revenue/number of episodes, revenue from channels other than the sale of the series), an increase of 12.5% over the previous year of 9 million yuan in 2022. Both gross margin and single episode output are at the leading level in the industry.

(2) 2024Q1 “You Too Today” was broadcast (the first broadcast from overseas on the Viu platform in Indonesia, Malaysia, etc.), “Hanjuku Man and Woman” has gone live, “Midnight Return” and “Crime Hunting Guide 2” have already been launched; series such as “A Dream in the Book”, “A Thousand Miles of Moonlight”, “Baoqingli”, and “The Abyss” are expected to be launched in 2024, and production capacity is expected to increase dramatically.

In 2023, skit revenue increased more than 12 times over the same period last year, creating a phenomenal hit and achieving profit.

(1) The revenue of the skit business in 2023 was 32.23 million yuan, an increase of more than 12 times over the previous year. The revenue share increased to 2.6%. The gross margin increased from a loss situation in 2022 to 25.6%, and the upfront investment achieved a positive cycle. ① Eight short dramas and 16 unit stories were launched on Douyin in China, with over 2.4 billion views. “29” (a phenomenal hit, with over 1.17 billion views in a single series), etc., have joined the top 1 Douyin skit series. ② Build an overseas skit platform for localized filming. As of March 27, 2 short dramas have been launched, and it is expected that overseas skit production and distribution will be accelerated in 2024.

(2) Actively develop content marketing business and strategic brand resources, provide customers with full-link marketing services such as series implantation, IP marketing, and social media distribution, and obtain multi-year frame cooperation opportunities from leading strategic customers and external leading drama series cooperation opportunities.

(3) In 2023, artist agency revenue was 40 million yuan, an increase of more than 2.5 times over the previous year. Multiple IP derivative developments have been explored and implemented, and derivatives such as “Illustrated Guide to Crime Hunting” and “Just Love” have launched derivatives such as musicals and audiobooks.

Profit forecast and investment rating: The company is a leader in the long series industry, with strong content production capacity and high popularity rate; it is focusing on developing new business forms such as overseas and short dramas; it plans to pay dividends of 0.218 yuan per share in 2023, totaling 78.58 million yuan, accounting for 36.8% of net profit. We expect the 2024-2026 net profit to be 2.59/3.05/343 million yuan, corresponding EPS of 0.72/0.85/0.95 yuan, and corresponding PE of 10.04/8.53/7.57X, covered for the first time, giving it a “buy” rating.

Risk warning: Risks such as content market performance falling short of expectations, production costs/project development process/revenue recognition falling short of expectations, loss of inventory, loss of core talent, impairment of accounts receivable, overseas performance falling short of expectations, increased industry competition, downward valuation center, and market style changes.