Recently, Chinese Online (300364.SZ) published the 2023 Annual Report.

According to financial data, the company achieved operating income of 1,409 billion yuan in 2023, up 19.44% year on year; realized net profit of 894.37 million yuan, up 124.71% year on year; net profit after deduction of 383.426 million yuan, up 90.25% year on year.

It is easy to see from the financial report that Chinese online performance ushered in a strong recovery and returned to a high growth trajectory. The company actively explores new growth poles, steadily increases its revenue scale, and continues to unleash diversified profit potential. At the same time, the company has maintained a sound financial structure and good cash flow, showing the high quality of its development.

Currently, under the AI trend, the greater highlight of Chinese Online is that it is actively embracing the “AI Moment” of the content industry, developing a series of layouts and investments around AI to fully empower the content industry. As shown in the financial report shareholder letter, Chinese Online continues to focus on three core directions:First, cultivate the AI vertical model so that AI can better understand content creation; second, cultivate the market application of AI content to make AI make money; third, cultivate the flexible AI content supply chain and use AI to “go overseas in culture”.Using these three directions as a starting point, it can be said that Chinese Online is gradually transforming AI technology into a strong driving force for the company's long-term growth, and is showing huge potential for value growth to the outside world.

1. Performance has picked up across the board, and the performance of core business indicators is impressive

The overall recovery in performance was actually expected by the market for a long time.

As early as in the company's performance forecast, Chinese Online mentioned that behind the rapid growth in performance, the rapid growth in the skit market is due to the rapid growth of the short drama market. In 2023, the company's mini-programs and related licensing business grew rapidly, and overall revenue from the company's cultural business and net profit attributable to shareholders of listed companies increased significantly compared to the same period last year.

Judging from financial data, the company's various business segments are growing well, and the cultural business performance is impressive. Revenue from the cultural industry reached 1,376 billion yuan, a year-on-year increase of 19.37%, accounting for 97.68% of revenue.

Looking further by product classification, revenue from digital content licensing and other related products reached 713 million yuan, accounting for 50.58% of revenue; revenue from IP derivative development products was 664 million yuan, an increase of 94.41% over the previous year, accounting for 47.11% of revenue.

In terms of gross margin, the gross margin of the Chinese online culture business reached 44.38% in the past year. In terms of products, the gross margin of digital content licensing and other related products reached 44.53%, and the gross margin of IP derivative development products reached 44.22%, a significant increase of 12.07 percentage points over the same period last year.

Furthermore, in 2023, the company's weighted average return on net assets reached 7.46%.

At the same time, the company's cost rate was effectively improved during the period. Driven by scale effects and AI cost reduction and efficiency, etc., the cost control effect in Chinese online management costs was obvious. Financial reports show that in 2023, the company's management expenses decreased by 39.65% year on year, and financial expenses decreased by 8.93% year on year.

Overall, the Chinese Online financial report performed well in various core business indicators. The restoration of profitability was particularly prominent. Emerging businesses are developing rapidly, showing a trend of continuing to enter the fast track of high-quality development.

2. Driven by the three major cores of IP, channel, and technology to accelerate the growth of the flywheel

Looking at it now, the subsequent growth of Chinese online is still interesting, and behind its ability to maintain high growth expectations, there are three core driving forces, namely the company's rich IP resources and deep channel accumulation, which are empowering big technology.

First, Chinese Online has massive literary IP resources and digital content accumulation, which has brought solid underlying support to the company's commercial monetization.

As an enterprise that has been deeply involved in the digital culture industry for more than 20 years, Chinese Online has accumulated more than 5.6 million kinds of digital content resources, more than 4.5 million original authors on the Internet, and cooperated with more than 600 copyright agencies to sign more than 2,000 famous writers and best-selling authors. The continuous production capacity of high-quality content is unrivaled in the industry.

Under the construction of a large-scale content ecosystem, the company is also actively promoting IP monetization. In the IP derivative business, Chinese Online places great emphasis on cultivating and derivative development of IP, and has created a creative model of “online text serialization+simultaneous IP derivation development”. Through full-modal development of high-quality online articles in audio, animation, animation, short dramas, movies and TV dramas, games, and cultural and creative peripherals, the IP-derived incubation chain is upgraded, and IP value mining is realized in multiple dimensions.

Looking at the skit market, Chinese Online began exploring in 2020 and quickly launched in 2021. By 2022, the revenue of mini programs and short dramas had already exceeded 300 million yuan, showing strong ability to monetize IP resources. In the field of skits, Chinese Online can be said to have a wealth of skit content resources, including skit script accumulation, short drama hit screenwriting team and production team, etc., as well as content editing, review, evaluation and production capabilities for the full link of skits. It is worth mentioning that in terms of mini-programs, the company also successfully incubated the domestic skit platform “Wild Elephant Theater” and achieved large-scale benefits in the short drama industry.

Looking at this financial report, revenue from skits has also become the key to supporting performance. Currently, the potential of the skit market is also highly anticipated by the outside world. Previously, the market research company YH Research predicted that the global market for vertical screen micro-skits will reach 56.6 billion US dollars (about 8.7 trillion yen) in 2029, which is more than 10 times the 5.5 billion US dollars in 2023.

(Source: Nikkei Chinese.com)

Furthermore, according to the “2023-2024 China Short Drama Market Research Report” released by Ai Media Consulting, the size of China's online short drama market in 2023 was 37.39 billion yuan, an increase of 267.65% over the previous year, and the size of the short drama market is close to that of movies. It is estimated that by 2027, the size of China's short drama market will break the 100 billion yuan mark. For Chinese online, which has a dual layout at home and abroad, the market opportunities behind this can be described as huge, and the company's first-mover advantage will also be obvious.

In addition to IP monetization, the high-quality copyrighted data accumulated by the company also has extremely high commercial value in the current big model era, which can greatly improve model training results and help train high-precision artificial intelligence models. Financial reports show that the Chinese data set that can be used to train large AI models has exceeded 60 TB, mainly composed of novels and publications, which provides a huge advantage for the company's AI model. In the current context of promoting large-scale model development in all walks of life, the accumulation of Chinese online data content and rich experience in content review and data labeling have also brought more opportunities for monetization.

Second, the high-quality channel resource network built online in Chinese provides good support for business expansion.

On the one hand, in terms of digital content sales methods, the company not only faces C-end customers, but also distributes with sales channels including leading reading platforms, audio platforms, the three major operators, and mobile phone manufacturers, and cooperates extensively with paid and free sales channels in the industry.

On the other hand, the company is also actively exploring overseas channel expansion, and can quickly implement and promote successful experiences in the domestic market in overseas markets.

The most typical one is a short drama. In recent years, the company has participated in the live action skit app Reelshort launched by the overseas company Crazy Maple Studio (CMS). The reason behind this is also due to the company's many years of overseas content operation and channel accumulation, deep understanding of market user needs and insight into the local business ecosystem.

Currently, Chinese Online is also continuing to deepen its international business, and has established an American subsidiary COL MEDIA, a Singaporean subsidiary COL WEB, and a Japanese subsidiary COL JAPAN, making full use of its existing advantages, deeply integrating its massive content and high-quality IP, and has multiple locations around the world.

Finally, the company's continuous technological innovation and development has built a solid competitive barrier for the company, while also opening up more room for imagination.

On the one hand, through the integration and innovation of technology and content, the company can promote cost reduction and efficiency of its own operations, such as using AI tools to reduce internal marketing and promotion costs, such as quickly producing posters and promotional materials.

On the other hand, with the support of AI, it has also opened up new productivity spaces and explores new opportunities for greater commercial value. In terms of AI multi-modality, Chinese Online has carried out technical layout and commercialization in multi-modal fields such as audiobooks, comics, animation, and video, based on the foundation of various IP derivatives production technology over the years and the advantages of massive digital content.

It is worth mentioning that in October 2023, the company released the world's first 10,000-character creative model “Chinese Easy 1.0.” This large model has the advantages of generating 10,000 characters with one click, writing a novel with one picture, and reading 1 million words at a time. The application of these innovative technologies has not only improved the efficiency of content production, but also brought revolutionary changes to content creation. It can be said that with the multi-modal support of AI, the difficulty of developing and producing Chinese online IP will be drastically reduced, and the production cycle will also be drastically shortened, effectively breaking production capacity bottlenecks and greatly increasing the speed of commercialization of the company's IP.

Overall, rich IP resources, deep channel accumulation, and powerful technological empowerment have built an internal combustion engine that accelerates the rotation of a Chinese online “flywheel”. These three driving forces promote and work together to form a unique competitive advantage and a driving force for continuous growth.

3. Conclusion

At a time when the global economy is facing many uncertainties, it is easy to see from this financial report handed over online in Chinese. With its deep accumulation and strong ability to innovate, it has shown strong adaptability and resilience in the face of market fluctuations.

Looking back at the company's performance in the capital market in recent years, although the overall performance has fluctuated greatly, the performance is still quite impressive. In particular, stimulated by a series of concepts such as AI and skits, stock prices have changed frequently. Since late March, the company has shown an inflection point despite some correction. It is worth mentioning that during the year, the company was also favored by many brokerage agencies. Including Great Wall Securities and Dongwu Securities, which have successively given “buy” ratings, it can be seen that market professionals are confident in their development.

As this financial report further digests the pessimistic expectations that exist in the market and unleashes the company's growth potential to the outside world, I believe the subsequent performance of Chinese Online will also be interesting.