Key points of investment

Event: Chinese Online's revenue in 2023 increased 19.4% year over year to 1.41 billion yuan. Among them, revenue from digital content licensing and other related products decreased 12.2% year over year to 710 million yuan, revenue from IP derivative development products increased 94.4% year on year to 660 million yuan, and revenue from education and other products was 32.66 million yuan.

In 2023, the company's net profit to mother was 894.37 million yuan (-360 million yuan in 2022), turning a loss into a profit; net profit after deducting non-return to mother was -383.43 million yuan (-390 million yuan in 2022); non-recurring profit and loss was 130 million yuan, mainly including net income from outside operations of 39.148 million yuan, depreciation of receivables to be transferred back to 32.55 million yuan, and the impact of CMS statements on net profit of 559.24 million yuan.

Forward-looking layout of the skit business, with complete content production capabilities: Since 2021, the company has actively laid out the skit market, accumulated rich script resources and professional teams, and has complete content production capabilities. (1) Platform skits: A number of skits have been successfully launched. For example, “Temptation” was broadcast on Tencent Video, which became the TOP1 skit of the year, and “Marry Donggong” was broadcast exclusively on Youku. Also, works such as “One in the Hand” and “One Kiss Archive” will soon be broadcast. (2) Mini program short drama: The company has incubated the “Wild Elephant Theater” platform to broadcast on the applet in vertical screen format. The production cycle is short, the cost is low, and large-scale benefits have been achieved. (3) Movies and TV dramas: “He Came Across Mountains and Seas”, co-produced by the company, premiered on iQiyi, and “The Anecdote of Flower Glass” was broadcast on Tencent Video.

Data Empowering Model Training, AI Accelerated IP Development and IP Going Overseas: (1) Big Model: The company's data set for AI big model training has exceeded 60TB, mainly composed of novels and publications. In October 2023, the company released the 1.0 version of the self-developed AI model “Chinese Freedom”, which can generate 10,000 word novels with one click, write a novel with one picture, read 1 million word novels at a time, etc., empowering beginners and professional writers. (2) AI translation: Using AI technology to drastically reduce text content translation costs and improve translation efficiency, the IP content of the novel has been converted into foreign languages and promoted to overseas markets with more than 25 million words. (3) AI+IP adaptation: In terms of audio, many of the company's audiobook works were broadcast excellently in 2023. “Shura Warrior” exceeded 5 billion times, and “Nine Star Master” exceeded 2.2 billion times. The total length of the audiobook recorded by the “AI anchor” was 180,000 hours. Many animation works have achieved good results. The 2023 anime “Asura Valkyrie” was broadcast exclusively on Tencent Video, ranking in the top 2 anime hits and hits; the VR animated extra “Dragon Cage”, which was co-produced by the company and PICO, went live in December 2023. AI-generated comics and animated comics have achieved phased results. Comic works produced with AI assistance have been launched on platforms such as Tencent Animation, Quick Watch Comics, and Bilibili Comics. In terms of reserve works, Haruki Chunhua, the company's holding subsidiary, is expected to complete the “The Legend of Luo Xiaohei 2” animated film by the end of 2024. The IP's comics, dramas, and animated films have all received good reviews.

Profit forecast and investment rating: Due to increased competition in the skit industry, we lowered the company's net profit due to increased competition in the short drama industry from 180/230 million yuan to 122/140 million yuan, and the company's net profit to mother in 2026 is 160 million yuan. The current stock price corresponding to 2024-2026 PE is 151/130/112 times, respectively. We are optimistic about the company's IP reserves and AI technology progress, and maintain a “buy” rating.

Risk warning: industry competition increases risks, intellectual property protection risks, overseas business development risks.