2023 and 1Q24 profit fell short of our expectations

The company announced its 2023 and 1Q24 results: revenue in 2023 was 2,267 billion yuan, down 8.4%; net profit to mother was 382 million yuan, down 5.1%; net profit after deducting non-return to mother was 292 million yuan, a decrease of 3.2%.

Net profit for 2023 fell short of our expectations, mainly due to TV series revenue falling short of expectations. 1Q24 achieved revenue of 177 million yuan, a year-on-year decrease of 81.7%; net profit to mother was 0.3 billion yuan, down 79.6%; net profit after deducting non-return to mother was 1.44 million yuan, a year-on-year decrease of 98.9%. The net profit for 1Q24 was lower than our expectations, mainly due to the series project confirmation that it fell short of expectations. In addition, the company plans to pay cash dividends of 0.41 yuan (tax included) for every 10 shares in 2023, with a cash dividend ratio of 20.4% in 2023.

Development trends

In 2023, the company moderately delayed the development and launch of movies and TV dramas, and the proportion of copyrighted dramas may increase. In terms of TV dramas: The quality of film and television content in the industry has improved markedly, and the filing of projects has stabilized. In 2023, a total of 538 TV series were registered nationwide, an increase of 14% over the previous year. In 2023, the company raised the quality requirements for script creation, moderately delayed the development and launch of movies and TV dramas, and strengthened the full life cycle management of film and television IP. Currently, all projects under development are copyrighted dramas. Currently, a total of 8 series are in post-production/review, and 4 series projects are planned to be launched in 2Q24, laying the foundation for long-term sustainable development. The company premiered 7 TV series in 2023, a year-on-year decrease of 3. In 2023, the company's gross margin was 28.5%, down 5.2 ppt. We judge that this is mainly due to the high proportion of series customization. In the future, as the proportion of copyrighted dramas increases, gross margin may improve.

There are few 1Q24 series projects, so focus on the pace of the release of subsequent films. The 1Q24 company mainly broadcasts the series “Our Translator”, which is relatively small. The boutique skits “In Search of Song”, “My Way Home Has Wind” and “Assassinating the Novelist: The Girl Strikes Back” went live on Douyin during the Spring Festival. Looking ahead, “National Color Fanghua” has been launched in 1Q24, and reserves also include “Seven Nights of Snow,” “Jinxiu Peace,” “Infinite Future,” and “Impossible.” We believe that in 2024, benefiting from market-based content distribution and normalization of demand for downstream platforms, the company's core business is expected to gradually recover.

Key films may be launched in 2024, focusing on copyright business and AI application potential. Movies: The company expects 6 movie projects to be screened in 2024; the company expects S-level projects such as “Assassination of the Novelist 2” and “Wild Age” to launch in 2024. Copyright business: The company completed the acquisition of SunUnion in 2023; the number of film and television copyrights rose to 50,000 hours, promoting technological and intelligent short video and camera production. Short drama business: In 2024, the company plans to create short dramas such as “The Man Who Saved Time” and “My Way Home Has Wind 2” to increase capital investment in the direction of skits. The company also established the AIGC Application Research Institute to promote the AIGC layout. We recommend focusing on the potential development of the film and skit business, as well as the progress of AI applications.

Profit forecasting and valuation

Maintain the 2024/2025 net profit forecast unchanged. The current price corresponds to 24.2/22.1 times P/E for 2024/2025. Maintaining an outperforming industry rating, considering market estimates that AI will drive copyright value reflection, raise the target price by 10.4% to 7.4 yuan, 25.0/22.8 times P/E in 2024/2025, and 3.4% upward space.

risks

Key projects are progressing slowly, supervision is being tightened, and progress in the promotion of new businesses and the application of new technologies has fallen short of expectations.