Incident: In 2023, Huace Film and Television achieved revenue of 2,267 billion yuan, a year-on-year decrease of 8.39%, and realized net profit of 382 million yuan, a year-on-year decrease of 5.08%, and realized net profit without deduction of 292 million yuan, a year-on-year decrease of 3.24%. 2024Q1 achieved revenue of 177 million yuan, a year-on-year decrease of 81.69%, realized net profit of 30 million yuan, a year-on-year decrease of 79.58%, and realized net profit without deduction of 1.44 million yuan, a year-on-year decrease of 98.80%.

Comment: The main business has sufficient reserves to improve quality and quantity, and the product cycle puts pressure on Q1 performance. The company's main business performance was steady. Seven TV series were first broadcast in 2023, and TV drama production and distribution revenue was 1,590 billion yuan, an increase of 4% over the previous year. The decline in 2024Q1's revenue and profit was mainly due to the product broadcast cycle. The release of 2 series decreased compared to the same period last year, and some revenue was confirmed in 2023. Currently, the company is still rich in reserves. There are 8 series projects in post-production/review or ready for broadcast. It plans to launch 4 series projects in the second quarter, plans to launch 10 series throughout the year, and complete pre-sale contracts of 1.981 billion yuan in 2023. In terms of films, the company will screen 3 participating projectors and 1 main projector in 2023, and plans to screen 4 main projectors and 2 participating films in 2024, and the film business is expected to usher in significant growth.

Businesses such as copyright and skits are developing rapidly and continue to build a second curve. The company completed the acquisition of Forest Union in 2023. The film and television copyright rose to 50,000 hours, and the annual TV drama copyright distribution revenue was 407 million yuan, an increase of 19% over the previous year. In terms of skits, the company collaborated with Douyin to screen the boutique skits “In Search of Song” and “My Way Home Has Wind”, which performed brilliantly. In 2024, they plan to produce quality skits such as “The Man Who Saved Time” and “My Way Home with Wind 2.” In addition, the company is also actively developing international business, distributing 150,000 hours of film and television productions to more than 200 countries and regions around the world, and is expanding participation in overseas series such as South Korea and Thailand. It has also set up more than 100 channels for overseas new media communication and promotion matrices.

The AIGC Applied Research Institute was established to further explore the integration of film, television and technology. The company established the AIGC Application Research Institute in 2023. The annual R&D personnel increased by 21.21% year-on-year, and R&D investment was 25.932 million yuan, an increase of 70.84% over the previous year. Currently, the company has developed its own vertical model for the “Windy” industry, covering literary and literary functions such as “AI Screenwriter Assistant” and “AI Screenplay Evaluation Assistant”. It has been put into internal use, and has launched the “AIGC Multilingual Intelligent Translation Workflow” and “AI Video Analysis and Search Function”. It is also testing functions such as “AI stills”, “multilingual voice dubbing”, and “AI adaptive animation”, and has developed a 4-second Wensheng video capability.

Investment advice: The company's net profit for 2024-2026 is expected to be 423/475/512 million yuan, an increase of 11%/13%/8% year-on-year. The corresponding PE is 32x/29x/27x, respectively, maintaining the “buy” rating.

Risk warning: The progress of film and television projects falls short of expectations, and the development of AI technology falls short of expectations