Incidents:

On April 24, 2024, Huace Film and Television announced the 2023 Annual Report and 2024 Quarterly Report:

(1) 2023 revenue of 2,267 billion yuan (YOY -8.39%), net profit to mother 382 million yuan (YOY -5.08%), net profit of non-return to mother 290 million yuan (YOY -3.24%).

(2) 2024Q1 has revenue of 177 million yuan (YOY -81.69%), net profit of 0.3 million yuan (YOY -79.58%), net profit of 1.44 million yuan after deducting non-return to mother net profit of 1.44 million yuan (YOY -98.8%).

(3) In 2023, it is proposed to distribute cash dividends of 0.41 yuan for every 10 shares, totaling 76.69 million yuan, with a dividend rate of 20.1%.

Investment highlights:

Equity incentives demonstrate confidence in development.

(1) The company's revenue in 2023 was 2,267 billion yuan (YOY -8.39%), mainly due to a decline in the number of series broadcast (251/331 episodes in 2023/2022, respectively); net profit of 382 million yuan (YOY -5.08%); net profit after deduction of 290 million yuan (YOY -3.24%), non-recurring profit and loss of 90.72 million yuan, mainly government subsidies. The gross margin for 2023 was 28.5% (down 5.17 pct year on year); the cost ratio for the period was 13.18% (down 2.76 pct year on year), of which the sales expense ratio decreased by 3.64 pct year on year.

(2) It is proposed to grant directors/CEO Fu Binxing and others no more than 12.82 million shares (about 0.67% of the total share capital) at a grant price of 3.65 yuan/share; revenue or net profit during the vesting period 2024/2025/2026 will not be less than 10%/21%/33% growth rate compared to 2023.

(3) 2024Q1 has revenue of 177 million yuan (YOY -81.69%), net profit of 0.3 billion yuan (YOY -79.58%), net profit of 1.44 million yuan (YOY -98.8%) after deducting non-return to mother net profit of 1.44 million yuan (YOY -98.8%), mainly due to fewer 2024Q1 projects.

The series is expected to resume high startup numbers, and the movie is gaining strength in the main control.

(1) TV series: In 2023, the TV series business revenue was 1,997 billion yuan (YOY +6.53%), and the gross profit margin was 26.8% (down 1.74pct year on year). Seven series including “To the Windy Place” premiered in 2023, with a total of 251 episodes (10 in 2022, 331 episodes), and 5 174 episodes (5 in 2022, 196 episodes) were launched. “Cheng Huan Ji” will be broadcast on 2024Q2; it is expected to launch 10 378 episodes in 2024 (including “National Color Fanghua” Q1, and 4/3/Q4 is expected to launch 4/3/2, such as “Necessary”, etc.); “Seven Nights of Snow” and “Infinite Future” have been screened; “Splendid Tranquil Peace” has passed the review and is expected to be launched in 2024.

(2) Movies: In 2023, the film business revenue was 80.56 million yuan (YOY -80.6%), and the gross profit margin was 46.71% (up 3.32pct year-on-year). In 2023, 3 participating films (“Wandering Earth 2”, etc.) and 1 main control film (“Burning Winter”) will be screened, and in 2022, 3 main control films (“The Way Home” grossed 1.59 billion yuan). The 4 main control films (“My Friend Andre”, “Dear Mom”, etc.) and 2 participating films (“The Guardian”, etc.) are expected to be screened in 2024H2. The S-level project “Wild Age” 2024Q1 has already started, and “Assassination of the Novelist 2” is expected to launch in 2024H2.

Businesses such as copyright, overseas, and skits are building a second growth curve.

(1) Copyright: In 2023, Sunlink Film and Television was acquired and completed, and the copyright library was expanded to 50,000 hours; TV series copyright distribution revenue was 407 million yuan (YOY +19.33%), accounting for 17.95% (4.17pct increase over the previous year). The data value has yet to be released at the level of large-scale model training.

(2) Going overseas: A total of 150,000 hours of film and television productions have been distributed globally and participated in overseas series; the overseas new media communication and publicity matrix has set up more than 100 channels.

(3) Skits: In collaboration with Douyin, “My Way Home Is Windy” received a good response, with a total broadcast volume of over 200 million times, ranking in the top three Douyin skits in the Spring Festival category; in 2024, it is planned to launch short dramas such as “The Man Who Saved Time” and “My Way Home with Wind 2” to increase capital investment.

(4) Animation and operators: The animation business group was established in January 2024. 6 IP series have been formed, production capacity has been initially formed, and derivative business formats such as animated movies and cards have been explored; business incubation of operators has been increased, cooperation with Migu has been deepened, and stable profits have been achieved.

The AIGC Applied Research Institute was established to increase investment in R&D.

(1) Build “AI+ film and television” capabilities and establish an AI tool matrix. ① Self-developed “Windy” vertical model, covering literary and cultural functions such as “AI Screenwriter Assistant” to improve creative and evaluation efficiency. ② Launched the “AIGC Multilingual Intelligent Translation Workflow”. ③ Launch the “AI video analysis and search function” to quickly lock down relevant materials. ④ Closed beta features such as “AI Stills” and “AI Adapted Animation”.

⑤ Accumulated 3D digital asset library construction, and about 700 digital asset scenarios have been stored.

(2) In 2023, R&D personnel increased by 21.2% year-on-year, and R&D investment increased by 70.8%, creating an internal atmosphere of “everyone knows AI, knows AI, and uses AI”; a special fund of 500 million yuan was set up.

Profit prediction and investment rating: As a leader in the domestic TV drama industry, the TV series/film business trend is improving, and the copyright, short drama, animation and other businesses are expected to build a second growth curve; at the same time, it also emphasizes the integration of technology and content to build “AI+ film and television” capabilities. We expect 2024-2026 operating income of 27.07/31.06 billion yuan, net profit to mother of 443/5.09/577 million yuan, corresponding EPS of 0.23/0.27/0.30 yuan, and corresponding PE of 30.70/26.76/23.58X, maintaining 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, risk of inventory impairment, loss of core talent, impairment of accounts receivable, policy risk, industry competition, downward shift in valuation center, and change in market style.