Matters:

The company released its 2023 annual report: In 2023, the company achieved revenue of 5.334 billion yuan (yoy +82.67%) and net profit to mother of 263 million yuan (yoy +222.36%), which is at the center of the performance forecast range (2-3 billion yuan), after deducting net profit of 112 million yuan (yoy +129.11%). In addition, the company announced a 23-year profit distribution plan with a cash dividend of 0.71 yuan (tax included) for every 10 shares.

Commentary:

Revenue side: Benefiting from general market recovery, various main businesses have recovered steadily. Looking at the split revenue structure, 1) Distribution sector:

Revenue of 2,053 billion yuan (yoy +111.75%) was mainly due to the recovery of the film market+relaxation of imported film reviews. The company distributed a total of 570 films during the reporting period, achieving 41.4 billion yuan in box office, accounting for about 83% of the national box office. Among them, 96 imported films were distributed, with a total box office of 5.4 billion yuan, accounting for about 69% of the national imported film market, and the overall share remained stable; 2) Creative sector: achieved revenue of 1,031 billion yuan (yoy +152.59%), produced and screened 37 films in '23, achieving a total box office of 26.9 billion yuan, accounting for 58% of the total box office of domestic films, including the main export “Wandering Earth 2”) (4 billion yuan), etc., and participated in the production of “Man Jianghong” (4.5 billion yuan), etc. “Throw” (box office: 3.8 billion yuan), etc. ; 3) Screening section:

Revenue of 1,168 billion yuan (yoy +78.91%), of which the company controlled 127 cinemas and 957 screens; 4) Technology sector: revenue of 822 million yuan (yoy +16.42%). By the end of the period, 157 CINITY cinemas had been opened domestically, 6 cinemas had been installed, and 8 overseas CINITY cinemas had been opened. Furthermore, the service sector generated revenue of 202 million yuan (yoy +36.71%).

Profit side: Net profit attributable to mother was greatly affected by impairment, but gross margin increased markedly. The company's net profit attributable to mother was 263 million yuan (yoy +222.36%), after deducting net profit of 112 million yuan (yoy +129.11%). Based on changes in the economic conditions of the industry and customers, the company raised a total of 333 million yuan in credit impairment losses+asset impairment losses. After excluding this impact, net profit returned to mother of 596 million yuan, compared with YOY +613.85% in '22 (after excluding asset and credit impairment losses). In '23, the company's gross profit margin was 24.5%, YoY+6.6pct. Mainly, the gross margin of the distribution+screening sector recovered significantly after the epidemic. Among them, the gross margin for distribution/screening was 34%/15%, and YoY+5.8/37.8pct.

Looking ahead, the market recovery continues, with a focus on the elasticity of the distribution & creative sector. We expect the film market to maintain its recovery trend in '24. As a leader in the layout of the entire domestic industry chain, the company suggests focusing on two major directions: 1) distribution: focusing on the subsequent recovery trend of imported films; 2) improving the company's internal strategic position, actively investing in master control, and actively investing in the diversified development of mainstream commercial films+genre films under the main investment control framework. Looking ahead to the future, the company still has a number of key main feature films to be screened (“The Legend of the Condor Heroes:

“Knight Rider”, “Volunteer Army 2”, etc.), it is recommended to pay attention to the pace of subsequent launches. In addition, the company announced the first investment in the “Chinese Film Young Filmmakers Program” to actively train young creators. Currently, 15 young film projects have been selected and set up, and 7 projects have entered production. Furthermore, the company signed a strategic cooperation agreement with China Youth Travel Service to prepare a “China Sci-fi Movie Park” centered around a series of sci-fi movie IPs in Huairou District of Beijing, which is expected to further expand the IP value.

Investment suggestions: According to the company's performance situation and subsequent film schedule, we forecast that the company's net profit for 2024 to 2026 will be 6.7/7.73/853 billion yuan respectively; the PE corresponding to the current stock price is 34/29/26X, respectively. Referring to the company's 24-year average PE valuation, considering the company's import and distribution business repair is more deterministic+positive changes in the content and technology sector, we give the company 40 times PE in 2024, with a target market value of 26.8 billion yuan, corresponding to a target price of 14.4 yuan, maintaining the “recommended” rating.

Risk warning: macroeconomic pressure continues; product launches fall short of expectations; box office performance falls short of expectations