The 2023 results are in line with market expectations, and the 1Q24 results are lower than our expectations. The company announced the 2023 and 1Q24 results: 2023 revenue of 1,608 million yuan, down 20.1% year on year; net loss due to mother of 553 million yuan, loss of 72 million yuan in the same period of the previous year; net loss after deduction of 743 million yuan, compared with loss of 194 million yuan for the same period last year. The net loss due to 2023 fell into the forecast loss range of 360 to 550 million yuan, which was in line with market expectations, but the performance fell short of our expectations due to high asset and credit impairment losses. 1Q24's revenue was 440 million yuan, down 16.1% year on year; net profit to mother was 5.552 million yuan, a loss of 108 million yuan in the same period of the previous year; net loss after deducting non-return to mother was 0.14 million yuan, which was a loss of 177 million yuan in the same period last year. 1Q24 performance fell short of our expectations, mainly due to the company's lower than expected film investment revenue and higher credit impairment losses.

Development trends

The box office for the main control films in 2023 fell short of expectations, and the cinema business recovered faster than the industry level. Film business: The company mainly invested and controlled 2 films in 2023, “Unnamed” and “Bursting Point”, which grossed 1.03 billion yuan at the box office; 8 projectors, totaling 5.864 billion yuan. Revenue from the film business sector declined significantly year-on-year due to the company's main investment and control of the two films falling short of expectations. Cinema business:

In 2023, the company's cinema business achieved a total box office of 1,047 billion yuan, recovering 108% from 2019, and higher than the industry's recovery level. We believe that the company has a relatively small number of film projects in 2023, and is still subject to high box office volatility for individual projects.

The box office performance of participating movies in 1Q24 was good, and gross margin improved year-on-month. The 1Q24 company participated in the release of the film “Flying at Life 2” and won second place in the Spring Festival. We expect it to have a certain driving effect on the company's 1Q24 investment and distribution business revenue, but considering the 1Q24 unowned investment control project, the overall revenue from film investment and distribution may still decline year-on-year. In 1Q24, the company's gross margin was 40.3%, an increase over the previous year. We judge that it mainly contributed to participating in the film competition.

Follow-up projects are well-stocked, and film and series projects are progressing in parallel. Currently, the company has nearly 15 projects under creation and development. The theme stories are original, and the types of projects are more diversified, and the continuity of schedule delivery is guaranteed through echelon production. According to the announcement, follow-up reserve films include “Operation Jiaolong” (currently being filmed), “Legend” (the company expects to release in 2024), “Human Warfare” (in preliminary preparations), and “Princess Kashmir” (the company expects to launch in 2024). In terms of dramas, filming and post-production of the company's drama “Shangganling” have been completed, and the company expects to broadcast it in 2024. Dramas that will launch in 2024 include “Chaochong in the Haojiang River” and “Hunting Time”; “Minister Chincha Lin Zexu” is currently under script development.

Profit forecasting and valuation

Considering the uncertainty of the launch of the film project, we lowered our 2024/2025 net profit forecast by 18.6%/8.9% to 391/505 million yuan. The current price corresponds to 24.4/18.9 times 2024/2025 P/E.

Due to the diversification of subsequent film and television reserves, maintaining an outperforming industry rating, and considering the reduction in profit forecasts, we lowered our target price by 18.1% to 7.7 yuan, corresponding 27/21 times the 2024/2025 P/E, with 10.8% upward space.

risks

Investment and distribution of films fell short of expectations. Film censorship risks, competition increased risks, and public opinion risks.