Incidents:

(1) On April 21, 2024, Chinese online announced the 2023 annual report, with 2023 revenue of 1.41 billion yuan (YOY +19.44%), net profit to mother of 89 million yuan (YOY +124.7%), net profit of non-return to mother - 38 million yuan (YOY +90.25%).

(2) On April 29, 2024, the 2023 Social Responsibility Report was announced online in Chinese.

Investment highlights:

Results picked up in 2023.

(1) In 2023, the company's revenue was 1.41 billion yuan (YOY +19.44%), net profit attributable to mother was 89 million yuan (YOY +124.7%), after deducting non-return net profit of -38 million yuan (YOY +90.25%).

Non-recurring profit and loss of $130 million in 2023 ($31 million in 2022) was mainly due to amortization of receivables of $32.5 million, non-operating expenses such as litigation compensation, etc.; investment income of $71 million was mainly derived from financial assets and equity investments.

(2) 2023 net profit margin 6.4% (2022 -30.4%), gross profit margin 44.7% (2022 49.9%); period expense ratio 48.05% (year-on-year decrease 17.6pct), of which the sales expense ratio was 34.2%, down 5.0 pct year on year, and cost control was better.

Digital content licensing is robust, and IP derivative business is growing rapidly.

(1) Digital content licensing: 2023 revenue of 710 million yuan (YOY -12.2%), gross profit margin 44.53%. The company has accumulated more than 5.6 million kinds of digital content resources and 4.5 million original Internet resident authors.

(2) IP derivative development: 2023 revenue of 660 million yuan (YOY +94.4%), gross profit margin of 44.2% (up 12.1pct year over year). ① Audio & short drama: The short drama market was laid out in 2021, with a rich accumulation of short screenplays, a screenwriting team for popular short dramas, and a short drama launch and operation team.

In terms of platform skits, the production of “Temptation” grossed 20 million yuan; in terms of mini-program skits, the domestic skit platform “Wild Elephant Theater” was incubated and a variety of blockbusters were launched to achieve large-scale revenue; the subsidiary Hongda Ether has over 480,000 hours of audio resources. ② Animation: Launched a number of AI+ animated comics; acquired 51% of Haruki Chunhua's shares to promote animation commercialization. “The Legend of Luo Xiaohei 2” will be produced by the end of 2024; and a VR animated extra “Ghost Cage” co-produced by PICO will be broadcast online.

Continuing to deepen its overseas business, ReelShort's turnover has repeatedly reached new highs.

(1) The overseas company CMS was listed on May 1, 2023, and the company currently holds 49.2% of the shares. CMS revenue in 2023 was 686 million yuan (YOY +87.4%; the first half of the year was 2.03/483 million yuan respectively) and net profit was 244,000 yuan (7.6 million yuan in 2022). Overseas short dramas had a large investment during the start-up period.

(3) According to Sensor Tower, the 2024Q1 overseas skit market surpassed 100 million US dollars ($58.26 million for the full year of 2023), achieving explosive growth. ReelShort, a subsidiary of CMS, is a skit leader, with a net turnover of US$0.6/35.78 million in 2022/2023 and US$34.15 million for 2024Q1, which is close to the full year of 2023.

Actively deploy AI to help IP unlock value.

(1) With a large number of IPs, the AI model “Chinese Easy” was launched in 2023 to achieve functions such as auxiliary novel creation, rewriting, and chatbots based on character settings. At the same time, it has achieved cost reduction and efficiency in AI generation of comics and animated comics, and is actively exploring AI's capabilities in various application scenarios such as animation, short dramas, and short videos.

(2) The data set that can be used for AI large model training has exceeded 60 TB. Data content cooperation contracts have been signed with a number of model companies, and the amount of each contract has reached the level of 10 million yuan.

Profit forecast and investment rating: We expect the company's revenue for 2024-2026 to be 1,713/20.22/2.304 billion yuan, net profit to mother of 1.21/1.53/177 million yuan, EPS of 0.17/0.21/0.24 yuan, and corresponding PS of 11.00/9.32/8.18X. The company has massive IP, AI+ short two-wheel drive, and profitability is expected to continue to increase. Based on this, the first coverage gave the company a “buy” rating.

Risk warning: Increased market competition, downward valuation center, regulatory risks, competition in other forms of entertainment, short drama development process and performance falling short of expectations, rising advertising costs, risk of asset impairment, risk of credit impairment, insufficient funding, falling short of expectations, and AI technology evolution falling short of expectations.