Core views:
Huace Film and Television disclosed its 2023 annual report and 2024 quarterly report: (1) In 2023, the company achieved revenue of 2,267 billion yuan, a year-on-year decrease of 8.39%; net profit to mother was 382 million yuan, a year-on-year decrease of 5.08%; and deducted non-net profit of 292 million yuan, a year-on-year decrease of 3.24%. (2) In 24Q1, the company achieved revenue of 177 million yuan, a year-on-year decrease of 81.69%; net profit to mother of 30 million yuan, a year-on-year decrease of 79.58%; deducted non-net profit of 1.44 million yuan, a year-on-year decrease of 98.80%. The sharp decline in 24Q1 performance was mainly affected by the confirmed pace of TV drama revenue.
Quality improvements have led to short-term production cuts, and there is plenty of potential for long-term development. In 2023, the company raised the quality requirements for film and TV drama projects, so it moderately delayed the launch of some projects and focused on copyrighted dramas and leading dramas. The company premiered 7 TV series in '23, and has premiered 2 TV series, “Our Interpreter” and “The Chronicles of Cheng Huan” in '24. There are currently 8 series in post-production/reviewing/preparation. 24Q2 plans to launch 4 episodes, and 24H2 plans to launch 5 episodes. By the end of 23, it had achieved a total of 3.798 billion yuan in pre-sales. In '23, the company launched a total of 4 main control movies. It is expected that 6 films will participate in the screening in '24, and the 2 leading films “Assassination of the Novelist 2” and “Wild Age” will be launched.
Construct a second growth curve around the main business ecosystem. (1) Copyright business. In '23, it acquired 100% of Sunlink's shares, the number of film and television copyrights rose to 50,000 hours, and achieved TV drama copyright distribution revenue of 407 million yuan in '23, an increase of 19.33% over the previous year. (2) In the skit business, the boutique skits “Looking for Song” and “My Way Home” (the top three Douyin skits for the Spring Festival) have been launched on Douyin for 24 years, and plans to increase capital investment in the skit direction. (3) The “AI+ Film and Television” capability has established a matrix of practical AI applications/tools for Wenshengwen, Wensheng Map, Wensheng Video, and Wensheng Audio.
Profit forecasting and investment advice. We expect that in 2024-2026, the company will achieve operating income of 23.20/26.19/2,857 billion yuan and net profit to mother of 431/4.95/545 million yuan. The company improved quality and reduced production in the short term, but it has a stable leading position, sufficient reserves of movies and TV series, and is actively expanding innovative directions such as copyright, short dramas, and AIGC. Referring to comparable companies, we gave the company a PE valuation of 42 times in 24 years, corresponding to a reasonable value of 9.53 yuan/share, maintaining a “buy” rating.
Risk warning. Policy changes; film and television projects falling short of expectations; impact on short videos; slow implementation of AI.