Incident: The company released its annual report for the year 23 and the quarterly report for '24. It achieved revenue/net profit attributable to mothers/net profit after deduction of 19.26/ -1.10/-88 million yuan respectively, +320.8%/loss/loss reduction over the same period last year. Excluding investment income and impairment losses resulting from holding long-term equity investments in Huafang Group, net profit returned to the mother in '23 was 829 million yuan, reversing the year-on-year loss. 24Q1 revenue/net profit attributable to mother/ net profit after deducting non-attributable net profit were $560/2.52/249 million, respectively, or +138.7%/+317.3%/+349.1% year-on-year, respectively.
The main performing arts industry is recovering, and new projects are gradually releasing results: benefiting from the recovery of the industry, the company's main performing arts business is gradually picking up.
The company's live entertainment revenue in '23 was 1.67 billion yuan, recovering to 89.1% in '19; of these, the revenue of Hangzhou/Sanya/Lijiang/Guilin/Zhangjiajie Ancient Scenic Area recovered to 71.3%/48.9%/96.6%/118.2%/104.7% in '19, respectively. 24Q1's revenue increased by 138.7% year-on-year, mainly because the base for the same period last year was low, and the company seized the Spring Festival Golden Week. The total number of shows during this period was 251% of the same period in '19, and the total number of visitors received was 207% in the same period in '19. The company's new project has been implemented with good results. The average number of shows per day since the opening of the Foshan project is close to 5; the maximum number of shows for the Xi'an project was 11 shows per day during the May 1st holiday in '24, and Theater No. 2 will open in the summer of '24; and Guangdong Qianguqing 24Q1 has a maximum of 10 shows in a single day.
The scale effect drove gross margin restoration, and sales expenses were well controlled: the company's gross margin was 66.3% in '23, an increase of 16.2 pcts compared to '22, and a decrease of 5.0 pcts compared to '19. 24Q1's gross margin was 68.7%, up 17.7pcts year on year 23Q1 and down 1.0pcts year on year 19Q1. Since the new project is still climbing, it will take time for gross margins to return to the 19-year level, but as the number of shows has increased, the scale effect highlights the gradual dilution of costs. In terms of expenses, the sales expense rate/management expense ratio in '23 was 4.6%/7.6%, respectively, -0.3/-78.0 pcts compared to '22, and -1.0/+0.4 pcts compared to '19, respectively. The 24Q1 sales expense rate/management expense ratio was 4.7%/7.9%, respectively, +1.4/-3.7 pcts compared to 23Q1, and -3.0/+2.8pcts compared to 19Q1, respectively. The sales expense ratio for '23/24Q1 is lower than the same period in '19, and there is still room for optimization of the management expense ratio.
The company received an unqualified audit opinion and continued to focus on the development of its main business: Huafang Group's frozen accounts have been unfrozen, and the company's 22-year report and 23-year annual report have received unqualified audit opinions. Over the past 24 years, the company's main performing arts business has continued to pick up. During the May Day period, the number of performances of the 12 Ancient Feelings was 127%/187% in the same period 2023/2019; the total number of visitors received was 119%/138% in the same period 2023/2019; and the total revenue was 128%/140% in the same period 2023/2019. In the future, the company will continue to focus on promoting the development of its main business by creating high-quality performing arts, scenic spots and vacation experiences.
Profit forecast, valuation and rating: Since the new project has been climbing for a longer period than our previous forecast, we have slightly lowered our 24-25 net profit forecast to RMB 1,755/15.56 billion (down 3.8%/4.9% from the previous forecast, respectively), and added the net profit forecast for 2026 to RMB 1,778 billion. The current stock price is 0.49/0.59/0.68 yuan for 24-26 EPS, respectively, and 22/18/16 times PE, respectively. The company's main business continues to recover, and Huafang Group's risk of depreciation has declined. We are optimistic about the company's future development prospects and maintain a “buy” rating.
Risk warning: The recovery of the industry fell short of expectations, and the operation of new projects fell short of expectations.