Key points of investment

Incident: In 2023, the company achieved revenue of 1,499 billion yuan, an increase of 19.44% over the previous year; net profit to mother was 89 million yuan, which changed from loss to profit. No transfers, no dividends. 2024Q1 achieved revenue of 223 million yuan, a year-on-year decrease of 22.81%; net profit to mother - 68 million yuan, a year-on-year decrease of 83.94%, mainly affected by the subsidiary Crazy Maple Studio.

Massive original content reserves and continuous content production capacity. The company is deeply involved in the digital cultural content industry, continues to consolidate the digital content foundation, and explores diversified content management methods around the needs of the omnichannel online content ecosystem, serving the upstream and downstream content industries. Currently, the company's platform reading business: using its own original content platform, famous writers, and copyright agencies as genuine digital content resources, more than 4.5 million registered authors; cooperated with more than 600 copyright agencies to sign contracts with more than 2,000 famous writers and best-selling authors. In terms of original content platforms, the company uses a full-category platform+vertical platform to form a multi-dimensional content platform matrix, taking into account the comprehensiveness and uniqueness of the content, and build a content ecosystem. The company directly charges C-end users through high-quality content, and distributes content to sales channels such as leading reading platforms, audio platforms, the three major operators, and mobile phone manufacturers.

Rich content reserves and a large audience form the foundation for the development of IP and related derivatives. The company's IP derivative business is centered on literary IP, and “simultaneous development of online text serialization+IP derivation” is used as the creative model to develop online articles in all modes of derivative forms such as audio, comics, animation, short dramas, film, television, games, and cultural and creative peripherals.

Among them, in terms of audio, the subsidiary Hongda Ether has over 480,000 hours of audio resources. In terms of animation, the company collaborated with platforms such as Tencent, Bilibili, iQiyi, and Quick Watch Comics. The animation “Asura Valkyrie” was broadcast exclusively on Tencent Video in September 2023, achieving the top 2 anime hits, etc., and many works have been distributed overseas. In June 2023, the company announced that it plans to acquire 51.04% of Hanki Chunhua's shares. Hanki Chunhua's core IP “The Legend of Luo Xiaohei” has reached several stages from comics, dramas, animated films, and derivatives, and has mature IP operation and development experience. The animated drama “The Legend of Luo Xiaohei” has been widely acclaimed since its launch, with over 1 billion views; in 2019, the animated film “The Legend of Luo Xiaohei” had box office revenue of over 300 million yuan and was shortlisted in the official feature film Contrechamp competition section of the French Ancy International Animation Festival; currently, the “The Legend of Luo Xiaohei 2” animated film is already in production and is expected to be completed by the end of 2024. The serial IP blockbuster will continue to amplify and add value to IP value. In addition to traditional animation, the company is actively trying to develop new IP derivative forms, and the “Ghost Cage” VR animation extra, co-produced by the company and PICO and produced by VeeR, will be broadcast online in December 2023. Derivative business aspects such as skits, movies, and television: The company laid out short dramas in 2021. Using the company's rich skit resources such as script accumulation, popular screenwriter team, and production and operation team, the novel adaptation “Attraction” was broadcast on Tencent Video at the end of March 2023, making it the TOP1 skit of the year with a split box office of 20 million yuan.

The overseas business adapts to local conditions and forms a new growth point. According to the “2023 Research Report on the Development of Online Literature in China”, the overseas market for online articles exceeds 4 billion yuan, with about 230 million overseas visitors, covering 200+ countries and regions around the world, with the US having the largest number of users. The overseas subsidiary CMS was listed on May 1, 2023. Currently, it is the company's shareholding company, and the company holds 49.16% of the CMS shares. CMS launched a series of products for C-end users, such as the interactive visual reading platform Opinions, the animated product Spotlight, the romance novel platform Kiss, and the live-action skit platform ReelShort. The company has established an American subsidiary COL MEDIA, a Singaporean subsidiary COLWEB, and a Japanese subsidiary COL JAPAN, with multiple locations around the world, combining the strong industries of the host country with the characteristics of overseas markets to export IP in line with the local cultural background.

AI-related applications cover many forms of content generation and will become a new trend in content production. The 2024 government work report mentioned deepening R&D applications such as big data and artificial intelligence (AI), and carrying out the “Artificial Intelligence +” campaign to build an internationally competitive digital industry cluster. Relying on a data set of over 60 TB composed of novels and publications, the company released the 1.0 version of the AI model “Chinese Freedom” in October 2023, enabling one-click generation of 10,000 character novels, writing a novel with one picture, and reading 1 million word novels at a time. Help authors greatly improve content production efficiency and invest more energy in content creativity and idea generation. Since 2021, the company has used “AI anchors” for content production, recorded audiobooks for more than 180,000 hours, and converted more than 25 million character novel IP content into foreign language versions and promoted them to overseas markets; AI has achieved phased results in generating comics and animated comics. Some AI-assisted comics have been launched on platforms such as Tencent Animation, Quick Watch Comics, and Bilibili Comics, etc., which is expected to become an important performance growth point this year.

Investment advice: The company has the ability to reserve and produce massive amounts of high-quality content and IP, expand its IP value in the fields of audio, animation, skits, etc. based on content, and build a content industry ecosystem with AI and other related technologies. We predict that the company's net profit from 2024 to 2026 will be 1.43/2.05/275 million yuan; EPS will be 0.20/0.28/0.38 yuan; PE will be 129.9/90.6/67.3; initial coverage, and a “holdings increase-A” proposal will be given.

Risk warning: AIGC-related technology development falls short of expectations, uncertainties in copyright-related policies, macroeconomic downturn, risk of impairment of goodwill and assets, operating risks of overseas business, and risks associated with increased market competition.