The core business of TV series and movies has improved quality and stability, and AI has enabled active second-curve ecological business development. In 2023, the company's total revenue was 2.27 billion yuan (-8.4% YoY), net profit attributable to mother was 380 million yuan (-5.1% YoY), deducted no more than 290 million yuan (YoY -3.4%), and cash flow from operating activities was 3.9 million yuan (+35.8% YoY).

2024Q1, the company's total revenue was 180 million yuan (-81.7% YoY), due to a year-on-year decrease in the sales scale of major TV series; net profit to mother of 3.01 million yuan (-80% YoY), net profit not attributable to mother was 1.44 million yuan (-98.8% YoY). In addition, the company launched the 2024 Restricted Stock Incentive Plan. The total number of restricted shares is no more than 12.8157 million shares, accounting for about 0.67% of the company's total share capital.

TV series reserves are sufficient for pre-sale, and the number of launches will pick up in 2024, and 6 movies are scheduled to be screened. In 2023, the company's TV drama production and distribution business revenue was 1.59 billion yuan (+3.7% year over year), accounting for 70.1% of total revenue (+8.17pct year over year). The top five grossing works of “Go to a Windy Place”, “Please Fall in Love with Me”, “Warm Spring Sun”, and “All the Way to the Sun” totaled 1.25 billion yuan, and sold for a single episode of about 6.47 million yuan. In 2023, the number of TV series licensed by the company was 5, 3 fewer than in the same period in 2022. Pre-sale contracts of 1.98 billion yuan were completed in 2023, with a cumulative pre-sale of 3.80 billion yuan; as of 2024Q1, the company's post-production TV series “Infinite Future” and “Seven Nights of Snow”. The legendary costume TV series “National Color Fanghua” has already been launched, and the 2024Q2-Q4 TV series to be launched is 4, 3, and 2, respectively. We expect the number of TV series licensed by the company to be 7 in 2024. In 2023, the company's film sales revenue was 80.56 million yuan (-80.6% year over year), mainly due to the high box office performance of “Return from a Thousand Miles” in 2022; 6 movies are scheduled to be screened throughout 2024. In addition, the company's S-rated film project “Wild Times” was launched in 2024Q1, and “Assassination of the Novelist 2” has been completed. At the same time, the company's artist brokerage business and music business have deeply empowered its core business. Revenue in 2023 was 120 million yuan and 21.86 million yuan respectively, accounting for 5.1% and 1.0% of total revenue, respectively. As of 2023, the company's cumulative music copyrights exceeded 200.

Accelerate the construction of ecological content such as copyright, international, skits, animation, and operators. In 2023, the company's TV series copyright distribution revenue was 410 million yuan (+19.3% year over year), accounting for 18.0% of the total revenue, rising to the company's second-largest main business. In 2023, it completed the 100% share acquisition of CIMU, and the number of film and television copyrights rose to 50,000 hours. In 2023, the company's international business revenue was 130 million yuan (-11.5% YoY), accounting for 5.8% of total revenue. It has distributed 150,000 hours of film and television productions to cover more than 200 countries and regions around the world, and has expanded participation in overseas series such as South Korea and Thailand. The overseas new media communication matrix has built more than 100 channels to expand innovative content such as skits. The number of overseas YouTube user subscriptions has grown to 20 million, and Facebook fans have surpassed 4.5 million, ranking first in China's film and television company's official account. The short drama business leverages the IP value of leading series to expand the development of boutique skits, collaborated with Douyin to screen the short series “My Way Home with Wind” (with a total broadcast volume of over 200 million, ranking in the top three Douyin skits) and “Looking for Song”. In 2024, it is proposed to create boutique skits such as “The Man Who Saved Time” and “My Way Home with Wind 2” to increase capital investment and begin to enter the normal production stage. In January 2024, the company officially established an animation business group. Through domestic and international cooperation and development, it has formed 6 IP series: “Challenge the Devil”, “Express Agent”, “Monster Remote Control”, “Little Dinosaur Cocaine”, “Little Mouse Reddick”, and “Yipin Sesame Fox”, initially forming a certain scale of production capacity. In the future, it will continue to introduce overseas S-class IPs and explore derivative industries such as animated movies and cards. In addition, the company has increased the incubation and cultivation of the operator (video ringtone) business, deepened strategic cooperation with China Mobile Migu, and achieved stable profits in 2023.

Set up the AIGC Application Research Institute to implement vertical models, empower the main business, and explore scenario applications. In 2023, the company upgraded the Science and Data Center to a first-level department and established the AIGC Applied Research Institute. In 2023, the company's R&D expenses were 2.59 million yuan (+70.8% YoY). The increase was mainly used for the introduction of AI-related talents, equipment procurement and project investment; 1) building a practical AI application/tool matrix for Wenshengwen, Wensheng Video, and Wensheng Audio around “film and television+AI”; 2) accumulating more than 50,000 hours of genuine film and television copyright library and 1.5 million minutes of HD/UHD original shooting material, which can form a copyright data set for draping multi-modal model training. 3) Self-developed vertical model for the “windy” industry, covering literary and literary functions such as “AI Screenwriter Assistant” and “AI Screenplay Evaluation Assistant”, which has been used internally, greatly improving the efficiency of creation and evaluation. 4) The “AI video analysis and search function” has been launched, which can automatically label specific elements such as people and objects in the video and quickly lock down relevant materials. 5) Features such as “AI stills”, “multilingual voice dubbing”, and “AI adapted animation” are currently being tested, and a 4-second literary video capability that satisfies and adapts to the time required for film and television workflows is being developed based on split camera creation and design requirements. 6) Efforts to 3D scan the crew's scenes have been stepped up. Currently, about 700 digital asset fields are in reserve, and 3D digital asset library scenes are continuously accumulated. In addition, the company has abundant cash flow and has set up a special fund of 500 million yuan to accelerate the application of AIGC in the industry.

Profit forecasting and valuation. Our forecast for the company's main business segments is as follows: 1) TV series sales: According to the filming plan and progress, we expect the company to confirm revenue of 276 episodes of TV series in 2024. Furthermore, the company's overall TV series development volume is expected to rise steadily and slightly. The number of TV series with confirmed revenue in 2025 and 2026 is 290 episodes and 300 episodes, respectively; at the same time, considering the continuous improvement of the company's production and refinement, assuming that the average price of a single episode of the company's 2024-2026 TV series will be 5.8 million yuan, 5.9 million yuan, and 6 million yuan, so 2024- In 2026, the company's TV series sales revenue is expected to be 1.60 billion yuan, 17.01 billion yuan and 1.80 billion yuan respectively, with year-on-year growth rates of 0.7%, 6.9% and 5.2%, respectively. 2) TV series copyright: Considering the 2023 merger list, the copyright business revenue growth rate is expected to be 20%, 18%, and 15%, respectively, in 2024-2026. 3) Film business: Considering the release of 6 films in 2024 and the ongoing S-level project development plan, the estimated revenue of the film business in 2024-2026 is 250 million yuan (+210.3% year-on-year), 300 million yuan, and 300 million yuan, respectively. 4) Brokerage business: Revenue is expected to grow at a rate of 15% year-on-year in 2024-2026, respectively. 5) Music business: Revenue is expected to grow at 30%, 28%, and 25% year-on-year in 2024-2026, respectively. 6) Advertising business: Revenue is expected to grow 8% year-on-year in 2024-2026. 7) Cinema box office:

Revenue is expected to grow by 5% year-on-year in 2024-2026, respectively.

Overall, we expect the company's total revenue for 2024-2026 to be 2.57 billion yuan, 2.85 billion yuan and 3.06 billion yuan, respectively, with year-on-year growth rates of 13.3%, 10.9% and 7.5%, respectively; net profit to mother of 400 million yuan, 590 million yuan, and 590 million yuan respectively, with year-on-year growth rates of 15.2%, 18.5% and 12.8%, respectively. PE valuation method: Refer to the average 28 times PE valuation of comparable companies in 2024, and give the company a dynamic PE valuation of 25-30 times in 2023. The corresponding reasonable value range is 5.75 yuan to 6.90 yuan. PB valuation method:

Referring to the average of 2.34 times PB of comparable companies in 2024, the company was given a PB valuation of 2.5 times to 3.0 times in 2023. The corresponding reasonable value range was 9.85 yuan to 11.82 yuan.

Based on the principle of prudence, the average value of the lower and upper limits of the two valuation methods was selected. We believe that the reasonable value range for the company is 7.80 yuan to 9.36 yuan, maintaining an superior market rating.

Risk warning: The development progress of film and television content projects falls short of expectations, and the implementation progress of AIGC applications falls short of expectations.