Incident: Huace Film and Television released its 2023 annual report: In 2023, the company achieved revenue of 2,267 billion yuan (yoy -8.39%) and net profit of 382 million yuan (yoy -5.08%).

Comment:

Revenue declined slightly, and the TV drama production and copyright distribution business developed steadily, moderately and positively. Throughout 2023, the company achieved revenue of 2,267 billion yuan (yoy -8.39%), of which: TV series production and distribution of 1,590 million yuan (yoy +3.68%), accounting for 70.10% of revenue; TV drama copyright distribution of 407 million yuan (yoy +19.33%), accounting for 17.95% of revenue; cinema box office revenue of 0.31 yuan (yoy +38.74%); movie revenue of 81 million yuan (yoy -80.59%); advertising revenue of 0.32 million yuan (yoy 48.66) %); brokerage business of 116 million yuan (yoy -26.42%); music business of 0.2 billion yuan (yoy +41.14%).

The decline in the company's revenue for the full year of 2023 was mainly due to a reduction in film and television projects and delays in revenue recognition. The company premiered 7 TV series throughout the year, 3 fewer than in '22; 4 movies, down 1 from the previous year; completed a pre-sale TV series project of 1,981 billion yuan, with a cumulative pre-sale of 3,798 billion yuan; and acquired Sunlink Film, the copyright operator for movies and TV series, and the number of copyrights for the company's movies and TV series increased to 50,000 hours. As an important source of revenue for the company, the TV drama production and copyright distribution business is developing steadily, moderately and positively, laying a stable foundation for the company's annual performance.

Under the pre-sale model, the main gross margin declined, and the sales rate decreased. Throughout 2023, the company's operating costs were 1,621 billion yuan, gross profit margin was 28.50%, down 5.16 percentage points year on year; sales expenses were 173 million yuan, sales rate 7.63%, down 3.64 percentage points year on year, mainly due to a decrease in the company's business performance, a decline in film volume, and a reduction in promotional expenses; administrative expenses of 171 million yuan, management rate 7.54%, an increase of 0.07 percentage points year on year, basically remained stable; net profit to mother was 382 million yuan, net profit margin 16.85%, up 0.57 percent year on year Percentage points. The company's current TV drama production and distribution business is dominated by the pre-sale model. In 23, a total of 5 TV series were licensed, a decrease of 6 over the previous year. However, revenue confirmation from the TV drama sales business needs to be carried out after obtaining a “TV Series Distribution License”, etc., which led to a decline in gross margin of the film and television project and a corresponding reduction in sales costs.

The ecological business has accumulated and developed, and it has transformed into a full-format media group driven by technology. The company mainly focuses on TV series and movie content, and also lays out business segments such as animation, music, artist brokerage, copyright management, international new media, integrated marketing, and cinemas. In terms of the overall industry layout, in 2023, the company participated in the films “Wandering Earth 2,” “Bear Cry 9: Accompany Me,” and “Previous Strategy 4,” and is expected to release 6 new film projects in 2024; 2 cartoons will be screened in 2023; the music team collaborated on OST with multiple project teams, with a cumulative total of over 200 music copyrights; and acquired the film and TV drama copyright operator Senlian Film and Television to establish an animation business group to form 6 IP series. Under the technology development strategy, in the first half of 2023, the company established the AIGC Application Research Institute, with more than 20 outstanding full-time talents, including artificial intelligence experts, AI man-machine co-creation talents, film and television data experts, as well as special equipment, special R&D and investment funds to conduct in-depth research on digital transformation and artificial intelligence in the field of audiovisual research; launch a self-developed vertical model to build a vertical data capability system.

Investment advice: As a leader in the film and television industry, Huace Film and Television has the ability to produce high-quality series and large-scale production capabilities. We expect the company's net profit to be 476 million yuan, 520 million yuan, and 574 million yuan respectively in 2024-2026, corresponding to the current share price PE of 34X, 31X, and 28X, respectively, maintaining a “highly recommended” rating.

Risk warning: (1) the film and television industry strengthens supervision; (2) long video platforms reduce content procurement budgets.