Confucian shares have been invested, management has taken up new positions, upstream and downstream resources in the industrial chain are expected to be linked, and there is a certain degree of upward valuation flexibility.
Leading the cinema line, laying out the entire film industry chain. The company was founded in 2005, went public in 2015, acquired 95.8% of Wanda Film and Television's shares in 2019, completed the layout of the entire film industry chain, and expanded to TV series, games, etc. The company ranked first in the country in terms of cinema box office market share from 2009 to 2023.
The actual controller was changed, and the management took up new positions. (1) At the end of 2023, Shanghai Ruyi/Ruyi Investment took over 100% of Wanda Investment's shares. The controlling shareholder was still Wanda Investment (holding 20%), and the Confucian leader Ke Liming indirectly held 20% of the company's shares and became the actual controller; the second and third major shareholders were Shenxian Rongzhi (a subsidiary of Wanda Culture Group) and Lu Lili, holding 10.21%/8.26% of the shares respectively. (2) At the beginning of 2024, the board of directors was restructured. Chen Xi, the former executive director of Ruyi of China, became the chairman and president of the company, in charge of film and television content, distribution and optical network business in Wuzhou; Chen Hongtao is still the company's director/executive president, in charge of the cinema business; Wang Huiwu remains the company's director/vice president/director; Gong Qiao/Yang Hai, a former Chinese Ruyi executive, is in charge of the company's game business.
The cinema business is leading in operating efficiency, and the new shareholders are expected to contribute to the three major strategies of “increasing the market share of cinemas”, “increasing the output capacity of the content sector”, and “vigorously developing derivatives”.
Cinemas: (1) High operating efficiency and increased market share. According to Yien, in 2023, the company's domestic direct-run cinema box office recovered to 98% in 2019, better than 84% of the overall market; single cinema/screen box office recovered to 80%/81% in 2019, and the pace of recovery was better than that of the market; the market share ratio was 15.4%, up 2.24 pcts from 2019. The lease between the company and Wanda Plaza will be extended until the end of 2033, and the expiration date can be extended for 10 years. After the epidemic, the overall domestic screen growth rate declined significantly, and entering a period of consolidation, the company maintained steady expansion, and had relatively high advantages in terms of scale and cost, leading operating efficiency, and is expected to achieve a continuous increase in market share. (2) The sales business is strong, and profitability is expected to increase. In 2017-2023, the company's sales business revenue accounted for an average of 18.1% of cinema-related business (screening+sales), which is higher than other leading film producers.
In 2023, the company's revenue from single subsales was 9.4 yuan, with 6.9 yuan in China and 38.9 yuan in Australia. Domestic single-person sales revenue was higher than that of other leading film producers (4.0-5.8 yuan). In the future, the company will continue to increase the development of self-developed food and beverages and other product lines, strengthen the sales business, and rely on TimeNet to develop derivatives business, develop its own IP derivatives, and actively obtain leading external IP licenses (Loopy, Bubble Mart's IP, etc.).
Advertising: The advertising business is mainly divided into advertising agencies and video investment, video embedded advertising, and cinema-related advertising business. In 2016-2019, advertising revenue grew rapidly, reaching a high of 2.52 billion yuan in 2018 and 1.32 billion yuan in 2023. In 2023, cinema-related advertising revenue was 960 million yuan, including 80 million yuan in cinema advertising revenue in China and 880 million yuan in Australian cinema-related advertising business. ValMorgan, a subsidiary of Hoyts, is the largest digital advertising screen company in Australia; in 2023, advertising agency revenue is 360 million yuan.
Film and television: China Ruyi, the new shareholder, focuses on film and television content, has extensive experience in content investment and production, and has successfully created many popular content. Taking advantage of the new shareholders' advantages in film and television content R&D, production and promotion, the company is expected to share resources and complement each other's strengths, produce more high-quality works, and combine its own advantages to make efforts in the field of film distribution. The company has a wealth of reserve projects. It has already prepared “Catch a Doll”, “White Snake: Floating Like You”, “Tricking to Like You”, etc., as well as “Mistaken Killing 3,” “Turning to Flowers,” “Tang Detective 1900,” etc.; the series “Sifanggwan” and “Misplaced Place” are expected to be broadcast in 2024, “We Are Young” and “Confessions in the Dark Night” are being produced, and “Beijing Folded” is being incubated.
Gaming: Mutual Love and Interaction focuses on game distribution, continues to promote overseas strategies, and the share of overseas revenue has increased markedly. The company's overseas game revenue in 2023 was 120 million yuan, accounting for 32.4% of overall game revenue. The representative product of Shikai, “Saint Seiya: Legend of Justice”, was launched in the Japanese market in January 2024, and is currently ranked 3rd on the Japanese iOS bestseller list. It is still ranked 50th on the iOS bestseller list on June 26, 2024, with excellent performance.
In the future, stock up on products such as “Shadow Fight 3” and “Rules of Battle.”
Finances went to battle lightly, and performance gradually recovered. (1) The company's net profit to mother reached a high of 1.52 billion yuan in 2017. The 2019/2020 results were affected by impairment of goodwill and the epidemic. Net profit to the mother in 2023 was 910 million yuan, which recovered relatively well, and there was room for improvement in the company's screening, advertising, and content sectors. (2) Net cash from operating activities remained at a high level, reaching 4.4 billion yuan in 2023. The financial situation was actively improved through repayment of long-term and short-term loans. Long-term and short-term loans were 2.63 billion yuan at the end of 2024Q1, a significant decrease from the end of 2023. (3) As of the end of 2023, the book value of goodwill was 4.375 billion yuan, including 3.33 billion yuan for the Australian cinema line and 860 million yuan for the Wanda Film and Television sector. The two businesses are developing steadily and positively.
With policy support, supply and demand in the film industry have both recovered, and the channel side is expected to be fully integrated. (1) Policy: The promulgation and implementation of a number of policies related to film development and many important speeches by relevant leaders of the National Film Administration are expected to promote the prosperity and high-quality development of the film industry. (2) Supply: The number of domestic film filings/screenings has gradually recovered, and content types have diversified; cash reserves of leading companies in the industry have improved; reserves of blockbuster films are abundant. They are expected to be released during the Spring Festival in 2025, and the quantity and quality of film supply continues to improve. (3) Demand: Compared with mature markets in North America, China's post-pandemic box office recovery is better; demand in the third to fifth tier markets continues to rise. The box office share of the third to fifth tier market in 2023 (excluding service fees) was 22.938 billion yuan, which has recovered to 92% in 2019, which is better than the overall recovery of the market; there is still a gap between the number of movie viewers per capita in China's urban population (1.4 times) and the developed North American market (2.7 times). As ticket prices continue to decline in revenue, the number of movie viewers is expected to continue to grow. (4) Channel: Beginning in 2019, the growth rate of Chinese screens has slowed, small and medium-sized films have been released, opportunities for integration have increased, and single-screen output is expected to reach an inflection point.
Profit forecast and investment rating: The company is a leader in the domestic cinema industry, and its box office market share is steadily increasing; new shareholders are expected to empower the company's three major strategies and enhance the operating advantages of the entire industry chain; the company's finances are lightweight, conditions have improved, and performance has recovered significantly, and there is room for improvement in all major business segments. Based on this, we expect the company's operating income in 2024-2026 to be 15.530/170.95/18.220 billion yuan, and net profit to mother of 12.13/15.69/18.225 billion yuan respectively, corresponding EPS of 0.56/0.72/0.84 yuan, and PE of 21.73/16.80/14.43X, maintaining a “buy” rating.
Risk warning: Risks such as box office recovery falling short of expectations, film development process falling short of expectations, box office performance falling short of expectations, cost control falling short of expectations, increased industry competition, brain loss, offline consumer demand falling short of expectations, asset/credit impairment, declining valuation center, and inconsistent data sources.