Investment logic

Since July '24, supply has improved or boosted box office improvement. We are optimistic that supply will drive box office growth in the medium to long term. 1) The box office for 1H24 fell 9%, Q1 increased 4%, and Q2 fell 28.7%, mainly due to lackluster supply, and travel, concerts, etc.; the company's H1 performance is pressured as a result. As a result, H1's net profit is expected to be 0.1-0.13 billion yuan, and Q2 losses are 0.2-0.23 billion. However, in July, “Murder” and “Catching the Doll” were released one after another to boost the popularity of the summer program. “White Snake: Floating” and the like will be screened in August, “Crisis Line” and others are scheduled for the National Day. The H2 box office is expected to improve compared to Q2. 2) Currently, there is a gap of about 15% in the box office compared to '19, and improving supply is expected to boost the box office. From January to May '23, the number of domestic films registered was about 250 or 265 per month, which is higher than in 20-22 to guarantee subsequent supply; the supply of overseas films is also steadily picking up.

Hengqiang, the leading movie theater company, has yet to be dug deeper into the non-ticketing business. 1) According to Cat Eye, the company's market share is 15-16%, an increase of about 3 pcts over 2019. The main advantage of the company's binding with Wanda Plaza during the industry adjustment period was outstanding. The rent ratio will not change for the next 10 years after signing an agreement with Wanda Commercial Management in '22, and the cost advantage will continue; and operating efficiency has improved, with an average single-screen operator of less than 2 people. 2) The company's domestic per capita non-ticket revenue is low, about 8 yuan. It increased in 19-21 due to the company actively expanding its own tea, derivatives, and hosting talk shows, etc., and declined in 22-23 due to weak consumption. Looking ahead to the future, we believe that there is great potential for selling products such as derivatives and using space in cinemas. The cinema line business was dragged down by Q2 in 24 years, but H2 is expected to improve. We expect to see -5%/-0.2%/-6.5% year-on-year revenue for the whole year; looking ahead, the company's target market share is 20% +. As the box office grows and the market share increases, the cinema business can be expected to grow.

Together with Confucius, the content business can be expected to reach a new level. 1) At the end of '23, Ruyi became the company's controlling shareholder. The management team took up a new position, and the chairman focused on movies, series, and derivatives. 2) Wanda Film, Television, and Ruyi are all deeply involved in content and have high synergy: ① “Wind Chaser,” “My Altay,” “Catching the Doll,” and “White Snake: Floating”, which will be released in '24, will participate together. The company can prioritize investment and promotion of subsequent movies and series produced by Confucius.

We expect a sharp increase in film production and distribution in 2012, with revenue rising by 202.1%, steady TV drama production and distribution performance, and a 7.6% drop in revenue. 3) Mutual Love and Interaction continues to expand overseas. Overseas revenue accounted for 30% + in '23, less than 8% in '19. 1H24 “Saint Seiya” performed well after launching in Japan, and “Shadow Fight 3” is expected to launch this year. We expect a steady increase in game revenue in '24, an increase of 10.7%. We hope to join hands with Ruyi to launch more high-quality products in the future.

Investment advice

The net profit for 24-26 is expected to be 0.81/1.33/1.62 billion, and PE is 27.8/17.0/14.0X.

Taking into account that the 24-year results were dragged down by Q2, PE24X was awarded based on the 25-year performance valuation at the current time, with a target price of 14.68 yuan. First coverage, giving a “buy” rating.

Risk warning

Film demand and film supply fall short of expectations; content launch and performance fall short of expectations; synergy effects with Confucius fall short of expectations; risk of impairment of inventory or goodwill; risk of majority shareholder pledge.