After Confucius enters the market, the content business is expected to explode. Ruyi's main business covers film, television, streaming platforms, and games, and has been deeply involved in content for a long time. Reviewing the company's previous main projects, we believe that Wanda Film and Television had certain capabilities in content creation before, but there is still room for improvement in content and schedule control.

With Confucian resources, the company is expected to consolidate the talent team and enhance external cooperation: 1) Talent support. Chairman Chen Xi brought an excellent team of producers and rich experience in the production management process to the company after taking office. At the same time, we insist on promoting a producer-centered system, scientifically managing production and operation, and guaranteeing investment expectations for works. We believe that the core of the content industry is “people”. After the production team joined, it directly strengthened the company's content productivity. 2) Content collaboration. For films produced by Confucius, the company can prioritize investment and promote them, which is expected to further obtain share revenue. In terms of subsequent films, there are plenty of reserves for the 24-year schedule. In terms of the summer program, films such as “I Don't Want to Be Your Friends” and “Catch the Doll”; the main sponsor and participation in the film “White Snake: Floating Life”; participation in “Silence,” “Under a Stranger,” and “Demystified”; “Mistaken Killing 3,” “A Cloud Is Like You,” and “Trick” to Like You” are also expected to be screened during the year. The reserve films also include the collaboration of director Jia Ling, the IP series “Tang Detective 1900,” and “We Live in Nanjing”.

The downstream cinema line maintains its leading position, and the target market accounts for 20%. On the industry side, looking ahead to 2024, we believe:

1) Domestic films continue to gain strength, and imported films are actively introduced, which is expected to form a positive cycle of high-quality content supply and movie viewing demand; 2) Promotion of new media channels such as short videos and discussion of topics will further drive the needs of non-core moviegoers; 3) Increased concentration of downstream cinemas will benefit leading companies. 4) If branch distribution is expected to be implemented, the company's advantages on the content and channel side are expected to be further expanded. The company will continue to expand its cinema market share through reasonable planning, with a target market share of 20%. The first is to vigorously expand direct-run cinemas and upgrade quality and seek cooperation with high-quality commercial real estate developers in the market; the second is to develop asset-light businesses under the principles of unified brand, unified production, unified operation, and unified management. The ultimate goal is to increase the market share to more than 20%. After changing shareholders, the cinema rent advantage is expected to be maintained in the medium term, which is conducive to its subsequent cinema expansion.

On the gaming side, “reshape classic IPs and enter the global market.” The company selected classic IPs such as “Saint Seiya” and “Transformers,” targeting relatively older men and targeting core fans. At the same time, the overseas focus is on Europe, America, and Japan, which is different from the spending habits of domestic players, and overseas sales are expected to come to a long end. After Confucius enters the market, it is expected that superior resources will be shared and the business layout will be broadened. We believe that Confucius's superior resources in gaming are: 1) Talent team. Gong Jiao, the head of Jingxiu Games, has 20 years of experience in the game industry. 2) Strategic cooperation with Tencent. If mutual love and interaction continues, it is hoped that through Confucian will, it may be possible to cooperate directly or indirectly with Tencent, or reinforce various aspects such as content and channels. On the Pipeline side, “Shadow Fight 3” and “Rules of Battle” will be launched in domestic and overseas markets one after another; “Tianyuan Breaks Through Red Lotus Luoyan” and “I Reboot for Song Fanatic Melody” have already received domestic editions. In terms of subsequent IP reserves, Mutual Love Interactive currently has IPs such as “Transformers” and “JOJO's Bizarre Adventure.” High-quality IP reserves are abundant and are expected to achieve long-term development.

The development of its own IP derivatives extends the industrial chain, and AI is expected to feed back the cinema and contribute to long-term logic. The company will focus on developing the derivatives business using the TimeNet platform. In the past, most of the main IPs were authorized by content parties and lacked their own IPs; with the injection of Ruyi content resources, TimeNet went directly to the source of IP in the derivatives market. Leveraging Wanda Film's existing online and offline positions to open up sales links. In terms of offline channels, all Wanda Cinemas across the country are potential display windows and sales counters, and in combination with movies being screened, the scenario-based atmosphere further enhances the consumer experience, further enhances the SPP of offline products, and is replicable. In terms of AI video, along with iteration of technology-level models and optimization of application-level workflows, the usability of AI in the film and television field is expected to increase, and film production is expected to further improve quality and efficiency, drive market growth from the supply side, and have a positive impact on cinema terminals. At the same time, Ruyi's Pumpkin Film continues to experiment and make some progress in AI production. If excellent AI films can be produced and screened online in theaters in the future, it is expected to boost the box office revenue of Wanda theaters.

Profit prediction and investment advice: We believe that in terms of traditional business, thanks to box office growth and market share, movie viewing revenue is expected to continue to grow; content sectors such as movies, TV series, and games, on the one hand, are expected to increase investment in the content side after the management team changes, and further increase returns based on their experience. At the same time, collaboration with Confucian content is expected to further increase revenue space. In terms of new business, IP and AI contribute long-term logic, further raising the valuation ceiling. It is estimated that in 24-26, the company's revenue will be 152.23/ 16.628/17.912 billion yuan, 4% /9%/8%; net profit to mother 0.942/1.063/1.183 billion yuan, 3.3%/12.8%/11.3%; corresponding PE is 24.17/21.42/19.26 times. The company is a leader in the cinema industry. The content business is expected to undergo changes in 24, further improving performance flexibility, and IP and AI empowering the company to grow in the long term. First coverage, giving the company a “buy” rating.

Risk warning: risk of related policy changes, risk of leaving the core team, failure to release the film as scheduled, etc.