1H24 net profit to mother was higher than our expectations

The company announced 1H24 results: revenue of 0.368 billion yuan, a decrease of 67.7%; net profit to mother of 71.2 million yuan, a decrease of 70.4%. Among them, 2Q24's revenue was 0.191 billion yuan, up 10.8%, lower than our forecast of 0.425 billion yuan, mainly due to the fact that revenue from new dramas fell short of expectations; net profit to mother was 41.2 million yuan, down 55.9%, higher than our forecast of 35 million yuan, mainly due to TV drama sales costs confirmed during the reporting period being lower than our expectations.

Development trends

The company adheres to the “content is king” strategy, the number of 1H24 launches has been reduced, and the focus is on quality projects. TV series: Under the complex industry environment and severe economic situation in the first half of the year, the company broadcast 3 films “Our Interpreter”, “Cheng Huan Ji”, and “Please Fall in Love with Me”, and launched 2 “National Color Fanghua” and “Necessary”. The number of launches declined year-on-year. Movies: “Wild Age” and “Assassination of the Novelist 2” have now started filming. Short drama: In the first half of the year, the long-drama IP joint project “My Way Home Has Wind” achieved good broadcast results. Looking forward to 2H24: The company plans to launch 8 TV series and 5 short dramas; plans to release 3 movies. We believe that the company's TV series sales declined significantly year-on-year in the first half of the year, or were affected by multiple factors such as the industry's production cycle and broadcast pace. Adhering to the “content is king” strategy meets the procurement and audience consumption needs of downstream platforms, and that high-quality content output may help boost the company's 2H24 revenue and profits.

1H24 confirmed that there were few series projects and that the cost rate fluctuated. The company's overall gross margin in 1H24 was 47.7%, up 19.6ppt year on year; among them, the gross margin for TV drama production and distribution was 41.7%, up 22.4ppt year on year. We believe this was mainly due to the sharp decline in the company's TV drama sales scale in the first half of the year. The company's 1H24 sales expenses were 53.11 million yuan, down 6.9% and 54.3%; management expenses were 73.55 million yuan, an increase of 16.8%, and a decrease of 32.1%. We believe that due to the influence of the company's content production cycle in the first half of the year, 1H24 showed certain fluctuations in gross margin and expense ratio. It is recommended to pay attention to the progress of the 2H24 reserve project and the company's reasonable control of costs during the recovery of the production cycle.

Focus on the potential of AI applications, international business, or help grow revenue. AI application: According to the company's official website, the intelligent film and television script creation assistance system developed by the company based on the “windy” AI model can achieve the initial screening evaluation of an IP work in 3 minutes and an accurate evaluation of the content of a million-word work in 30 minutes. International business: According to company reports, Huace Group's YouTube Thai channel recently surpassed 1 million subscribers, once again receiving the YouTube platform's official gold medal. We believe that the company is increasing the deployment of AI technology and deepening the cultivation of “China flows overseas”, and it is recommended to pay attention to the progress of overseas business and AI applications.

Profit forecasting and valuation

Considering the slow progress of the company's projects, we lowered 2024/2025 revenue by 20.3%/17.4% to 2.44/2.74 billion yuan, and net profit by 27.8%/21.9% to 0.405/0.481 billion yuan. The current price corresponds to 25.5/21.5 times P/E 2024/2025. Maintaining an outperforming industry rating and considering the pace of profit forecast adjustments and project confirmation, we switched the 2025 P/E valuation to 25.0 times and lowered the target price by 14.9% to 6.3 yuan. There is 15.8% upside compared to the current stock price.

risks

Key projects are progressing slowly, regulations are being tightened, and progress in the promotion of new businesses and the application of new technology falls short of expectations.