Incidents:

The company released its mid-year report. 24H1 revenue was 6.96 billion yuan, up 2.5% year on year; net profit to mother was 1.06 billion yuan, down 15.5% year on year; net profit after deducting non-return to mother was 0.91 billion yuan, down 23.0% year on year.

Single Q2 revenue was 3.64 billion yuan, down 1.5% year on year; net profit to mother was 0.59 billion yuan, down 16.7% year on year, slightly lower than expected; net profit without return to mother was 0.45 billion yuan, down 32.0% year on year.

Key points of investment:

According to the company's financial report, the Internet video business 24H1 revenue was 5 billion yuan, down 4% year on year, gross margin was 36%, down 7 pct year on year; revenue and profit margins were mainly dragged down by operator business. The volume and price of membership revenue has risen sharply, driven by high-quality content. Member business 24H1 revenue was 2.5 billion yuan, up 27% year over year. Driven by popular shows such as “The Singer,” we expect Q2 membership revenue growth to increase month-on-month compared to Q1. Advertisements have fluctuated but the recovery trend has not changed. The revenue of the advertising business 24H1 was 1.7 billion yuan, down 4% year on year. The revenue decline continued to narrow in half a year since 22H1. We expect Q2 advertising revenue to decline year over year due to base size+distribution of some TV networks, but it is still expected to stop falling and pick up throughout the year. Carrier business is still under pressure.

The 24H1 operator's revenue was 0.75 billion yuan, down 46% year over year. According to the State Administration of Radio, Film, and Television, since August 23, work has been carried out in the three fields of cable TV, IPTV, and Internet television to control the charges and complicated operation of TV “match-making”. In May '24, it was stated that the management goal of “booting up to watch live broadcasts, reducing the fee package by 50%, and improving consumption transparency” has been achieved. Due to progressive regulation, Mango Q2 operators' business revenue declined more than in Q1, but risks have gradually been unleashed.

Improvement of non-core video business operations. According to the company's financial report, 24H1 revenue from the non-Internet video business was 2 billion yuan, up 21% year on year, gross profit margin was 11%, down 1 pct year on year. Among them, Golden Eagle Cartoon 24H1's total profit increased by about 15% year on year; Xiaomang's losses narrowed, and the 24H1 loss rate was 14% (25% for the full year of '23).

Effective cost control. According to the company's financial report, the absolute value of 24H1 sales expenses, management expenses, and R&D expenses decreased by 16%/21%/17%, respectively, over the same period last year, and the cost rate also fell to an all-time low. Cash flow was affected in the short term due to content expenses. 24H1 net cash flow from operating activities was -0.18 billion yuan, of which Q1/Q2 was 0.17/-0.35 billion yuan, respectively. In terms of intangible assets, the new value of film and television copyright in this issue was 3 billion yuan, an increase of 8% over the previous year. The decrease in monetary funds is due to the purchase of term deposits, large deposit certificates, etc. By the end of '24, the company's monetary capital was $3.2 billion, compared to $11.9 billion at the beginning of the period; time deposits and large deposit accounts added $7.7 billion in the current period (other current assets and debt investment accounts). 24H1 investment income of 0.15 billion yuan is mainly interest income from time deposits, large deposits and structured deposits.

The profit forecast was lowered. Considering the pressure on the operator's business, we lowered the 24-26 net profit forecast to 1.831/2.17/2.487 billion yuan (the original forecast was 1.966/2.248/2.553 billion yuan).

Maintain a buy rating. The current stock price partly reflects pessimistic expectations. In the short term, the pressure to rectify the big screen has gradually been released; the income tax rate was raised to 15% in the first half of the year; the H2 key series “People in the Alley”, “Long Song”, “National Color Fanghua”, and “Water Dragon Yin” are expected to support the continued impressive growth of members. Looking at the medium to long term, there is still room for overseas travel and technology. Maintain a buy rating.

Risk warning: Variety show performance fell short of expectations, advertising recovery fell short of expectations, and content e-commerce losses fell short of expectations.