Incident: The company announced results for the second quarter of 2024, achieving operating income of 3.636 billion yuan, a year-on-year decrease of 1.52%, and net profit to mother of 0.593 billion yuan, a year-on-year decrease of 16.68%.

The business situation is steady, and reaching a cooperation agreement with Migu is expected to be mutually beneficial and win-win. The company achieved revenue of 3.636 billion yuan in the second quarter, down 1.52% year on year, net profit of 0.593 billion yuan, down 16.68% year on year; revenue for the first half of the year was 6.96 billion yuan, up 2.46% year on year, operating profit was 1.233 billion yuan, up 2.15% year on year, and net profit to mother was 1.065 billion yuan, down 15.45% year on year. The decline in profit was mainly affected by changes in preferential corporate income tax policies. The company also announced that the wholly-owned subsidiary Mango TV plans to sign the “Overall Cooperation Framework Agreement between Migu Culture and Mango TV 2024-2026” with Migu Culture, a wholly-owned subsidiary of China Mobile. The two sides will give full play to their respective advantages in terms of content and channels, and cooperate in various fields such as large screen business, small screen business, member rights, 5G innovation business, music business, joint expansion and resource investment. The period is two years from January 8, 2024. The estimated amount of cooperation is not less than RMB 4.4 billion.

By business situation:

1) On the membership side, revenue in the first half of the year was 2.486 billion yuan, up 27% year on year, accounting for more than 50% of the Internet video business revenue. The launch of popular variety shows represented by “Singer 2024” and “Ride the Wind 2024” and popular series such as “With Feng Xing” and “Happy Parent Group” boosted the growth in membership size. At the same time, the company continued to innovate the member rights system and launch more than 300 member benefits, which supported the steady rise in ARPPU value;

2) On the operator side, revenue in the first half of the year was 0.75 billion yuan, compared to 1.389 billion yuan in the same period last year. The company actively implemented the TV industry governance work plan and comprehensively optimized TV screen services. The proportion of free programs recommended on the homepage remained at least 50%. Short-term revenue was affected to a certain extent, but in the long run, the company also has IPTV and OTT licenses, which is expected to benefit the high-quality development of the industry; 3) In terms of advertising, revenue in the first half of the year was 1.721 billion yuan, down 4% from 2023. There has been a contraction in the year, and the industry is slowly recovering. Relying on solid content advantages and platform traffic advantages, innovative marketing strategies and AI algorithms, the company is expected to continue to accelerate the recovery of the advertising business; 4) Golden Eagle Cartoon continued to lead the way in parent-child content ratings in the first half of the year, achieving a year-on-year increase of about 15% in total profit;

5) In terms of content e-commerce, the GMV of Xiaomang e-commerce reached 6.65 billion yuan in the first half of the year, an increase of nearly 50% over the previous year and a loss of nearly 40%. Through continuous expansion of the core circle, the proportion of male users increased to 30%, giving full play to its ecological advantages.

The content ecosystem is prosperous, and the product reserves are rich to promote the continuous development of the main business. In the first half of '24, the company insisted on maintaining integrity and innovation, stabilized content barriers, and launched 56 variety shows, an increase of 17 over the same period last year. The effective number of variety shows on the platform ranked first in the industry; 17 movies and TV dramas were launched in the first half of the year, and the broadcast pace remained stable. In the second half of the year, the company's reserve programs include “Crossing Thorns 4” (already broadcast), “Flowers and Teenagers 6”, “Endless Sound: Hong Kong Music Season”, “Flowers Bloom”, and “Dance Mania”, etc., and reserve movies and TV dramas such as “National Color Fanghua”, “People in the Alley”, and “Water Dragon Song”, etc., which are expected to continue to support the steady rise in membership and advertising revenue.

Maintain a “Highly Recommended” investment rating. The company further broadens the source of high-quality users through high-quality channel cooperation such as China Mobile and 88VIP, while strengthening member operation and retention by creating a “pre-broadcast + post-broadcast derivation” matrix for variety shows. The supply of high-quality content is expected to continue to drive an increase in the number of members and ARPU, the continued launch of ace variety IP and premium series is expected to support the acceleration of the recovery of the advertising business. Strong alliances with Migu Culture are expected to achieve mutual benefit and win-win results in multiple business sectors, and continue to be optimistic about the company's commercialization capabilities over the long term.

We expect the company's net profit to be 1.89/2.12/2.35 billion yuan in 2024-2026, corresponding to 18.7/16.7/15.1 times the price-earnings ratio, respectively.

Risk warning: Economic recovery falls short of expectations, membership growth falls short of expectations, industry competition intensifies, e-commerce and other projects fall short of expectations, etc.