1H24 net profit slightly lower than our expectations

The company announced 1H24 results: 1H24's revenue was 1.334 billion yuan, up 120.4% year on year; net profit to mother was 0.473 billion yuan, up 133.1% year on year; net profit after deducting non-return to mother was 0.461 billion yuan, up 143.9% year on year. 2Q24 revenue was 0.264 billion yuan, up 37.0% year on year; net profit to mother was 48.2 million yuan, down 40.3% year on year; net profit after deducting non-return to mother was 45.08 million yuan, down 36.4% year on year. The company's 2Q24 performance was slightly lower than our expectations, mainly due to higher income tax expenses than expected.

Development trends

The number of films screened on 2Q24 was low and the box office performance was lackluster, and new businesses such as artist brokerage continued to expand. Movies and TV series: The company screened the films “Grass and Trees” and “Fight Black: Never Give Up” on 2Q24. We judge that 1H24 movie revenue was mainly contributed by “Section 20” of Q1, while Q2's contribution was relatively limited. The 2Q24 company drama “The Saddle of the Moon” aired on July 31. Artist agents and others: 1H24, corporate brokerage and other business revenue of 0.13 billion yuan, an increase of 64.2% over the same period. 1H24, the company's artist brokerage and content-related business are progressing steadily, contributing to a certain amount of revenue. According to the announcement, the company formulated the “321 Plan”: training 30 producers, 20 screenwriters, and 10 directors internally, while also continuously searching for and signing external directors and screenwriters. Currently, the plan is in progress. We believe that the diverse types of companies and relatively sufficient supply guarantee business stability and operational efficiency, and that business segments also promote each other and develop collaboratively.

The 3Q24 company has now screened 1 film, and operating expenses are relatively low. On 3Q24, the company's film “Safe Evacuation from the 21st Century” was screened on August 2. According to Cat's Eye Pro, as of August 28, it had a cumulative box office of 0.111 billion yuan including service fees, and the performance was average. 1H24, the company's operating expenses were 61.95 million yuan, and the overall cost investment remained relatively controlled. We believe that the company's overall operating efficiency is relatively high, but the profit level in a single quarter still fluctuates due to the pace of film project releases.

Key animated films are to be screened, and we will continue to pay attention to the long-term construction of the animation system. Looking ahead to 2024 and beyond, according to the announcement, the company's reserve film projects include projects such as “Jo-yeon's Heart”, “The Winning Ticket”, “The “Little” Figure, “Her Little Pear Vortex”, “Invisible Man”, “Mordogga”, and “44 Bitter Persimmons.” According to the announcement, animated film projects such as “The Demon Boy in the Three Kingdoms”, “Starry Sky in the Three Kingdoms”, “Acacia Si”, “Shuo Feng”, “Inhuman”, “Zhuolu”, “Journey to the West: Daisheng Hao Tiangong”, “Jiang Ziya 2,” “Tea Ah 2 Middle School 2,” and “Yesterday's Blue Sky 2” are all progressing at their own pace. We recommend focusing on the screening performance of key animated films and the profit flexibility they bring; in the medium to long term, focus on the construction of animation systems and the empowerment and efficiency of new technologies such as AI.

Profit forecasting and valuation

Net profit forecast for 24/25 was lowered by 48.5%/17.9% to 0.62/1.042 billion yuan due to adjustments in the film project release pace. The current price corresponds to 32.8/19.5 times P/E for 24/25. Maintaining an outperforming industry rating, due to profit forecast adjustments and the pace of subsequent film reserve projects, we switched to 25 times the corresponding 25-year P/E and lowered the target price by 37.5% to 9 yuan, with 30% room for an increase of 30% from the current price.

risks

The film's box office fell short of expectations, competition intensified, efficiency improvements fell short of expectations, and investment returns fell short of expectations.