Core views

As the film market fell short of expectations in the first half of the year, the company's performance declined. However, on the one hand, the company still showed a high level of participation in various stages, and the number of movies distributed and produced increased further year-on-year; on the other hand, the offline performance market increased year-on-year, offsetting the decline in the ticketing market for some movies. Looking ahead to the second half of the year, the company is rich in content reserves. The top 2 summer box-office movies are all sponsored by the company, while 3 National Day movies have been developed. The New Year's Eve program has also already been scheduled, and the company's market participation is still high. At the same time, we are also optimistic that the company's offline performance ticketing will continue to grow rapidly along with the market.

We expect the company to achieve net profit of 0.615/0.907/1.045 billion yuan in 2024-2026, -32.44%/47.40%/15.28% YoY. The PE corresponding to the closing price on August 28, 2024 is 10.76/7.30/6.33x.

occurrences

According to the 2024 semi-annual report, during the reporting period, the company achieved revenue of 2.171 billion yuan, a year-on-year decrease of 1.18%; net profit of 0.285 billion yuan, a year-on-year decrease of 29.96%; and adjusted net profit of 0.352 billion yuan, a year-on-year decrease of 22.80%.

Brief review

1. The ticketing business benefits from a high increase in offline performances, and the content business is affected by the decline in the total box office of participating movies

Revenue from the ticketing business increased slightly, and movies declined year over year, but there was a high increase in tickets for offline shows. In the first half of 2024, online entertainment ticketing revenue was 1.046 billion yuan, up 2.98% year over year. Looking at it separately, there are different trends in movie ticketing and offline show ticketing:

1) The film industry's performance in the first half of the year fell short of expectations. Looking at industry data, movie box office in the first half of 2024 was 23.903 billion yuan, down 9.02% year on year; movie viewers were 0.55 billion yuan, down 8.94% year on year, and overall performance fell short of expectations. We believe that the film market was mainly affected by supply shortages in the first half of the year, and the phenomenon of discontinuation after May 1st was particularly obvious. After the May Day holiday until the end of June, the highest-grossing film was “A Small Shop by the Clouds”, which only grossed 0.498 billion yuan; the remaining movies basically grossed less than 0.2 billion yuan.

2) However, there was a year-on-year increase in the offline performance market. According to the China Performance Industry Association, the national offline performance box office was 19.016 billion yuan, an increase of 13.24% over the previous year.

The company's revenue growth rate declined only slightly, lower than the decline in the film industry. The company's layout in other offline entertainment scenes is reflected on the revenue side.

And it is expected that the company's offline performance ticketing will also increase rapidly. According to the semi-annual report, the company provided more than 3,000 concerts in the first half of the year, including leading artists such as Zhang Xueyou, Andy Lau, and Jay Chou. GMV also increased by about 3 times.

The content business was affected by a decline in the total box office of participating movies, but the number of companies participating in films continued to grow. In the first half of 2024, entertainment content services achieved revenue of 1.024 billion yuan, a year-on-year decrease of 6.91%. According to the semi-annual report, the company distributed/produced a total of 32 movies in the first half of the year, an increase of 8 over the previous year. Among the top five grossing movies in the first half of the year, the company participated in 4 of them, namely “Flying Fast and Furious 2” and “Catching the Doll”, “Hot and Hot”, which participated in the competition, and “Bears Are Incurring: Reversing Time and Space”.

Looking ahead to the second half of the year, I am optimistic that offline performances will continue to increase, and the summer will continue to verify the company's high market participation:

1) Looking at the ticketing business, although the summer movie program fell short of expectations, offline performances still performed well. According to the Lighthouse App, the box office for national music shows reached 2.091 billion yuan in July, an increase of 60.97% over the previous year, and the number of movie viewers was 3.301 million, an increase of 49.91% over the previous year; as of August 27, the two indicators also more than doubled. According to the company's official account, the summer company represented concerts of singers including Lin Junjie, Zhang Xueyou, Chen Yixun, Twins, and Lee Wing-ho, and is optimistic that tickets for offline shows will continue to rise.

2) Looking at the content business, participation in the company's core schedule is still high. Currently, the top two grossing summer movies are all sponsored and sponsored by the company. They are “Catching the Doll” and “Murder.” In addition, they have also participated in films such as “Decryption,” “Rebirth,” and “White Snake: Floating”. Of the 6 programs already scheduled for National Day, the company sponsored and participated in 3, namely “Crisis Route,” “Safe Access,” and “P Plan.” On New Year's Eve, “Deceiving Liking You” has already been scheduled. The strategy of distributing multiple movies during the core schedule and joint marketing continues to advance, giving full play to the company's promotion advantages, and continuing to monitor the progress of the company's flagship movies on New Year's Eve.

2. Financial situation

1) Gross margin benefited from a reduction in content production and distribution costs, achieving a year-on-year increase. In the first half of 2024, the company achieved gross profit of 1.16 billion yuan, a year-on-year increase of 5.0% and a gross profit margin of 53.3%, an increase of 3.1 pct over the same period last year. The cost reduction was mainly due to a reduction in content promotion and content production costs, which decreased by 17.2% and 47.6%, respectively.

2) Management expenses are stable, and the increase in sales expenses is mainly due to an increase in ticket compensation. In the first half of 2024, the company's sales and marketing expenses were 0.51 billion yuan, up 39.9% year on year, mainly driven by ticket supplements. Marketing and promotion expenses related to ticket supplements increased by 44.28% year on year; general and administrative expenses were 0.18 billion yuan, a decrease of 1.7% year on year, which was basically stable.

Investment advice:

As the film market fell short of expectations in the first half of the year, the company's performance declined. However, on the one hand, the company still showed a high level of participation in various stages, and the number of movies distributed and produced increased further year-on-year; on the other hand, the offline performance market increased year-on-year, offsetting the decline in the ticketing market for some movies. Looking ahead to the second half of the year, the company is rich in content reserves. The top 2 summer box-office movies are all sponsored by the company, while 3 National Day movies have been developed. The New Year's Eve program has also already been scheduled, and the company's market participation is still high. At the same time, we are also optimistic that the company's offline performance ticketing will continue to grow rapidly along with the market.

We expect the company to achieve net profit of 0.615/0.907/1.045 billion yuan in 2024-2026, -32.44%/47.40%/15.28% year-on-year, and the PE corresponding to the closing price of August 28, 2024 is 10.76/7.30/6.33x.

Risk analysis

The risk of a film falling short of expectations at the box office, the risk of a film not being released as scheduled, the risk of not being screened as scheduled due to insufficient filming progress, the risk of content regulation, the risk of increasing the difficulty of supervision, the risk of increased competition from channels such as Douyin and other theater-owned platforms, the risk of developing generative AI technology falling short of expectations, risk of technological monopoly risk, risk of inadequate laws and regulations related to generative AI, risk of falling short of expectations, copyright ownership risk, risk of deep fraud, risks affecting the health and safety of Internet content ecosystems, enterprises The risk of insufficient risk identification and management capabilities, and the risk of changes in the user's aesthetic orientation.