“Article 20” drove performance in the first half of the year, and revenue for the second quarter increased 37% year over year. 1) In the first half of 2024, the company achieved revenue of 1.33 billion yuan, a year-on-year increase of 120.4%, mainly driven by the New Year's Day and Spring Festival in the first quarter; net profit to mother was 0.47 billion yuan, an increase of 133.1% over the previous year. The gross margin increased 9.2 percentage points year over year to 44.4%, and the overall expense ratio decreased by 0.7 percentage points to 3.3%. 2) Looking at the second quarter alone, the company's revenue was 0.26 billion yuan, up 37.0% year on year; net profit to mother was 0.048 billion yuan, up 40.3% year on year. The gross margin fell 27.5 percentage points to 28.9% year on year, mainly due to the increased cost of more reserve projects in the current period; the overall cost ratio increased by 3.0 percentage points to 8.3%.

“Article 20” and others led to outstanding performance in the film and TV drama business in the first half of the year. Looking at the business segment in the first half of the year: 1) In terms of movies, the films that the company participated in the investment distribution and included in the reporting period include “Heavy Rain,” “Article 20,” “Clean Up, Never Give Up”. The films released in 2023 and some of them carried over to the reporting period included “Lighting Store,” “Rage,” and “Your Wedding” (replay), with a total box office gross of about 2.813 billion. 2) In terms of TV dramas, the online drama “Dali Temple Shaoqing Tour”, based on the popular comic “Dali Temple Diary”, went live on iQiyi on February 20; the costume light comedy “Flowing Jade Saddle” was broadcast on Tencent Video and Mango TV on July 31; “Mountain and River Pillow”, “Spring Dinner”, and “My Date List” continued to advance. 3) In terms of animation, “Heavy Rain”, which the company participated in and distributed, was screened on January 12.

In the third quarter, “Safe Evacuation from the 21st Century” and “Jade Saddle” were launched, and there are many reserve projects. 1) In terms of movies, the film “Safe Evacuation from the 21st Century”, which was invested and distributed by the company, was screened on August 2; many film projects such as “Jo Yeon's Heart” and “Holding the Winning Ticket” are in reserve. Furthermore, following “Article 20,” the company's “Article X” series on social and legal topics will continue, such as “Article 3” and “Article 17.” 2) In terms of TV dramas, “Yu Yu Saddle” was broadcast on Tencent Video and Mango TV on July 31; “Mountain and River Pillow” has now reached intense post-production stage; development of drama projects such as “Spring Dinner” and “My Date List” is also continuing. 3) In terms of animation, “Xiao Qian” has already been produced, and “Nezha 2” and “Tea Ah No. 2 Middle School 2” are currently being produced; the fantasy animated film “Go to Your Island”, which was produced in-house by the company as the first step, is being fully promoted. In addition, the company's internal animation production team's talent team is also being built smoothly, and team building is expected to be completed within the year.

Risk warning: Production or screening progress falls short of expectations; regulatory policy risks; box office falls short of expectations, etc.

Investment advice: Sufficient content reserves, pay attention to the launch time of new films such as “Nana”, and maintain a “superior to the market” rating. Considering the impact of factors such as the pace of new film launches, we lowered our profit forecast. We expect net profit to be 0.65/1.08/1.23 billion yuan (originally 1.11/1.25/1.37 billion yuan) for 2024-2026, respectively, 55.7%/65.7%/13.9%; diluted EPS = 0.22/0.37/0.42 yuan, corresponding to the current stock price PE = 36x/19x/17x. The company continues to consolidate its leading position in film and animation, and is rich in reserve projects. AIGC continues to enrich the company's commercial monetization capabilities and maintain a “superior to the market” rating.