1H24 results are in line with our expectations

The company announced 1H24 results: 1H24's revenue was 6.218 billion yuan, down 9.5%; net profit to mother was 0.113 billion yuan, down 73.2%, falling within the 1-0.13 billion yuan range of the performance forecast; net profit after deducting non-attributable net profit of 86.48 million yuan, down 79.2%, falling into the estimated performance range of 71 million yuan to 0.101 billion yuan. 2Q24's revenue was 2.397 billion yuan, down 23.0%; net loss to mother was 0.212 billion yuan, which was changed from profit to loss; net loss not attributable to mother was 0.194 billion yuan, which changed from profit to loss. The performance was basically in line with the market and our expectations.

Development trends

The performance of the cinema line business is affected by the general market and faces certain challenges, but the position in the industry remains leading. 1H24's domestic direct-managed cinemas achieved box office of 3.13 billion yuan (excluding service fees), a decrease of 14.5%; the company's domestic direct-managed cinema market share was 14.6%, which is still at the top of the industry. Due to the lackluster national box office performance of the summer program, we expect that the company's 3Q24 cinema business may decline significantly year-on-year, and profits may fluctuate in the single quarter.

1H24, due to insufficient supply of high-quality content in overseas markets, the company's Australian cinema line achieved box office of 0.131 billion Australian dollars, a decrease of 6.8%. However, with the release of summer films such as “Mind Force 2” and “Deadpool and Wolverine” and outstanding box office performance, Australian cinema operations continued to resume. We believe that although the industry's performance is relatively lackluster, the company's operating advantages and brand effects are still strong, and its leading position in the market remains stable.

The film and television business continues to expand, and the year-on-year growth rate of the game business is obvious. All of 1H24's investments in films were profitable. The films “Peace and Riot Force” and “I Don't Want to Be Friends with You” produced by the company became box office winners in the May 1st and Dragon Boat Festival categories respectively; “Catch the Doll” and “White Snake: Floating” have already been screened in the summer program. According to the announcement, the company expects the key game product “Saint Seiya: Legend of Justice” to continue to contribute revenue to the company; the company expects games such as “Shadow Fight 3” and “Tianyuan Breakthrough” to be launched in the second half of the year. We believe that the company's film, television and game business is diversified, and it is recommended to pay attention to the progress of subsequent projects.

The market is concerned about the marginal improvement in the film market, and is optimistic about the implementation in collaboration with Confucianism in the medium to long term. Looking ahead, according to the announcement, “Mistaken Killing 3,” “Having a Cloud Like You,” and “Tricking to Like You” has been filmed, and the company expects to release them within 2024; reserve projects such as “Tang Detective 1900,” “Remembering Flowers Bloom,” and “We Live in Nanjing” are progressing according to plan. We believe that considering that the company's cinema business is highly correlated with the movie market and experienced a relatively low summer box office performance, investors are now paying more attention to opportunities for marginal improvements in the industry, such as the performance of subsequent Mid-Autumn Festival, National Day, and Lunar New Year movies, as well as supply-side restoration expectations for next year's content. We believe that the company is still in a leading position in the industry, and the new management has rich experience in the layout of the entire content industry chain, such as content production. In the medium to long term, or on the basis of Wanda's original dominant theater operations, they will strengthen the film and television content production and derivatives business, expand the value of the entire content industry chain, and open up room for long-term development.

Profit forecasting and valuation

Due to the reduction in the overall film market, we lowered our net profit forecast for 24/25 by 66%/23.6% to 0.443/1.205 billion yuan. The current price corresponds to 17.8 times P/E for 25 years. Maintaining an outperforming industry rating, lowering the comprehensive profit forecast, and improving room for next year's industry, we switched to a 25-year 20-fold P/E valuation, and lowered the target price by 47.6% to 11 yuan, with 12% room for growth compared to the current price.

risks

The box-office performance fell short of expectations. The pace of release of key content and the box office were uncertain, and competition intensified.