Core views

The company's second-quarter results were mainly affected by the film business, while the brokerage business increased rapidly, and TV series were released steadily. Looking forward to the future, the company has abundant reserves. The semi-annual report shows that there are 18 movies to be screened and produced, which are expected to be released one after another within a year and a half. In terms of animated films, the report shows that “Nezha: The Demon Boy in the Sea” is still in production, and a new project is the Guochuang animation “Inhuman”, which was serialized on station B. In terms of live-action movies, “Holding the Winning Ticket” and “Jo-yeon's Heart” are expected to be released in the short term; in addition, live-action movies are also currently trending as a series, and a number of legal reality movies are being planned, such as “Section 17.”

We expect the company to achieve net profit of 0.601/1.005 billion yuan in 2024-2025, a year-on-year increase of 43.94%/67.04%. The closing price on September 2, 2024 corresponds to PE.

Brief review

1. TV series and brokerage business are growing rapidly, and Ali Venture Capital continues to increase its holdings 1) Film business: Achieved revenue of 0.974 billion yuan in the first half of 2024, an increase of 84.34% over the previous year. It is expected to be mainly contributed by “Article 20” released during the Spring Festival. After watching the second quarter alone, 2 movies were screened this year. “Herbal People” and “Fight Black: Never Give Up”, the main cast grossed 0.313 billion yuan. In the same period last year, there was 1 low cost romance film “So Many Years”, which grossed 0.301 billion yuan at the box office. Therefore, considering the investment ratio, the two movies in the second quarter of this year are expected to contribute higher revenue and also drive the company's overall revenue to achieve a year-on-year increase. However, since the combined investment costs of “Grass People” and “Fight Against Black” were also higher than “So Many Years,” gross profit and net profit declined year on year in the second quarter.

Judging from financial reports, “Article 20” was repaid in the second quarter. The company's net operating cash flow for the second quarter was 0.667 billion yuan, which is a month-on-month correction compared to the first quarter. It is expected to be mainly due to “Article 20” repayments. Meanwhile, accounts receivable fell back from 1.098 billion yuan at the end of the first quarter to 0.369 billion yuan at the end of the second quarter.

2) TV drama business: TV series have been released again in the past two years. In the first half of 2024, the company's TV drama business achieved revenue of 0.234 billion yuan, mainly contributed by “Dali Temple Shaoqing Tour” and “Yu Saddle”. This is another time in the past two years that the company has released TV drama reserves. Furthermore, the reserve “Mountain River Pillow” is in post-production, and “Spring Dinner” and “My Date List” are being developed.

3) Brokerage business: System construction progressed steadily, and revenue increased year-on-year. In the first half of 2024, the company's brokerage and other businesses achieved revenue of 0.126 billion yuan, an increase of 64.16% over the previous year. The “321 Plan”, which internally trains 30 producers, 20 screenwriters, and 10 directors, is progressing smoothly.

Ali Venture Capital increased its shares in the company. According to an announcement issued by the company on May 15, 2024, Ali Venture Capital increased its shares to 5%. According to the semi-annual report, Ali Venture Capital's shareholding ratio further increased to 5.39%. Prior to that, Ali Venture Capital reduced its holdings for many years after obtaining shares through a fixed increase in 2015, and reduced its holdings to less than 5% in April 2023.

The company has extensive reserves of animated films and live-action film projects. According to the semi-annual report, the company's reserves of 3 films to be screened and 15 in production, for a total of 18 films, are estimated to be the project reserves for the next year and a half. By animation and live-action movies, the details are as follows:

1) Animated film: The construction of the light animation production team is expected to be completed within the year. According to the semi-annual report, core personnel for all aspects of light animation are already in place, team building is expected to be completed within the year, and the reserve project will enter a rolling development mode. Light Animation is currently promoting the first fully in-house film “Go to Your Island”, and the brand's first animated film “Xiao Qian” will be screened at an opportune time. In addition, “The Demon Boy in the Sea” is in production; the semi-annual report added the national comic animation “Inhuman”, which was serialized on station B. In addition to the above, the semi-annual report shows that animated films in production include “Big Fish Begonia 2,” “Shuo Feng,” “Acacia,” and “Starry Sky in the Three Kingdoms.”

2) Live action movies: Promoting the “Article X” series on social and legal topics. Due to the outstanding box-office performance of “Article 20” during this year's Spring Festival, the company will also continue to promote the “Section X” series on social and legal topics, and reserve “Section 3,” which shows that there are no principles of criminal punishment or suspicion, and “Article 17,” which focuses on juvenile delinquency; and the first film “People's Justice” by Li Lu, director of the TV drama “The Name of the People”, is also being developed and created. Looking at movies to be screened, reserve projects include “Holding the Ticket” starring Deng Chao and Deng Jiajia, “Joey's Heart” starring Zhao Liying and Xin Zhilei, and “Little People”.

2. Financial analysis

1) The decline in gross margin in the second quarter was mainly affected by the film business. In the second quarter of 2024, the company's gross margin was 28.87%, down 27.54 pcts year on year. It is expected to be mainly affected by the film business, due to the fact that the total cost of “Clean Up the Grass” and “Never Give Up” is higher year on year.

2) The absolute cost base for the period is small and stable from month to month. Expenses for the second quarter of 2024 were $0.021 billion, compared to $0.01 billion for the same period last year. Among them, management expenses increased from 0.017 billion yuan to 0.024 billion yuan year over year; financial expenses narrowed from -0.012 billion yuan to -0.008 billion yuan year over year due to a decrease in interest income. However, on a month-on-month basis, the total cost for the period was 0.022 billion yuan in the first quarter of 2024.

Investment advice:

The company's second-quarter results were mainly affected by the film business, while the brokerage business increased rapidly, and TV series were released steadily. The two movies in the second quarter increased slightly compared to the box office, and their revenue contribution increased, but the cost was also higher than last year's low-cost romance films, which led to a decline in profits. However, the company's second-quarter results also proved that the company was able to maintain good profitability even when the movie box office was poor.

Looking at the third quarter, the company is experienced in choosing film schedules and promotion strategies. “Safe Evacuation from the 21st Century” was a hit during the intense summer season. It was screened ahead of schedule in small-scale cinemas and reaped certain results through word-of-mouth effects. As a film production company that has maintained vitality and influence in the industry for a long time, we have always been optimistic about the company's ability to operate projects, and are expected to usher in performance and stock price flexibility along with the implementation of the company's medium- to long-term strategic goals. Continue to monitor the progress of production and scheduling of films such as “The Demon Boy in the Sea” and “Article 17.”

We expect the company to achieve net profit of 0.601/1.005 billion yuan in 2024-2025, a year-on-year increase of 43.94%/67.04%. The PE corresponding to the closing price on September 2, 2024 is 32.88/19.68x.

Risk analysis

The risk of the national film market falling short of expectations, the risk that animated film production progress falls short of expectations and the risk of not being screened as scheduled; risk of not being screened as scheduled due to falling short of expectations; risk of rising advertising costs; risk of generative AI implementation in the film and television industry falling short of expectations; risk of content production facing generative AI competition; risk of screenplay killing and other offline entertainment competition; risk of film not being screened as scheduled due to moral and legal issues of participating artists; ability to identify and manage corporate risks Risk of insufficiency and risk of changes in the user's aesthetic orientation.