Incidents:

On August 31, 2024, Wanda Film announced its 2024 mid-year report. 2024H1's revenue was 6.218 billion yuan (YOY -9.48%), net profit to mother 0.113 billion yuan (YOY -73.18%), after deducting non-return net profit of 0.086 billion yuan (YOY -79.17%).

Investment highlights:

The weak performance of the film market put pressure on 2024Q2 results.

(1) 2024H1 revenue of 6.218 billion yuan (YOY -9.48%), net profit of 0.113 billion yuan (YOY -73.18%), net profit of 0.086 billion yuan (YOY -79.17%) after deducting non-attributable net profit of 0.086 billion yuan (YOY -79.17%), and non-recurring profit and loss of 26.91 million yuan (YOY +256%), mainly government subsidies of 30.34 million yuan.

On a quarterly basis, 2024Q1/Q2 revenue was 3.821/2.397 billion yuan (YOY +1.7%/-22.97%), and net profit to mother 0.326/ -0.212 billion yuan (YOY +3.25%/-298.23%), mainly due to weak performance in the 2024Q2 movie market, and the cost was more rigid, which led to a significant decline in the company's cinema sector's performance. According to Cat Eye, 2024Q1/Q2 national box office (excluding service fee) was 14.933/6.696 billion yuan (YOY +3.13%/-28.14%), and the company's directly-managed cinemas had a box office of 2.218/1.074 billion yuan (YOY +1.09%/-29.39%).

(2) 2024H1 net profit margin 1.88% (YoY -4.34pct), gross profit margin 26.08% (YoY -2.18pct), and period expense ratio 20.97% (YoY +1.63pct), mainly due to sales/management expense ratio +0.94/+0.98pct yoy; financial expenses 0.359 billion yuan (YOY -15.1%).

By the end of 2024H1, long-term loans were 1.913 billion yuan, a decrease of 0.243 billion yuan from the end of 2023. The net operating cash flow of 2024H1 was 0.537 billion yuan (YOY -77.59%), mainly due to increased investment, payment of film investment and increased operating expenses.

Cinemas continue to optimize operations and vigorously develop sales business.

(1) Continuously optimize cinema operations. 2024H1 movie revenue was 3.639 billion yuan (YOY -9.96%), gross profit margin 2.46% (-2.56pct year over year). Domestic direct-managed cinemas/screens at the end of 2024H1 were 706 houses/6138 blocks (a decrease of 3 or 18 blocks compared to the end of 2023). According to Cat Eye, the 2024H0.01 million film market did not include service fees of 3.292 billion yuan (YOY -11.41%); the market share ratio was 15.22% (-0.40pct year on year), and the future target was 20%. The single-screen box office grossed 0.536 million yuan (YOY -11.3%). At the end of 2024H1, 61 Australian cinemas and 530 screens (an increase of 0 or 1 block over the end of 2023) achieved box office of 0.131 billion Australian dollars (about 0.63 billion yuan at the September 3 exchange rate), and YOY -6.8%.

(2) Strengthen sales business and develop IP derivatives. ① 2024H1 sales revenue is 0.813 billion yuan (YOY -17.25%), gross profit margin 60.96% (year-on-year -1.98pct), and revenue from single sub-sales is 10.3 yuan (2023H1 is 11 yuan). The company is actively building a self-developed product system to innovate and create the cinema sales scene “Flower World”. It is expected to open one after another in 2024H2.

In addition, it focuses on developing the derivatives business. TimeNet combines fashion trends to continuously enrich derivative categories, launch derivatives such as the “Milk Dragon” series, Bubble Mart Baby-Molly series, and Capybara, and continue to explore IP commercialization value. During the summer program, it collaborated with the movie “White Snake: Floating” to create more than 60 types of derivatives around the movie. ② 2024H1's annual advertising revenue is 0.588 billion yuan (YOY -3.64%).

The game business's revenue doubled year-on-year, and reserves for blockbuster movies to be released.

(1) Movies: 2024H1 revenue 0.158 billion yuan (YOY -21.83%), gross profit margin 46.53% (year-on-year +15.81 pct). The company is actively planning key dates. The 2024H1 Spring Festival program has released the participating projects “Article 20” and “Bears Are Coming: Reversing Time and Space”; the May 1/ Dragon Boat Festival showcased the main control film “Peace and Riot Force”/“I Don't Want to Be Friends with You”; during the summer program, it screened the main projects “Catching a Doll”, “White Snake: Floating”, and the participating project “Murder”. It is expected that “Mistaken Killing 3,” “A Cloud Is Like You,” and “Deceiving” to Like You, will be filmed and screened during the summer program.; “Tang Detective 1900,” “Change Your Mind Blossoms,” and “We Live in Nanjing” are in preparation.

(2) Episode: 2024H1 revenue 0.065 billion yuan (YOY -66.38%). 2024H1 has broadcast 4 episodes (2023H1 is 1). “Misplaced” and “Sifangguan” were broadcast in July/August, and production of “Love Has Fireworks” has already been completed; “The Prosecutor and the Teenager,” “Confessions of a Dark Night,” “Yellow Card,” and “Folding City” are being actively promoted.

(3) Gaming: 2024H1 has revenue of 0.331 billion yuan (YOY +100.19%), gross profit margin of 58.51% (year-on-year -3.15pct), mainly “Saint Seiya: Legend of Justice” performed very well after its launch in Japan in January, driving the company's game business performance to achieve significant year-on-year growth, and is expected to continue to contribute to the company's turnover in the future. At the same time, Mutual Love Interactive's other online products are operating steadily, and they are actively expanding and optimizing applet games and BT games, and the turnover increased significantly after the adjustment. The overseas distribution strategy will be maintained in the future. “Shadow Fight 3” will be launched in August, and “Tianyuan Breakthrough” and others are expected to be launched within this year.

Profit forecast and investment rating: We expect the company's revenue to be 14.192/16.494/17.866 billion yuan in 2024-2026, and net profit to mother of 0.604/1.363/1.607 billion yuan, respectively, and the corresponding PE is 35/16/13X. As a leader in the domestic cinema investment industry, the company's share of the box office market is steadily increasing, and the entire film industry chain is expected to be empowered after Ruyi takes a stake in the content side, strengthen the company's overall industry chain layout advantages, and have high upward flexibility in valuation. Based on this, the “buy” rating is maintained.

Risk warning: Risks such as box office recovery falling short of expectations, film development process falling short of expectations, box office performance falling short of expectations, cost control falling short of expectations, increased industry competition, brain loss, offline consumer demand falling short of expectations, asset impairment, and declining valuation center.