Key points of investment:

The company's film and television reserves are rich in content. 1) TV drama business: The company plans to launch 8 TV series in the second half of this year, including “Our River and Mountain” and “I Want to Hide You and Time,” which is expected to boost the TV drama production business; 2) In the film business, 24H1 completed investment in the three projects of “Speeding Life 2,” “I Don't Want to Be Friends with You,” and “Murder”; “Wild Times” and “Assassination of the Novelist 2” have already started filming in the second half of the year. On the 2024 Chinese Film Director's Night, “The Return of a Thousand Miles”, “Assassination of the Novelist”, and “If One Day I Will Leave You” won many awards. 3) The TV drama copyright business continued to grow at a high rate. 24H1 revenue increased 26.9% year over year to 0.18 billion yuan.

Develop short dramas and explore new animation businesses. 1) Quality skits focus on the three directions of IP linkage, cultural tourism integration, and brand cooperation:

The long drama IP joint project “My Way Back Home” appeared on the Douyin Hot List 9 times and appeared on the Douyin Entertainment List 12 times. The average broadcast volume exceeded 10 million, and the total number of albums was nearly 0.2 billion. It was selected as an excellent online audiovisual work by the State Administration of Radio and Television in the first quarter of 2024; the commercialized and customized short drama “The Man Who Saved Time” reached the top of the Douyin Short Drama Hot List; the mini program short drama “The Fat Wife from Nongmen” was on the short drama list. 2) The company set up a separate division for the animation business at the beginning of '24. Currently, it is developing three key projects (two animated film projects and one major animated film project). In the second half of the year, it plans to introduce and release an animated film and complete the production of an animated series.

Accelerate AI layout in multiple dimensions. 1) In May 2024, the “Windy” model developed by the company passed the National Generative Artificial Intelligence Service List and became the first A-share film and television company to pass the national “Generative Artificial Intelligence Service Filing” self-developed model. In terms of integrating AI and industry, the company has already produced output. Using literature and literature technology on the script side, it has produced tools such as editing assistants and evaluation assistants to improve the work efficiency of the script process; using multi-modal technology on the production side, it has introduced tools such as video analysis, multilingual translation, and Wensheng posters. 2) The company strengthens links to external resources through equity investment and strategic cooperation. The company invested in Beijing Zhipu Huazhang Technology Co., Ltd. and signed a strategic cooperation to jointly develop an intelligent film and television content generation device and a vertical model for film and television content review, and jointly build an AI research platform for the domestic film and television field.

Adjust profit forecasts to maintain a “buy” rating. 24H1 achieved revenue of 0.368 billion yuan, down 67.7% year on year; net profit to mother was 0.071 billion yuan, down 70.4% year on year. The sharp decline in revenue and performance in the first half of the year was mainly due to a significant decrease in the number of movies and TV series released. Considering the company's increased investment in film and TV drama content and exploring new business formats such as skits and animation, we adjusted the company's net profit forecast for 24-25 to 0.424/0.468 billion yuan (the original forecast was 0.607/0.726 billion yuan), and the net profit forecast for the company in '26 was 0.518 billion yuan; the current price is 23/21/19 times PE for 24-26, respectively. According to Wind's unanimous expectations, the 24-year average PE of the company Optical Media, Shanghai Film, and Bona Pictures is 32 times. Considering that the company's basic market for movies and TV shows is stable, and the second growth curve for short dramas and animation can be expected, copyright is expected to be revalued under the AIGC wave. We are optimistic about the company's medium- to long-term growth and competitiveness, and maintain a “buy” rating.

Risk warning: Risk of policy and regulatory changes; content investment results falling short of expectations; AI technology evolution and commercialization falling short of expected risks.