Songcheng Entertainment released 3Q24 results: 3Q revenue of 0.836 billion yuan, -4.69%, +35.33% month-on-month; net profit to mother 0.457 billion yuan, -5.54% YoY, +53.16% month-on-month. In the first three quarters, the company achieved revenue of 2.013 billion, +24.46% year over year; net profit to mother was 1.008 billion yuan, +28.04% year over year. The company's main business operations were steady, with 3Q revenue and net profit falling year on year. Mainly due to the relatively high summer vacation base last year, the number of love events in Hangzhou and Shanghai declined year on year. The number of projects in 3Q's stock projects was stable, but new projects such as Guangdong and the Three Gorges performed well during the climbing period, and operations continued to expand. Since entering the 4Q, the number of places in stock in key scenic spots has shown signs of stabilizing year over year, or driving revenue and profit into a month-on-month improvement channel.

Looking ahead, the company's ability to replicate nationally and offsite is scarce. The equity incentive target unleashes core team momentum, and will still benefit from continuous iteration in supply and growing domestic demand for cultural tourism. Maintain a “buy” rating.

The year-on-year performance of existing projects was divided, and the climbing performance of new projects was impressive

According to the official website, the total number of games in 3Q24 was about 3,911/ yoy +20%. After excluding new projects, the total number of plays/heavy assets was yoy +15.1/ -9.4%, and the new project contributed a lot of incremental games. By project, the 3Q24 Hangzhou/Shanghai project performed 445/231 shows during the season, yoy-20/ -15%; the two venues accounted for a high share of assets (14.0/ 7.3% in 3Q24) and the average ticket price was high. The year-on-year decline in the number of shows had a certain impact on the company's performance. The year-on-year performance of the Sanya/Lijiang/Guilin project was stable. The number of games in the season was yoy-4/-9/ -1%, which may be affected by local competition/weather. New summer projects contributed a lot. The total number of summer games (7.1-8.31) was +13%, excluding new projects launched during the year, yoy +4%; the 3Q Foshan/Three Gorges Light Asset Project (opened at the end of July) totaled 341/268 games each, with plenty of climbing potential.

4Q is expected to see a steady recovery in stock market performance. It is expected that 3Q24 will improve the 3Q24 company's net interest rate of 54.7% /yoy-0.49pct, 2Q +6.4pct; the company's gross margin/sales rate/management rate will reach 75.6/5.0%, yoy-2.1pct/+0.6pct/+0.8pct, respectively. The rate increase is mainly due to the increase in advertising investment during the period and the year-on-year increase in amortization expenses accruing equity incentives. Looking ahead to 4Q, according to the official website statistics, the YOY +20% year-on-year increase in the number of games in Hangzhou from 10.1-10.21 has steadily rebounded; the YOY -14% drop in Shanghai has narrowed month-on-month, and active drainage through special tickets. Benefiting from the rationality of the year-on-year basis and promotional drainage measures, we expect the 4Q game performance to pick up year over year. In the long run, the company will still benefit from a strong recovery trend in the cultural tourism industry. It is actively promoting the iteration of performing arts content to enhance the competitiveness of performing arts operations, and is optimistic about the increase in revenue and profit brought about by new projects and the steady recovery of existing projects.

Target price RMB 13.00; maintaining “Buy” rating

Considering that the year-on-year growth rate of annual memory capacity projects was slightly slower than previously anticipated, we lowered the company's 24-26 EPS to 0.44/0.52/0.58 yuan (previous value: 0.47/0.56/0.64 yuan). Referring to the 25-year Wind, the average PE value is 18 times, benefiting from the scenic area+performing arts model, which is highly replicable, and new projects catalyze growth and give premiums; considering that the growth of existing projects has yet to be verified, the premium rate is reduced, 25 times PE in 25 years, and the target price is 13.00 yuan to maintain “purchase.”

Risk warning: Travel recovery falls short of expectations; market competition intensifies; new business development falls short of expectations.