Performance grew steadily in the first three quarters of 2024. Due to the high base in Q3 last summer, revenue declined this year. The gross margin of new projects declined slightly, and profits were affected by marketing and R&D costs. New projects in Foshan and Xi'an have performed well, and the number of performing arts projects has increased. The company's net profit to the mother is expected to be 1.11/1.32 billion yuan in 2024/2025, and the corresponding PE valuation is 23x/20x.

Results grew steadily in the first three quarters of 2024, and Q3 profits were affected by marketing and R&D costs. In the first three quarters of 2024, Songcheng Entertainment achieved revenue of 2.013 billion yuan/ +24.46%, recovering 91% from the same period in 2019, with net profit attributable to mother of 1.008 billion yuan/ +28.04%, net profit of 0.994 billion yuan/ +28.05%.

In the third quarter of 2024, Songcheng's performing arts revenue was 0.836 billion yuan, or -4.69%, mainly due to the high summer base last year. The number of shows in old scenic spots such as Shanghai, Lijiang, Zhangjiajie, and Shanghai decreased year-on-year, but the number of shows in Xi'an increased significantly year-on-year, compounded by the long-standing experience of the newly opened Foshan; net profit of 0.457 billion yuan, -5.54% year on year; net profit not attributable to mother was 0.446 billion yuan, -7.10% year on year. The changes stemmed from an increase in sales expenses due to an increase in advertising investment in Q3, an increase in equity incentives and R&D costs, and a decrease in financial expenses due to increased interest income.

Gross margin declined slightly, and cost increases affected profit margins. In the third quarter of 2024, the overall gross margin of Songcheng Performing Arts was 75.64% /-2.14pct, mainly adding the Guangdong Foshan Ancient Scenic Area, which increased depreciation and amortization.

Song Cheng Entertainment's sales/management/ R&D/ finance expense ratio for the third quarter of 2024 was 5.39%/4.99%/1.26%/-0.85%, with year-on-year changes.

+0.62pct/+0.78pct/+0.64pct/-0.13pct. The increase in the management expense ratio is mainly due to an increase in equity incentive amortization expenses. In 24Q3, Songcheng Performing Arts's net profit margin was 54.72%, a year-on-year rate of -0.49ppt. The main reason was a sharp increase in investment income, which offset the increase in costs and expenses.

The number of performing arts projects has increased dramatically, and new projects have led to an increase in revenue. According to the company's official account, the number of shows for the 2024 Q3 performing arts program reached 3,415, an increase of 53 shows over the previous year, mainly due to the addition of the new Foshan Qianguqing Project and a significant increase in the number of shows after the upgrading and transformation of the Xi'an project. During National Day Golden Week 2024, Song Cheng Performing Arts's 13th National Scenic Area received more than 2.6 million visitors over 7 days, or 159.7% of the 2023 National Day Golden Week.

Investment suggestions: Old Songcheng projects in Hangzhou, Sanya, Lijiang, Jiuzhai, and Zhangjiajie were under slight pressure in the third quarter of this year. The Xi'an and Foshan projects showed excellent results. Among them, the Xi'an project had a sharp year-on-year increase, turning losses into profits. The first year of operation of the Foshan project exploded. Looking forward to the continuation. The company's self-operated Xitang and asset-light Three Gorges and Yan'an projects are expected to contribute to the increase. The company's net profit for 2024/2025 is estimated to be 1.11/1.32 billion yuan, and the corresponding PE valuation is 23x/20x.

Risk warning: the risk of declining macroeconomic consumption; the risk of market competition increasing the risk; the risk of new projects falling short of expectations; the risk of Huafang investment projects.