Incident: Songcheng Entertainment released its 2024 three-quarter report. The first three quarters of 2024 achieved total revenue of 2.013 billion yuan, an increase of 24.46% over the previous year, and realized a net profit of 1.008 billion yuan to mother, an increase of 28.04% over the previous year.

Comment:

Results for the third quarter of 2024 declined slightly under a high base, and overall in line with expectations. Song Cheng Entertainment achieved total revenue of 0.836 billion yuan in the third quarter of 2024, down 4.69% year on year; the company's net profit to mother was 0.457 billion yuan, down 5.54% year on year; net profit after deducting non-return to mother was 0.446 billion yuan, down 7.10% year on year.

The company's performance declined slightly year-on-year in the third quarter. Considering the concentrated rebound in travel in 2023, which formed a high base and the market environment where the overall domestic travel volume increased and decreased in 2024, the decline in performance was reasonable, and the company's results for the first three quarters were in line with our previous performance forecasts.

The unit price of mature projects may drop, and nurturing projects are growing strongly. The steady growth in the company's performance in the first three quarters of 2024 may be related to the outstanding performance of new projects such as Foshan. Looking at each project, mature projects such as Hangzhou, Lijiang, and Guilin were affected by last year's high base, extreme weather, and weak market environment, and the revenue scale remained flat or declined slightly compared to the same period last year. Projects during the incubation period performed brilliantly. The two theaters of the summer Xi'an project staged a total of 586 shows in parallel; the Foshan project was profitable and continued to be popular; the asset-light Three Gorges project performed 170 shows a month after opening, receiving nearly 1 million visitors.

The National Day Golden Week is in full swing. During National Day Golden Week, Song Cheng Performing Arts's 13th National Scenic Area was in full swing, receiving more than 2.6 million visitors over 7 days, which is 159.7% of the 2023 National Day Golden Week; 481 shows of the 13th National Day “Love Through the Ages” were performed; during peak periods, “Love Through the Ages” performed at a maximum of 95 shows in a single day. The retail rate of Songcheng, Hangzhou reached 72%; “Love Through the Ages” performed 69 shows during the National Day; “A Thousand Years of Love in Xi'an” began a parallel mode of two theaters during the summer, with 17 shows in a single day for multiple days, with a total of 86 shows during Golden Week; and “Guangdong Through the Ages” performed 47 shows during Golden Week, with a retail rate of 87%.

Flower houses have little impact on profits. HUAFANG GROUP has submitted materials relating to the resumption of trading and is still awaiting feedback from the Stock Exchange. The company uses the income method to determine the fair value of the long-term equity investment of HUAFANG GROUP.

As of June 30, 2024, the book value of HUAFANG GROUP's long-term equity investment held by the company was 0.777 billion yuan; HUAFANG GROUP's net assets were 2.087 billion yuan, and the net equity assets held by the company were 0.738 billion yuan based on the shareholding ratio. The book value of HUAFANG GROUP's long-term equity investment held by the company is close to the net equity level. Regardless of whether HUAFANG GROUP resumes trading, the impact on the company is expected to be small.

Maintain an investment rating of “increase in holdings” of the company. The company's performance grew steadily in the first three quarters of 2024. Despite a slight decline in the third quarter due to factors such as high year-on-year base, extreme weather, and weak market conditions, the overall performance was in line with our previous performance forecasts. During the National Day, Qianjiao Qin was in full swing, and new projects such as Foshan and the asset-light Three Gorges have performed brilliantly since their opening. The book value of Huafang's long-term equity investment is close to the net equity level. The impact on the company is expected to be small, and the fourth quarter results are still worth looking forward to. The urban performing arts model has great potential for continued expansion. We are optimistic that the growth in consumer demand for surrounding travel and spiritual experiences will drive long-term growth in the company's performance. The company's earnings per share for 2024/2025 are estimated to be 0.43/0.54 yuan, respectively, and the current share price is 22.69/18.06 times PE, respectively, maintaining the company's “increased holdings” investment rating.

Risk warning: The recovery of passenger flow in the park fell short of expectations, natural disasters affected passenger flow, changes in consumer preferences, and the performance of new projects climbed lower than expected.