China Film released its three-quarter report: Q3 revenue 0.893 billion yuan (yoy -33.99%), net profit to mother of 11.3059 million yuan (yoy -89.78%). The performance fell short of our expectations (0.066-0.077 billion yuan). Q1-Q3 revenue was 3.016 billion yuan (yoy -28.38%), net profit due to mother 0.216 billion yuan (yoy -54.22%), after deducting non-net profit of 0.142 billion yuan (yoy -64.81%). The company plans to distribute a cash dividend of 0.35 yuan for every 10 shares. The decline in performance was mainly due to the weakness of the film industry. “Volunteer Army 2” produced by the National Day Company in '24 was a good box-office and will contribute to the performance. We think the industry is expected to improve in 25 years as the supply of content is expected to recover. Furthermore, the company's “Legend of the Condor Heroes” has received market attention and is expected to be screened in 25 years. Maintain a “buy” rating.

Q1-Q3 performance declined due to weak industry

In 24Q3, revenue fell 34%, and net profit to mother decreased by about 90%. 24Q1-Q3's revenue fell by about 28%, and net profit to mother fell by about 54%. Mainly due to the overall weakness of the film industry since Q2 '24, the company is the leader in the entire film industry chain, and its business has been affected. Q1-Q3's comprehensive gross profit margin was 23.08%, down 3.3 pct, mainly due to declining revenue and partly cost rigidity. Sales/management/R&D/finance expenses were 3.77%/11.67%/0.81%/-1.75%, respectively, compared to +0.82/+3.53/+0.2/-0.7pct. Due to the decline in revenue, sales/management/R&D expense ratios all increased.

“Volunteer Army 2” has a bright box office and is expected to contribute to performance, and has prepared blockbuster movies such as “The Legend of the Diaoh Heroes” for the 24th National Day. “Volunteer Army 2” produced by the company owner had outstanding box office results and won the National Day box office title. According to Cat's Eye Pro, the film's total box office is predicted to reach 1.287 billion yuan, which is expected to contribute to Q4's performance. In addition, the main investment and control film “The Legend of Condor Heroes: The Master Knight” is highly anticipated by the market. The film is directed by Xu Ke and stars Xiao Zhan, Zhuang Dafei, etc., and we expect it to be screened in '25.

Maintain leading market positions in each business line

According to the three-quarter report, in terms of distribution business, the Q1-Q3 company dominated or participated in the distribution of domestic films with a cumulative box office of 22.183 billion yuan, accounting for 91.37% of the total box office of domestic films during the same period; the cumulative box office for imported films was 5.526 billion yuan, accounting for 78.01% of the total box office of imported films during the same period; in the screening business, by the end of Q3, the company controlled a total of 23,875 screens and 2.97 million seats, with a screen market share of 29.85%.

Optimistic about the recovery of the film industry, content reserves are expected to provide support. To maintain the “purchase” rating combined with the actual performance of Q1-Q3, we adjusted the 24-26 net profit forecast to 3.1/8.51/9.5 (previous value 5.65/10/10.36) billion yuan. Considering that the industry's 24-year pressure was mainly due to the short-term shortage of high-quality content supply, we expect a gradual recovery after 25 years. Comparable company Wind agrees that the PE average value is 20X. The company is the leader in the layout of the entire film industry chain, leading the market position, and “Legend of the Divine Hero:

“Knight Rider” has received more attention from the market and is expected to support performance. The 25-year valuation PE is 29X, which corresponds to a target price of 13.34 yuan (previous value of 10.8) yuan.

Risk warning: Movie box office falls short of expectations, content regulation risks, and the supply of imported films falls short of expectations.