3Q24 results fell short of our expectations

The company announced 3Q24 results: revenue of 0.108 billion yuan, a year-on-year decrease of 67.8%; net loss to mother of 11.89 million yuan, from profit to loss; net loss from non-return to mother of 27.81 million yuan, year-on-year change from profit to loss.

The performance fell short of our expectations, mainly due to higher costs and investment losses than expected.

Development trends

The 3Q24 content supply was relatively lackluster, and the series “Falling Jade Saddle” was broadcast. On 3Q24, the company screened the film “Safe Evacuation from the 21st Century”. According to the Cat's Eye Pro Edition, as of October 29, the total box office was 0.112 billion yuan including service fees. In terms of dramas, “Falling Saddle” was broadcast on Tencent Video and Mango TV on July 31. Looking ahead to 4Q24, the film “Jo Yeon's Heart”, which was invested and distributed by the company, was screened on October 26; the company's investment film “Holding the Winning Ticket” is scheduled to be screened on November 15. We believe that 3Q24 has fewer online film and television projects, and that its performance is relatively lackluster, and revenue fluctuates from quarter to quarter.

Gross margin declined year-on-year, excluding investment losses affecting main business profits. We believe that considering 3Q24, the company released fewer films, the cost was higher than expected, the gross margin was 25.1%, a year-on-year decrease of 12.3ppt. In terms of operating expenses, the company's 3Q24 sales expense ratio was 0.6%, which was basically the same as the previous year; the management expense ratio was 22.1%, and the absolute value of management expenses decreased slightly from month to month. In addition, 3Q24 achieved an investment loss of 24.44 million yuan. According to the company announcement, some of the funds invested by 3Q24 were affected by market fluctuations, and their performance was weak, which had a certain adverse impact on the company's performance. If the negative impact on investment income was not taken into account, the company's main business in the third quarter was profitable.

There are plenty of film reserves in 2025, focusing on the profit flexibility brought by the key animated film “The Demon Boy in the Sea”. Animated films: According to the announcement, the company said that the animated film “Xiao Qian” is at the stage of choosing an opportunity to be screened; the creation of animated film projects such as “The Demon Boy in the Three Kingdoms”, “Starry Sky in the Three Kingdoms”, “Big Fish Begonia 2”, “Big Fish Begonia 2”, “Inhuman”, “Zhuolu”, “Journey to the West: Daisheng Haunted Tiangong”, “Jiang Ziya 2”, “Yesterday's Blue Sky 2”, etc., is progressing steadily. We believe that along with the launch of more key projects in 2025, it may contribute more revenue and profit flexibility to the company. Live action movies: The company is preparing projects such as “Little” People, “Her Little Pear Vortex,” “Invisible Man,” “Mordogar's Mysteries,” and “Forty-Four Bitter Persimmons.” It is recommended to keep an eye on the progress of the film schedule. TV series: According to the announcement, “Mountain and River Pillow” is in post-production; drama projects such as “Spring Dinner” and “My Date List” are being developed.

Profit forecasting and valuation

Considering the impact of costs and investment losses, we lowered our 2024 net profit forecast by 15.3% to 0.489 billion yuan, leaving the 2025 net profit forecast unchanged. The current share price corresponds to 23.7 times 2025 P/E. Maintaining an industry rating and target price of 10.7 yuan, corresponding to 30 times the 2025 P/E, there is 27.4% upside compared to the current stock price.

risks

Key points: Box office performance fell short of expectations, industry competition intensified, productivity improvements fell short of expectations, and investment losses were higher than expected.