Event: On April 30, 2024, Wanda Film released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 14.62 billion yuan, an increase of 50.79% over the previous year; net profit to mother of 9.1 billion yuan, which turned a year-on-year loss into a profit; net profit of 720 million yuan after deducting non-attributable net profit, which turned a year-on-year loss into a profit; and a basic earnings per share of 0.42 yuan. In the first quarter of 2024, the company achieved operating income of 3.82 billion yuan, an increase of 1.70% year on year; net profit to mother of 330 million yuan, an increase of 3.25% year on year; net profit after deducting non-return to mother was 310 million yuan, a decrease of 15.31% year on year.

The recovery of the movie market combined with marketing efforts, and the company's main theater business continued to grow. In 2023, the company's offline cinema box office revenue was 8.44 billion yuan, a year-on-year change of +56.89%; gross margin was 4.32%, a year-on-year change of +15.20pct. The company's domestic direct-run cinema achieved box office revenue of 7.56 billion yuan (excluding service fees), recovering to 96.4% in 2019, up from 12.5 pcts; the number of moviegoers reached 186 million, recovering to 92.7% in 2019. Among them, the box office in North China and Northwest China surpassed the same period in 2019; the company's cumulative market share of 16.7% remained number one in the industry. Overseas, the film market gradually recovered in 2023. Films such as “Barbie” and “Oppenheimer” performed well at the box office. The company's Australian cinema line achieved box office revenue of about 1,401 billion yuan, an increase of 13% over the previous year, and the number of moviegoers was 16.15 million, an increase of 5.5% over the previous year, and business performance continued to improve steadily. In terms of marketing, the company actively carried out online and offline marketing business, reached in-depth cooperation with various well-known game and technology brands, and increased member stickiness and activity through newly upgraded W+ member benefits and rich app and applet marketing activities. The share of online self-channel box office continued to increase; in terms of non-ticket business, the company's non-box office revenue in 2023 increased by more than 10% compared to 2019. At the same time, the subsidiary TimeNet continues to strengthen IP acquisition and operation capabilities, focus on self-research projects, and increase IP commercialization value and gross profit. We believe that with the gradual recovery of the film market and the increase in the company's marketing and operation efficiency and IP conversion rate, the company's main cinema business and derivatives revenue are expected to maintain a growth trend.

The movie box office had a double boom, and the drama business grew significantly. In 2023, the company's film production and distribution business achieved revenue of 330 million yuan, a year-on-year decrease of 12.06%; the TV drama production and distribution business achieved revenue of 740 million yuan, an increase of 388.51% over the previous year. In 2023, the company invested and controlled 5 films. Among them, the films “Three Teams” and “I Want to See You” received box office of 700 million yuan and 400 million yuan respectively. At the same time, the company actively promotes the production of key projects and maintains good long-term cooperative relationships with outstanding creators such as Director Chen Sicheng, Director Guo Fan, and Director Jia Ling. We believe that Ruyi's rich experience in production and content production can accelerate the synergy of the company's upstream layout in the film industry chain. In terms of TV dramas, the 4 series produced by the new media Eslite were broadcast successively on CCTV and mainstream video platforms. Among them, “The Three Teams” were screened and broadcast jointly at the end of the year and received major market attention, with a total of 1,136 billion broadcasts across the Maogan network; “Who Is He” and “The Most Brilliant Us” all achieved good ratings and investment returns. Meanwhile, in 2023, the company signed a contract to sell 7 series and completed production of 6 to be broadcast. Among them, “Legend of Sword and Fairy 4,” “From the South to the North,” and “Tomorrow's Boy” were broadcast in the first quarter of 2024. We believe that rich upstream and downstream resources and distribution channels will help the company expand its competitive advantage in film and television production and distribution, and increase participation in key films.

The launch of games is accelerated, and enhanced marketing contributes to stable revenue. In 2023, the company's subsidiary Mutual Love Interactive released 4 games and obtained 4 editions. Among them, the new product “Qin Shimingyue: Canghai” performed well since its launch in August, and was profitable in the first month of launch. At the same time, Mutual Love Interaction continues to explore product features, change the content and version of products such as “Crazy Tank” that have already been launched, strengthen online marketing and promotion, contribute stable revenue to the company, and apply AI technology to the production of advertising materials for game products, including images and video materials of characters and scenes, to reduce costs and increase efficiency.

We believe that with the normalization of version distribution in the game market and the company's continued efforts on the content and marketing side, the profit scale of the company's game business is expected to increase further.

Investment advice: Considering the overall movie market situation in 24 and the profit side expected to continue to be optimized under the injection of Confucian content business, we adjusted the company's revenue for 2024-2026 to 165.38/ 182.44/ 201.71 billion yuan (170.07/17.614 billion yuan, respectively), with year-on-year growth rates of 13%/10%/11%, respectively, and net profit to mother of 14.22/ 17.46/ 2.092 billion yuan respectively (values before 24/25, respectively) 15.42/17.73 billion), PE was 22/18/15 times in 24-26, respectively, maintaining a “buy” rating.

Risk warning: The recovery progress of the film market falls short of expectations, the box office of film projects falls short of expectations, the promotion of film and television projects is postponed, cash flow risk due to fluctuations in operating performance, and subjective risk is measured.