1H20 performance meets expectations
The company announced 1H20 results: operating income of 59.66 million yuan, down 92.8% from the same period last year; net loss of 6.21 million yuan, falling into the range of forecast loss of 40 million yuan, in line with expectations.
Trend of development
The epidemic affected the shooting of the project, and the company's film and television business was dragged down, paying attention to the release of the follow-up key projects. 1H20, especially from January to April, the company's film and television business was greatly affected because the production team of the epidemic industry stopped filming and the start of the project was delayed. 1) Film and television business: 1H20 realized revenue of 54.06 million yuan, down 93.1% from the same period last year; gross profit margin increased by 64.5ppt to 82.9% compared with the same period last year, mainly because 1H20 confirmed that most of the revenue was from multi-round distribution of stock dramas, resulting in higher gross profit margin of film and television business. 2) Game products and channel promotion business: 1H20 realized revenue of 3.91 million yuan, down 91.5% from the same period last year.
Under the dual drive of policy and market, the trend of "reducing quantity and improving quality" in the production of the series is obvious. On February 14, 2020, the State Administration of Radio, Film and Television stipulated that when the drama is declared and put on record, the producer must promise to the provincial bureau that the script has been basically completed; no more than 40 episodes will be filmed and no more than 30 episodes will be encouraged. According to media internal references and cat's eye data, the total number of 1H20 TV series recorded was 362, down 16% from the same period last year. The number of episodes below 36 episodes increased; the upstream production reduced, started 92 new dramas, and obtained 84 licenses for 3325 episodes, which was also down from the same period last year. We expect that the influencing factors of the epidemic may be gradually digested in the second half of the year, but the adjustment of supply and demand in the industry will continue, and the pace of key new projects of companies dominated by boutique dramas may be promoted or accelerated in an orderly manner.
Pay attention to the progress of project shooting and release, and keep the medium-and long-term competitive advantage unchanged. Since May 2020, the company series "Trident", "restart Polar Thunder (season 1)" and "odds" have been released on May 31, July 15 and July 16, respectively. Among them, the ratings of City 59 of Jiangsu Satellite TV reached 2.04% on the night of the finale of Trident on June 23; the popularity of "restart extreme Hailin Thunder (season 1)" continued to rise since it was broadcast; and the ratings of "odds" were stable and ranked among the top 5 in prime time ratings of CSM 59 City Satellite TV. We believe that to a certain extent, this proves the strength of the company's boutique drama production. As of August 28, in the company's new film and television project reserve, one TV series ("Yijiang Water") has obtained a distribution license, two online films have been completed, and three online movies and one online drama ("the heart is as pure as an ice jade pot") are in post-production. Three online dramas ("Tianya Ke", "Kill the Wolf", "two conjectures of Marriage") and one online movie are under production. We believe that the company's dramas have been broadcast one after another, laying a financial reserve foundation for the orderly promotion of new projects in the next phase.
We judge that, based on the production strength of the company's boutique dramas, or long-term benefit from the improvement of the industry supply and demand brought about by the enhancement of demand for boutique dramas by the video platform downstream of the industrial chain.
Profit forecast and valuation
We keep our profit forecast unchanged. The current share price corresponds to a price-to-earnings ratio of 20.7 to 14.3 in 2021. To maintain the outperform industry rating, based on the high uncertainty in revenue recognition of the company's film and television projects, we lowered our target price by 10% to 11.52 yuan, corresponding to 18 times 2021 price-to-earnings ratio, which has 26.3% upside space compared with the current stock price.
Risk.
Key projects are not advancing as expected; downstream demand is weak; and regulation is tighter.