1H23 performance is in line with our expectations

The company announced 1H23 results: revenue was 422 million yuan, down 12.1% from the same period last year. Nonfruit IFRS net profit was 139 million yuan, an increase of 32.1% over the same period last year, falling into the range of 137 million yuan and 140 million yuan forecast, in line with our expectations.

Trend of development

Content marketing has grown strongly, and comprehensive budget management has achieved good results. In terms of copyright dramas, the company's 1H23 broadcast the first round of the work "just Love", which ranked as the hot TOP3 of Tencent's video 1H23 series, but there were two shows in the first round of 1H22, so 1H23 revenue fell 18.5% to 377 million yuan compared with the same period last year. In terms of content marketing, the effect of the company's full-link content marketing system has gradually emerged, and the expansion of strategic brand resources has been strengthened. at the same time, the popularity of artists' business series has achieved rapid growth. 1H23 revenue has increased by 150% to 39.7 million yuan over the same period last year, and gross profit has increased by 258% over the same period last year. We believe that with the launch of copyright dramas in the second half of the year, the growth elasticity may be further revealed. On the profit side, the company has further promoted comprehensive budget management, effectively implemented cost reduction and efficiency, and reduced the production cost of a single episode. Thanks to the simultaneous distribution and distribution of the "Love only" network, the gross profit margin of 1H23 has increased by 10.3ppt to 49.7% compared with the same period last year. The rates of sales and management expenses have respectively decreased to 7.8%, 20.6%, and 11.0%ppt, respectively, compared with the same period last year.

The content is rich, pay attention to the launch rhythm in the second half of the year. The company's TV series "ask the Heart", "A thought of Guanshan", "you are what you are today" and "semi-familiar Men and Women" have been pre-sold on the platform, which is in the post-production stage, and we expect it to be broadcast within the year, and the show will be launched in the second half of the year to increase or boost performance. The company's key IP sequel "30 and already 2", "Hunting Map 2" has been launched, "Xiaozhaimen", "Moon Mingqianli" and "midnight return" are also under preparation. We believe that the company has rich content reserves and production capacity is released or gradually increased.

Extend the advantages of content production, short dramas and overseas business to develop new growth points. In terms of short plays, the company continued to iteratively upgrade its production capacity. During the Spring Festival season, 1H23 "29" took the lead in the production of short plays, Douyin feature films were viewed more than 800 million times, and the second season of "behind Traffic" and "29" also achieved good performance. We believe that the company is expected to continue to deepen the brand advantage of short drama head, expand the production capacity of short drama, and explore multi-dimensional commercialization path. In terms of overseas business, the company has set up an overseas business entity platform "Lemon International" to speed up the development of overseas markets. 1H23 has released "Twenty without doubt 2", "Minjia" and "Love" overseas. The Thai version of the first overseas localization production series "only 30" has been launched, and the original IP content in Thailand is also under development. We believe that the company's overseas business will accelerate multi-dimensional exploration such as content distribution, local production and commercial operation of IP, and short dramas and overseas operations are expected to contribute to revenue growth.

Profit forecast and valuation

Taking into account the uncertainty of content launch, the net profit of 2023 Non-IFRS 2024 was reduced by 9.2% Universe 6.0% to RMB 323 Universe 545 million. Maintain the outperform industry rating, lowering the target price by 9.0% to HK $13.2b, corresponding to 12.4x2023x2023 Non-IFRS P Band E in 2024, with a potential upside of 42.5%. The current price trades at 8.7 Universe 5.0x 2023 Non-IFRS Placer E in 2024.

Risk

Content launch time and performance uncertainty, increased competition in the industry, liquidity risk.