Events:

The company released the third quarter report of 2023, the results are in line with expectations. 23Q3 achieved revenue of 330 million, an increase of 18% over the same period last year, and a net profit of 86.81 million, up 42% from a year earlier. In the third quarter, the company started 3 movies and TV dramas (including 1 platform customized short play), killed 3 films, and broadcast 3 films. The company completed the merger of Senlian Film and Television, and the copyright database was expanded to 50,000 hours, which laid a good foundation for building a diversified business ecology based on the core copyright resources of film and television.

Main points of investment:

Huatze Film and Television has healthy cash flow, rich reserves of new products and recovery of production capacity in the past 23 years. 1) during the adjustment period of the TV series industry, the company actively adjusts the market management strategy and optimizes the operation and management process. According to wind, by the end of June 23, the company had more than 2.9 billion yuan in currency and ample cash flow reserves. 2) the level of gross profit margin increased. Over the past 19 years, gross profit margin has rebounded as costs such as actors' salaries have fallen to normal levels, and companies have adapted to the regulatory pace of the industry, alleviating the problem of mismatch between income and costs, and expanding copyright business and overseas markets. 3) Huatze TV series has a leading production capacity in the industry and its output is relatively stable. According to the company announcement, Huatze Film and Television released more than 10 series a year from 18 to 21, leading the industry in large-scale production capacity. Huatze 23 drama series has rich reserves and production capacity has been restored, and 23Q4 is expected to start a strong product cycle. According to the company announcement, the company has signed a new contract to pre-sell 6 TV series (including the process), with a cumulative pre-sale of 15, 8 of which are planned to start up in the second half of the year, and more than 30 of its R & D reserves.

The company expands its copyright business and achieves new momentum of growth. According to the company's announcement, the number of rights to films and TV series has been expanded to more than 50,000 hours. The company will further improve the strategic positioning of copyright business and speed up the development of scientific and technological copyright innovation business. 23H1, the company completed the minority equity repurchase of the copyright subsidiary and the acquisition of Senlian Pictures and Television with its own funds. According to wind, Shanghai Huazhou 23H1, a copyright subsidiary of Huatze, has revenue of 83.18 million yuan and a net profit of 36.42 million yuan. We are optimistic about the outlook for the copyright business: with the passage of time, there is no need to amortize content costs, the profit margin of the business will increase; under the trend of legalization, the demand for copyright materials for short videos will increase.

AIGC promotes the industrialization of film and television, and the value of film and television copyright is expected to be enlarged. Over the past 23 years, the company has organized a number of learning sessions for management and all employees with the theme of "AIGC technology changing the industry". All employees are encouraged to actively use all kinds of AI tools in the work field and share their experience. Through Huazekton University, the company will form a series of courses to train a group of creative talents such as producers and editors who are good at using AI tools, so as to strengthen the ability of high-quality content development. Pay attention to the improvement of the industrialization level of the company's film and television and the value of copyright materials under the tide of AIGC. The "Film and Television script Intelligent Writing system" developed by the company's AIGC Application Research Institute was launched in September for use by the company's business team. Based on the vertical large model of self-developed screenplay, the system provides tools of "evaluation assistant" and "screenwriter assistant". The evaluation assistant, the evaluation of 20-500000-word novel scripts, has been increased from the past 3 days to 5 minutes now. Screenwriter assistant, in the form of efficient workflow, to improve the inefficiency of multiple rounds of dialogue.

Maintain earnings forecasts and maintain "buy" ratings. With reference to the company's current product plan, we maintain the company's homing net profit forecast for 23-25 to 502, 607 and 726 million yuan, and the current price corresponding to 23-25 PE is respectively times that of 20-17-14. Considering the reversal of the predicament of the TV series industry and the clearing of the long tail, the copyright is expected to be revalued under the AIGC wave, we are optimistic about the company's medium-and long-term growth and competitiveness, and maintain the "buy" rating.

Risk hint: the risk of policy regulatory change; the effect of content input is not as expected; the evolution and commercialization of AI technology is not as expected.