Incident: The company announced its 2023 performance forecast. In 2023, the company is expected to achieve net profit of 0.70-105 million yuan, turning a year-on-year loss into a profit; deducting non-net loss of 0.3 to 70 million yuan, an increase of 82.20% to 91.10%; and achieve operating income of 1.30-1.45 billion yuan, an increase of 10.21%-22.93% over the previous year.

Among them, the company expects to achieve net profit of 0.68 to 103 million yuan in 23Q4, turning a year-on-year loss into a profit.

With high-quality IP, the company's short drama business is developing well. Currently, most skits are adapted from online text IPs. Chinese Online has a large number of web text IP resources, and continues to provide the company with short script ideas and materials; on the platform side, the company owns Wild Elephant Theater. Traffic portals include WeChat, Douyin, and Kuaishou applets and app versions. Monetization methods include membership recharges and ads to unlock series. Among them, “Temptation” was 20,000 popular on Tencent in the 10 hours it was broadcast, and received a high level of attention. In addition, CMS, a Chinese online overseas shareholding company, has launched the interactive game platform ReelShort (which previously launched interactive games for women to live) and the skit platform ReelShort. The two have been mutually draining, driving the rapid growth of ReelShort's turnover, and the company's skits have also been successful in going overseas. According to the company's 2023 performance forecast, the company's 23 mini-programs and related licensing business grew rapidly, and the overall revenue from the company's cultural business and net profit attributable to shareholders of listed companies increased significantly compared to the same period last year.

AI technology continues to iterate, empowering the company's various businesses. The company actively uses AI technology in various businesses. For example, (1) the company uses AI to generate comics in 7 languages, including English and French, and distribute them through the MangaToon platform to dozens of countries and regions around the world, including North America, Europe, and Southeast Asia; (2) developing the Chinese Escapist Model not only assists Chinese writers in creating novels, but can also be used to create short screenplays to provide creative inspiration and creative assistance for film and television creators. We believe that the company attaches importance to the application of AI technology and is expected to evolve content product production from a manpower model to a “manpower+computing power” model to reduce costs and increase efficiency in various business lines, and the company's profitability is expected to continue to improve.

Investment advice: We expect the company to achieve revenue of 1,379/1,664/1,817 billion yuan in 2023-2025; net profit to mother of 0.95/1.43 billion yuan; and EPS of 0.13/0.20/0.30 yuan. The corresponding PE was 170.0/112.2/74.1 times, respectively, maintaining the “buy” rating.

Risk warning: AI development falls short of expectations; risk of significant impairment of goodwill; overseas business development falls short of expectations; regulatory risk of the short drama industry.