Key Points: SH Film Co.'s strategic layout covers in-depth development of IP business, innovative upgrades in the theater business, and close collaboration with SH Film Group. These factors together form a solid foundation for the company's future growth.

With IP and cinema business advancing hand in hand, SH Film Co. developed jointly with SH Film Group. The company's IP business not only represents the second growth curve but also drives cinema attendance and merchandise sales. SH Film Group is not only a major shareholder of SH Film Co. but also provides considerable support for its IP development. Conversely, the IP business of SH Film Co. also boosts the economic benefits of the group's cultural and tourism real estate.

The cinema business builds a foundation, with cinema renovation and film market recovery. Alpha: Shanghai cinemas undergo renovation and upgrades, employing diversified marketing strategies to effectively increase box office and attendance while reducing operating costs and expanding profit margins. Additionally, the company's IP business contributes to the development of its existing cinema and merchandise business, and cinema business, in turn, amplifies the influence of IP. Beta: The box office performance during New Year's Day and Spring Festival in 2024 slightly exceeded expectations. As for the summer and National Day box office, the release of blockbuster films is likely to continue driving market growth; the proportion of Shanghai's film box office is also likely to increase with the rise in the proportion of imported films.

IP business is likely to become a lever for group resource integration. Market concerns about the company's IP development mainly revolve around the difficulty in calculating IP monetization potential, the early release year of IP, and the uncertainty of IP renovation effects. However, we believe that precise errors are inferior to vague correctness. Instead of calculating the valuation of each IP, we should pay more attention to the company's IP strategy and the important significance of this business for the cinema business and the overall strategy of the group. Compared to short-term challenges, we should focus on long- term development space. The process of renovating old IPs and cultivating new IPs undoubtedly faces many challenges, but through matrix-based development, online and offline linkage, and multi-channel penetration, IPs are likely to gradually integrate into people's daily lives; AI is also likely to reduce the cost of IP development and monetization while enhancing productivity. Classic animated IPs not only have profound cultural connotations but also contain enormous commercial value, which can be innovated and extended through sequels, derivatives, cross-border cooperation, etc., bringing new growth drivers for the company.

Earnings Forecast & Rating: We expect the net profit of the company in 2023-2025 to be Rmb120/260/420mn, corresponding to P/E at 101x/48x/30x. We initiate coverage with "Buy" rating.

Risks: Lower-than-expected film box office performance, AI technology development, IP renovation and development.