1H22 non-IFRS net profit to the mother is basically in line with our expectations
The company announced 1H22 results: The company shifted its focus from prioritizing current revenue growth to operating efficiency and cost structure optimization. Revenue was 4,087 billion yuan, down 5.9% from the previous year; non-IFRS net profit was 666 million yuan, higher than market expectations (618 million yuan), which was basically in line with our expectations (690 million yuan).
Development trends
The online business focuses on incubating quality products, and the copyright operation business is hampered by proprietary games. 1) Online business: 1H22's online business revenue was 2,307 million yuan, a year-on-year decrease of 9.2%. The 1H22 online business MAU was 265 million people, an increase of 13.8% over the previous year, including 14 million people who read DAU for free; due to the development of the free reading business, the number of paying users fell 12.9% year over year to 8.1 million, and ARPPU for paid reading was 38.8 yuan/month, an increase of 6.6% over the previous year. Revenue from 1H22's own platform and Tencent's proprietary channel fell 6.3% and 1.7%, respectively, while revenue from third-party platforms fell 35.8% year over year due to the suspension of some partnerships. We believe that the company's online business focuses on incubating quality products and consolidating the IP content ecosystem. In the short term, the business itself has limited potential for growth. 2) Copyright operation business: Although the company's revenue from series, movies, copyright licensing and animation grew steadily, 1H22's copyright operation business revenue other than Xinli Media fell 28.3% year-on-year to 814 million yuan due to a decline in proprietary game sales. Shinri Media earned 967 million yuan and achieved a profit of 210 million yuan.
The strategy to reduce costs and increase efficiency continues to advance, and operational efficiency has improved. The gross profit margin of 1H22 was 52.5%, down 0.2ppt from the previous year. Among them, the gross margin of the online business and copyright operation business increased 2.9ppt and decreased 4.8ppt, respectively. We believe that the decline in gross margin may be due to the decline in proprietary game revenue and the structural impact confirmed by the Sindy Media's total project volume method. The sales expense ratio of 1H22 was 27.2%, a year-on-year decrease of 3.9 ppt; the management expense ratio was 13.6%, a year-on-year decrease of 1 ppt, improving operating efficiency under the cost reduction and efficiency strategy. The company also mentioned at the 1H22 earnings conference that it will continue to control sales and management expenses in the second half of the year. We believe that in the current macro environment, the company is prioritizing ROI ahead of schedule, and operational efficiency is expected to continue to be optimized.
The promotion of IP visualization and commercialization is optimistic about the long-term value space of copyright operations. In terms of the company's IP visualization, film, television, and animation productions have produced many hits, while IP supply-side diversification is emerging. For example, sci-fi is the fastest growing reading category on the 1H22 platform. We think this is also in line with the increasing trend of industrialization of domestic entertainment products. Preliminary exploration of IP commercialization has led to a GMV of “Breaking the Sky” Medusa statue reaching 5 million yuan.
Looking ahead to the 2H22 Shinri Media series going live or waiting to be broadcast include “Battle of the Roses” (already aired on August 8), “Even When the Wind Rises”, “Daily Life in Shinkawa”, and “The Lurker”. We believe that the company's IP platform capabilities are stable, have a competitive advantage in IP incubation, development and operation, and focus on its long-term development space.
Profit forecasting and valuation
Due to the decline in revenue from proprietary games, we lowered the 2022 non-IFRS net profit to 1.44 billion yuan by 7.4% to 1.44 billion yuan, keeping the 2023 non-IFRS net profit forecast unchanged. The current price corresponds to 19/14 times 2022/2023 non-IFRS P/E. Maintaining an outperforming industry rating, the target price was lowered by 7.4% to HK$42.2 after excluding the impact of changes in the number of shares (changes in the exercise of rights granted to employees), corresponding to 25/18 times non-IFRS P/E in 2022/2023, with room for 32.5% of the current price.
risks
Content regulation has been tightened; the growth in online reading users and revenue from IP operations have fallen short of expectations.