Incidents: The company announced its results for the first half of 2022, with total revenue of 4,087 million yuan, a decrease of 5.9% over the previous year. The decline in growth was mainly due to the company's cost reduction and efficiency strategy; gross profit was RMB 2,146 million, down 6.2% year on year, gross margin was 52.5%, and overall performance was stable; the company's net profit was RMB 229 million, down 79% year on year, mainly due to investment and acquisition losses; adjusted net profit of RMB 666 million, an increase of 0.4% over the previous year.
The number of active online reading days increased, and overall revenue was stable: 1H22's online business revenue was 2.31 billion yuan, a decrease of 9.2% over the previous year. Among them: 1) Revenue from its own platforms decreased 6.3% year on year to 1.76 billion yuan, mainly due to online business optimization costs and improved operational efficiency, thereby reducing marketing expenses related to user acquisition; 2) Tencent channel revenue was 350 million yuan, a decrease of 1.7% over the previous year, due to the decline in advertising monetization efficiency of free-to-read content due to the influence of the macro-environment. Among them, its own platform and Tencent MPU fell 12.9% year over year to 8.1 million yuan, the same as the previous month. The average DAU of 6M22 free reading users increased 7.7% year over year to 14 million, and the active free reading strategy attracted more light users. 3) Third-party platform online business revenue fell 35.8% year over year to 200 million yuan, mainly due to the suspension of cooperation with certain third party distribution partners.
The matrixization of copyright operations has been promoted, and the IP has authorized a wealth of benchmark works in the film, television, and animation categories: 1H22 copyright operation and other revenue was 1.78 billion yuan, a slight decrease of 1.2% over the previous year. The revenue of Shinri's custom dramas increased to 55.8% in copyright operations, achieving a net profit of 210 million yuan. The company expects to achieve a net profit of 500 million yuan in 2022. With the exception of Xinli, IP operations and others earned 760 million yuan. Revenue from the IP operation business declined slightly, but high-profile works continued to grow.
1) In terms of film and television, the TV drama “The World of Life” set a record high in the ratings of a set of prime TV series on CCTV in nearly 8 years, and the TV drama “My Heart Lives” ranked first among 1H22 local TV's prime TV series. The movie “This Killer Isn't Calm” grossed 2.6 billion yuan, making it the second highest grossing Spring Festival in '22. Premium IP series such as “Celebrate the Years After”
“Son-in-law” and the like were developed serially over a long period of time. 2) In the field of animation, the new “Changing Stars” and “Martial Arts”
The number of animation views reached 4 billion and 3 billion, ranking first in the average number of views of Tencent Video's newly launched 1H22 animation collection. Among the top 20 domestic animation works that were viewed on Tencent Video 1H22, 11 were adapted from the IP of the read text.
3) In the field of comics, more than 170 comics adapted from Reading Text IP have been launched on Tencent Animation, and first-line works such as “Dafeng Taiganren” have appeared. 4) In the gaming sector, some IPs have found game adaptation partners one after another, but the self-operated online game business is weak.
Profit forecasting, valuation and ratings: It is expected that IP value will become a long-term deterministic trend, and the company's IP reserves will lay the foundation for future full-link operation; it will participate deeply in Tencent's pan-entertainment industry chain layout, and animation will provide initial screening opportunities for big IPs; the launch of works such as “Battle of the Roses” and “Even If the Wind Rises” will continue to support Xinli's steady performance in the second half of the year. Considering that the short-term cost reduction and efficiency strategy puts pressure on the reading business to increase revenue, the advertising industry as a whole is under pressure, proprietary game revenue is declining, and the film and television industry has regulatory policy uncertainty, we lowered the company's revenue forecast for 22-24 to 81.85/90.60/9988 billion (compared with the previous forecast of -15.2%/-17.8% /- 19.4%); lowered the forecast for Guimo's net profit for 22-24 to 826/17.18/1,957 billion yuan (compared to the previous forecast of -43.4%/-8.7%/-21.0%). Maintaining the 22-year 15x PE valuation of the online reading business and the 6x PS valuation of the copyright operation business, corresponding to the 22-year target price reduction to HK$36.9; downgraded to the “increase in holdings” rating.
Risk warning: macro environment; IP adaptation falls short of expectations; Xinli is unable to complete the performance gamble