On August 15, 2022, China Literature (0772.HK) released the semi-annual report of 2022. In 2022, H1 realized revenue of 4.087 billion yuan, a year-on-year drop of 5.9%. The net profit of Noncolor IFRS was 670 million yuan, the operating profit increased by 8.2% year-on-year to 690 million yuan, and the operating profit margin increased to 17.0% from 14.8% in the same period last year.

Cost reduction and efficiency continued to advance, and free reading business boosted the rise of MAU. In terms of revenue, the revenue of the online business was 2.307 billion yuan, down 9.2% from the same period last year. Among them, the revenue from self-owned platform products was 1.763 billion yuan, down 6.3% from the same period last year, mainly because the company implemented measures to optimize costs and improve operational efficiency, thus reducing users' related marketing expenses; Tencent's product self-supporting channel income was 348 million yuan, a decrease of 1.7% compared with the same period last year, mainly because the advertising cash efficiency of free reading content decreased due to the impact of the macro environment. The revenue of the third-party platform was 197 million yuan, a decrease of 35.8% compared with the same period last year, mainly due to the suspension of cooperation with some third-party distribution partners. At the user level, the MAU of China Literature's own platform and self-owned channel was 264.7 million, an increase of 13.8% over the same period last year. Among them, the MAU of self-owned platform products was 119.8 million, an increase of 4.5% over the same period last year, mainly driven by the advantage of high-quality content; the MAU of Tencent's self-supporting channel increased by 22.7% to 144.9 million compared with the same period last year, mainly because the expansion of free reading business attracted more users. In terms of the number of paying households and ARPPU, the average number of monthly paying users decreased by 12.9% to 8.1 million compared with the same period last year, mainly due to the expansion of free reading business, but the monthly ARPPU increased by 6.6% to 38.8 yuan compared with the same period last year, reflecting the improvement in content operation, community function and recommendation efficiency, and further strengthening the willingness of paying users to pay.

The visualization of IP is eye-catching, and various forms of ecological construction are developing smoothly. Revenue from copyright operations and other businesses totaled 1.78 billion yuan, down 1.2 percent from the same period last year. Among them, the operating income of copyright is 173 million yuan, which is basically the same as the same period last year. Other income decreased by 21.2% to 48.9 million yuan compared with the same period last year. These revenues mainly come from paper book sales.

In terms of IP visualization, H1, revenue from TV dramas, online dramas, movies, copyright licenses and animation grew steadily in 2022. In the film and television field, the TV series "the World" set a new high in the ratings of CCTV-1 prime-time TV series for nearly eight years. "Heart House", "Longxi from the Wind" and "Please call me Director" were well received by the audience, while the film "the Killer is not very calm" ranked second at the box office of the Spring Festival in 2022. In the field of animation, the new hits of "Star change" and "Wu Zhi Qiankun" have reached 4 billion and 3 billion respectively, ranking first in the average number of new animation collections of Tencent videos in the first half of the year. In addition, according to Guduo data, among the top 20 domestic animated works of Tencent Video H1 in 2022, 11 were adapted from China Literature IP. In the field of comics, China Literature Animation and Tencent Animation cooperation in 3 years 300 parts of the network text and animation reform plan to continue to promote, there are more than 170 China Literature IP adapted cartoons in Tencent animation online, and there are a number of first-line works, such as "Dafeng hit more people", "the first sequence", "the beginning of a mountain" and so on. However, the above revenue growth was offset by a decline in revenue from proprietary online games. In the first half of this year, high-quality IP such as "Breaking the Sky" and "Night naming" have found game adaptation partners one after another, and it is expected that games of the same name will be published one after another in the next few years. In terms of IP creation, the IP quantity, quality and influence of China Literature's online literature platform continue to improve, and the high-quality content of the platform continues to accumulate. In the first half of the year, China Literature added about 300000 writers and 600000 novels, adding 16 billion words, and vigorously supported science fiction topics by launching two science fiction essay competitions and a series of activities at the beginning of 2022, making the science fiction category the fastest growing reading category. On the occasion of the 20th anniversary of the birth of Qiqian.com, it launched a brand-new brand advocating that "every good book is a new starting point", establishing that it will take good books as the core, focus on the creation of high-quality content of online literature and IP incubation, and pay attention to content diversification to create a healthy writer ecology.

In terms of IP commercialization, China Literature focuses on consumer goods, trendy toys and offline real-life consumption opportunities, and has made initial progress, such as the authorized launch of Medusa's single statue of "Breaking the Sky" sold out immediately after pre-sale, with GMV reaching 5 million yuan. In the future, various forms of derivatives will be developed around more IP, such as "Qingyu year", "Secret Master", "full-time Master", "Ghost blowing Lantern" and so on. In terms of going out to sea, as of June 30, 2022, China Literature's overseas reading brand Web Novel has provided about 2600 Chinese translation works and about 420,000 local original works to overseas users.

Investment suggestion: China Literature is accelerating the strategic layout of the whole industry chain, forming the ability to continuously output high-level and high-value cultural content, and many popular IP content fully demonstrates the company's content production strength. At present, the ecology of free reading and paid reading are both on their own track of benign development, and we are optimistic about the long-term development potential of China Literature.

Risk hint: the number of online literature readers is declining rapidly, the progress of commercial cooperation with partners is not as expected, and the relevant regulatory policy risks in the content field.