Yuewen Group: Continues to reduce costs and increase efficiency in the second half of the year. The box office performance of Xinli's movies is impressive. (1H22 conference call summary)

The following is the incremental information of Yuewen Group's 1H22 conference call, and a brief review of financial data can be found in "A Simple Talk about Yuewen's 1H22 Performance".

Management Report

1. Continuously implement cost reduction and efficiency enhancement strategies in the second half of the year.

2. Continuously expand into the overseas market. WebNovel, an overseas reading brand, will provide users with about 2,600 translated Chinese works and about 420,000 local original works.

3. In 2H22, there are expected to be four TV dramas, 2-3 network movies, and new episodes released. New Li Media is expected to make a profit of 500 million yuan, meaning the company's profit for the year could reach 700 million yuan.

4. IP derivative products have become one of the focuses of IP transformation, with a focus on the consumer product and trendy toy industries. Online channels will be prioritized.

5. In the context of normalized game version numbers, boutique strategies will require IP empowerment, which will benefit the game authorization business.

Analyst Q&A

Q: Progress and outlook for cost reduction and efficiency enhancement?

A: 1. Sales expenses focus on ROI and efficiency and decreased by 17.6% YoY, with revenue accounting for 27.2%. Management costs strictly control all expenditures, with a YoY decrease of 12.2% and revenue accounting for 13.6%. Overall management efficiency has improved in 1H22 with operating profits and net profit margins increasing.

1. Continued promotion in the second half of the year, with a focus on advertising marketing for sales costs based on ROI and efficiency. Management expenses will continue to strictly control all expenditures to build a foundation for the long-term healthy development of the business and enhance operational efficiency.

Q: Progress of IP universes in various forms and outlook for derivative products?

A: 1. Mature IPs have successfully been transformed into multiple forms of media:

1. Douluo Dalu, adapted into comics, animations, TV dramas, games, etc., formed an effective linkage, with the animation having the highest number of Tencent plays and the game's cumulative flow exceeding 10 billion yuan. All forms continue to be updated, and the commercial value of the IP still has great room for growth.

2. Battle Through the Heavens has been adapted into film, television, and animation, with the animation having over 12 billion plays. In July 2022, a new annual show was released to keep the IP hot. The Medusa statue released achieved GMV of over 5 million yuan, and more trendy toy forms will be released in the future.

1. Derivative products are one of the focuses of IP transformation. The domestic derivative product period is in its early stages, but the outlook is huge. In the future, it will cooperate with upstream and downstream partners in the industry chain to jointly promote the prosperity of IP transformation and derivative product markets in China.

Q: The impact of macro situation and the epidemic on various sectors in the second half of the year and the release of new plays?

A: The macro situation was uncertain in the first half of the year, and the epidemic brought uncertainty, but the management maintained an optimistic attitude and implemented cost reduction and efficiency enhancement strategies, focusing on key businesses and long-term goals. In the second half of the year, Yuewen Group will continue to implement cost reduction and efficiency enhancement strategies and focus on high-quality and sustainable business as well as operational efficiency in response to changes in the market environment.

1. IP Original Creation: Continue to elevate the IP strategy, focus on incubating high-quality writers for quality works;
2. IP Visualization: a) Series: Tencent's recent productions "Heart House" and "Genius Basic Law" have been successful. The second half of the year has a variety of series releases, including "The War of Roses," and "Blazing Fields," "Infiltrators," and "Daily Life in the Qing Dynasty" produced by Xinli will be launched soon. b) Animation: The anime "Battle Through the Heavens" season 1, "Cute Wife and Foodie" season 2 and 3 will be released in July. Animation and comic projects will be steadily released in the second half of the year;
3. IP Commercialization: a) Continuously build and strengthen basic capabilities, shorten the time from IP to product conversion, expand the number of IPs, and achieve breakthroughs in themes, styles, designs, and other aspects. b) Focus on consumer goods and offline experiential consumption to explore new opportunities and continue to promote cooperation with the upstream and downstream of the industrial chain. c) Develop various derivative products based on IP, and launch projects that focus on the strike point corresponding to the release of anime, movies, and games.

Q: How is the industrialization of content production built?

A: Two years ago, there were good IPs, but there was no systematic rules or professional capabilities in the anime, film, and later stages.

Today's core strategy:

1. Network literature: Continue to cultivate high-quality authors and works in network literature, especially for paid reading;

2. Derivative industry chain: After acquiring Xinli, Yuewen Film and TV, together with Xinli, is converting literary IP into good films and TV works in a systematic way.

1. Improve industrialization capacity under the three following pipelines:

1. Increase investment in the Yuewen Anime team and capacity building, set up a comic and animation studio;

2. Cooperate with Tencent Animation, promote comic adaptation and animation production capabilities;

3. Recruit more excellent animation teams.

Q: How are derivative products planned and channels built?

A: The target of derivative products is to fully explore the derivative value of IP. The strategy is to build a systematic product design and R&D capability from the production end to the user end, with self-research and authorization as equally important. The layout includes action figures, sculptures, and soft peripheral products. The channel of choice is online, including e-commerce platforms, as well as offline channels with partnerships as the main approach. In the future, high-profile and fan-oriented IPs, such as "Joy of Life", "The Mystery of the Lord", "The King's Avatar", and "Ghost Blows Out the Light," will develop high-quality derivative products.

Q: What is the situation with Xinli?

A: TV dramas: "The War of Roses" is currently airing. At the same time, "Blazing Fields," "Infiltrators," and "New Chuan Daily" are expected to be launched later this year. Film: Two films have been released in the first half of the year, and 2-3 online movies are planned for the second half of the year. This year, Xinli's profits are expected to reach the upper limit of 500 million.

Q: Under the situation of a decrease in the number of game version approvals this year, how is the game authorization business in the first half of this year and the prospect for next year? What drives the game authorization business in the future?

A: 1) The game authorization business progressed smoothly in the first half of the year: As version approvals have become tighter, game developers are increasingly focused on developing top-ranked projects. The large number of fans of Yuewen's IPs has a great effect on the success of games. Game companies need high-quality IPs more than ever before under the current tightening policy. 2) In the past, game development was authorized for a period of 2-3 years, and some games were close to completion and would have revenue sharing upon release.

1. In the second half of the year, the issuance of game version numbers has resumed normalcy, and future boutique strategies require IP support.

2. Future drivers: 1) strong ability to cultivate textual IP; 2) strong visual ability, driven by films, TV dramas and animations; 3) serialization of IP extends the lifecycle, games with a longer lifecycle generate good commercial returns.

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