Is Oriental Disney still salvageable?

After the stock market closed on March 16, Beijing time, Yuewen Group (772.HK) released its 2022 full-year results. Following the strategy of reducing costs and increasing efficiency in the first half of the year, in the second half of the year, it mainly targeted piracy, and also implemented price increases, which partially offset the performance gap caused by user loss, advertising pressure and company's active contraction.

Here we mainly focus on the second half of the year's performance:

1. Free cannot completely defeat paid, the final result is coexistence

After experiencing years of impact from free to paid, when the Byte, the owner behind the free reading leader, also began to launch a paid reading platform, this noisy war is expected to come to a halt.

Although the financial report disclosed that the MAU of Yuewen's platforms in the second half of the year suffered a devastating loss, with a year-on-year decrease of about 15%, especially after the price increase. But according to the latest Questmobile data, although Byte's tomato app is still growing rapidly, Seven Cat app, which is also a free reading app, has appeared a significant year-on-year decline in January this year. The growth rate of Tomato has also slowed down. Meanwhile, the user decline trends of Yuewen's two paid reading apps (QQ Reading and Qidian) have improved in the same period.

2. Combating piracy digested the possible user loss caused by the price increase

In the second half of last year, Yuewen raised prices for its paid platforms to varying degrees, with an overall increase of not small magnitude. Taking QQ Reading as an example, the increase in the membership fees of different periods was around 40%-60%. However, while raising prices, Yuewen also carried out accurate crackdowns on piracy, so the number of its own platform's paying users grew by 16% year-on-year in the second half of the year. And the piracy-prevention focused Qidian app saw its MAU in December rise 80% year-on-year, driving a 30% increase in total Qidian revenue for the year.

3. New Li Media exits the black hole and output gradually returns:

Last year, New Li Media aired a total of seven TV dramas and produced two major movies, many of which are popular dramas. In terms of quantity, the output of film and television is mainly concentrated in the first half of the year, with only two TV dramas aired in the second half of the year. Among them, "Daily Life of the Royal Concubine" on iQiyi quickly exceeded 10 thousand in popularity value, breaking the time record of "The Fatty Bride's Time to Hit 10,000."

4. The game distribution revenue was worse than last year due to the poor environment.

In 2021, Yuewen's distributed game "Soul Master Duel" performed relatively well, which boosted its revenue. Due to the impact of the suspension of the game license last year, no new games were distributed in the second half of the year. The two games distributed in the first half of the year had either small revenues or quickly falling revenues, resulting in poor game revenue for the year as a whole.

5. More efforts were made to reduce costs and increase efficiency in the second half of the year.

Throughout last year, Yuewen has been cutting various expenses. In addition to reducing customer acquisition, it also actively gave up some platform partnerships and traditional businesses that did not have high returns on investment, so the profit margin could gradually be seen improving.

Changqiao Dolphin Research Viewpoint

The performance of Yuewen in the second half of the year was still significantly weaker than market expectations. The market's optimism mainly stems from: (1) on the one hand, the number of TV dramas broadcast by Xinli last year was more than in previous years, and there were also works with good reputation exposure, which raised the market's expectations for revenue from this business; (2) on the other hand, the company's high-profile announcement of cracking down on piracy at the end of last year achieved excellent results, but it did not anticipate that the company would voluntarily shrink in third-party channels; (3) in addition, the impact of the decline in advertising on online reading platforms was not estimated properly. Therefore, institutions had relatively high expectations for the second half of last year in their performance outlook at the beginning of the year.

However, looking at Yuewen's own operating changes separately from expectations, Dolphin believes that there are opportunities ahead :

(1) In the online literature business, the competition between free and paid reading has eased, and, coupled with the accurate crackdown on the piracy market, it can be said that the worst period of paid reading has passed. Although there is no growth, there is a gradually stabilized trend in the decline of the basic stock. (2) The derivative businesses mainly of copyright operations based on film and television will also return to the natural operating environment with the overall recovery of the post-epidemic film and television industry. (3) In addition, other forms of cultural and entertainment businesses such as games that have come out of the bottom also have the potential to give more value to Yuewen's IP library.

Therefore, Dolphin believes that unlike some platforms that will fall into an endless abyss if they fail in the traffic war, Yuewen has a certain bottom value. After the adjustment since February, the valuation has gradually moved to a reasonable and downward-leaning range, and it is expected to come to a relatively comfortable position.

Yuewen has always regarded the IP thinking of Disney as a guide. However, if it wants to achieve more breakthroughs in valuation in the future, it not only needs the further recovery of the visualized environment (film and television, games, animation, etc.) of IP but also needs to commercialize downstream IPs and develop richer derivative paths (theme parks, consumer goods, etc.).

What are the management's expectations for online literature and copyright in the new year? It is recommended to pay attention to the upcoming conference call. Dolphin will be the first to release it to the investment research group and Changqiao App. Please feel free to add the assistant WeChat "dolphinR123" to get it.

Detailed interpretation of this financial report

1. The "drumbeat" of free reading has slowed down

The monthly active users of Yuewen's self-operated platform in the second half of the year have slightly decreased. The company explained that it had reduced customer acquisition investment under the cost-cutting and efficiency-raising strategy. The online reading users via Tencent's channels (WeChat Reading, Tencent Video, etc.) also experienced some losses in the second half of the year, but their overall performance remained stable throughout the year.

Although compared with competitors, ByteDance's Tomato is still very powerful in terms of absolute value, far surpassing Yuewen and Tencent's online literature users. However, the growth rate of Tomato Novel is slowing down from the marginal change perspective, and the decline in the two self-operated platforms (QQ Reading, Qidian) of Yuewen is gradually narrowing. And if compared with Qimao novels, which are also free to read, there has been a year-on-year decline.

Looking at the distribution of time, after classifying by category, it was found that in the entire traditional online literature and audio novel market, the proportion of the Yuewen Group began to stop declining and even rebounded from October last year. Judging from the changes in the market share of other major platforms, Yuewen may have eaten up the share of Zhangyue and Baidu (Qimao and Baidu reading).

2. The combination of reducing customer acquisition costs, increasing prices, and cracking down on piracy is the result of the company's renewed emphasis on paid reading

The wave of free reading has been around for three years since the appearance of Tomato Novels in 2019. Since the end of 2021, when Byte also began to launch paid reading novel platforms, it gradually proved the logic that free reading cannot dominate the world. Dolphin Jun mentioned a similar point in the Yuewen depth article Yuewen Group (Part 1): Can online literature still make money at an older age?: free and paid models can and need to coexist.

(1) Works of top authors/high IP value potential works are more suitable for the free model, which achieves the ultimate value of IP by increasing user penetration. (Or the platform can provide a certain deposit in advance to encourage authors to choose the free model)

(2) The paid model is the one that truly protects the knowledge and basic rights of small and medium-sized authors in the long tail, allowing writing to become a sustainable career.

Although there were cost reductions and efficiency improvements due to environmental changes throughout last year, especially in the second half of the year, the idea behind reducing customer acquisition, increasing prices, and cracking down on piracy of starting point works can still reflect the company's return to the value of core users and value excavation.

According to the financial report, although the company reduced customer acquisition costs, due to anti-piracy measures, the monthly active users of Starting Point app (paid reading) increased by 80% year-on-year from December last year. Although the company's platform raised prices significantly, the number of paying users still increased by 16% year-on-year.

The per-user payment amount in the second half of the year was declining year-on-year. Dolphin Jun believes that this may be due to new users who converted from cracking down on piracy, whose payment ability is lower than that of original platform users, and they still need to be gradually cultivated. Therefore, the increase in average price was not reflected in the overall average data in the second half of the year.

3. Pressure on Reading and Games Affected by Edition Numbers, Jointly Impacting Online Business

Overall online business revenue accelerated by 26% year-on-year decline in the second half of the year. In addition to the period of pressure on payment, advertising and games are also affected by the adverse environment.

4. XINLI Slowly Coming Out of the Black Hole

In the copyright operation business of Yuewen, since the acquisition of XINLI, the short-term performance support has been on XINLI. XINLI represents the first step of Yuewen's IP monetization-IP visualization. Because XINLI's own production ability is not bad, the environment impact faced by the film and television industry has a greater impact on Yuewen's short-term performance and valuation.

In 2022, XINLI Media's revenue accounts for more than 50% of the overall copyright operation revenue. The rest can be split into IP authorizations, animation production, self-owned games, and Yuewen film and television investment, etc.

Due to the epidemic's disturbance to film and television production, among the 7 TV drama works scheduled for the whole year, 5 were broadcast in the first half of the year, and the two movies were also released in the first half of the year. Therefore, XINLI's revenue in the second half of the year did not far exceed the first half of the year as in previous years. (Generally, key film and television works would be broadcast during the summer vacation period.)

However, these 7 TV dramas have performed well, and the popularity is also very high, such as "In the World", "Heart Dwelling", "Fengqi Longxi", etc. The "Qing Qing Daily" broadcast in the second half of the year also refreshed the record of over 10,000 sets in iQiyi's "The Fatty Squanders".

Thus, although XINLI's revenue has not yet returned to its historical peak, it has finally crawled out of the pit of stepping on unfortunate celebrities and gradually returned to the normal operating track. In addition, the gap with the peak period of revenue also includes the impact of movies. Last year, the epidemic was repeated, and the overall performance of the movie market was very miserable. Therefore, when the offline business recovers after the epidemic, when film and television production and release can be scheduled normally, XINLI's income returning to previous levels is still very promising.

Excluding copyright revenue from XINLI, although there was a year-on-year decline due to the decrease in self-operated game revenue, there is also a positive trend on a month-on-month basis, indicating that despite the unfavorable environment, IP rights are steadily advancing in other derivative businesses.

For example, in the second half of last year, the company announced a plan with Tencent Comics to complete the adaptation of 300 online literature IPs in the next three years. By the end of 2022, more than 230 have been launched, exceeding expectations.

In addition, there have been cumulative sales of 20 million yuan in statues designed for the "Battle Through the Heavens" IP. Development of derivative products for other IPs is also underway, such as "The King's Avatar", "Joy of Life", and "The Vigilantes in Masks".

Fifth, carry the banner of reducing costs and increasing efficiency, and return to profitability in the main business throughout the year.

The gross profit margin has been optimized over the past two years due to changes in revenue structure. The increase in almost cost-free game distribution revenue and high-gross advertising revenue has brought a slight increase in gross profit margin to the overall online business.

Last year, we implemented a "reducing costs and increasing efficiency" strategy throughout the year. In addition to reducing investment in online content costs (about 250 million yuan), it mainly included a substantial decrease in marketing expenses for customer acquisition and sales personnel salaries.

However, it was basically a reduction in investment in promotional customer acquisition. Throughout the year, it decreased by nearly 700 million yuan, a year-on-year decline of 48%.

As a result, after excluding other losses and gains, the operating profit of the main business increased by 15.2% year-on-year in the second half of the year, and grew by 37% for the whole year. The better profitability in the first half of the year was due to the concentrated broadcasting of film and television works, which also indirectly reflects the impact of XINLI on short-term performance.

At present, Yuewen's cash flow is stable, and the free cash flow in 2022 is close to 1 billion yuan, with nearly 5.5 billion yuan of available cash, 1.8 billion yuan of deposits, and 120 million yuan of short-term investments in its account. At the same time, the external borrowing balance is not high, a total of 420 million yuan, resulting in a net cash position of 7 billion yuan, accounting for 23% of the current market value of HK $34 billion.

Unlike Dolphin Jun's outlook for the 2021 annual report (high uncertainty, need to prepare for winter), our expectations for Yuewen's 2023 recovery are positive and greater than the risks. We also recommend paying attention to more descriptions of the outlook from management during the performance conference call.

Dolphin Jun will also immediately follow up on the content of the conference call. Interested friends can add the WeChat account "dolphinR123" to obtain it. Dolphin: "Reading Group" Historical Articles:

In-Depth

August 16, 2022 "Reading Group: Continuing to Reduce Costs and Increase Efficiency in the Second Half of the Year, New Lineup is Impressive (1H22 Conference Call Summary)"

August 15, 2022 "Talking Simply About Reading 2022 Half-Year Performance"

December 28, 2021 "Reading Group (Part 2): Bad Luck is Not a Mistake, "Eastern Disneyland" is Worth While"

December 20, 2021 "Reading Group (Part 1): Is Online Literature Still Worthwhile Despite Its Age?"

Report Season

August 17, 2021 Conference Call "Reading IP Realization Rises to Phase 2 | Conference Call Summary"

August 16, 2021 Report Review "Reading Group: The Story of "Eastern Disneyland" is Too Difficult!"

March 24, 2021 Conference Call "Reading Today Rose Unexpectedly in My Expectations "Annual Report Conference Call"

March 23, 2021 Report Review "Dolphin Investment and Research: Don't Expect Online Reading, IP Operation is Reading's Hope"

Risk Disclosure and Statement for this Article: Dolphin Investment and Research Disclaimer and General Disclosure