Why did Alibaba Pictures face a sell-off of funds on the eve of the merger with Damai?

Alibaba Pictures' (1060.HK) improved performance seems unable to stop the outflow of funds seeking profits.

On November 13th, Alibaba Pictures released its semi-annual performance report for the six months ending September 30th. Thanks to the strong recovery of the offline cinema market, Alibaba Pictures achieved a revenue of 2.616 billion yuan, a year-on-year increase of 43%; and a net profit of 464 million yuan, reversing the loss from the same period last year.

On the day before the release of the earnings report on the evening of November 13th, Alibaba Pictures' stock price rose by 5.56% throughout the day. However, the stock price opened high and closed low the next day after the release of the profit-turning report, closing at HK$0.52 per share, a daily decline of 8.77%, with a market value of only HK$14 billion.

According to Wind data, on November 14th, the total trading volume of Alibaba Pictures reached nearly 100 million Hong Kong dollars, second only to the previous day, setting a new high in the past 36 trading days. On November 15th, the total trading volume of Alibaba Pictures was 87.74 million Hong Kong dollars, an increase of 1.92%, closing at HK$0.53 per share.

Private equity investors in the East China region analyzed by Zhitong App (ID: TradeWind01) believe that the structure of Hong Kong stock investors is different, with fewer retail investors, and their investment habits are also different, which tends to lead to profit-taking after good news.

During the reporting period, Alibaba Pictures' film investment, production, and distribution business, which accounted for nearly 40% of its revenue, increased by 96% year-on-year to 1.27 billion yuan. Alibaba Pictures participated in the production and distribution of 37 films, including 18 major promotional projects. The film "She's Missing" had a box office of over 3.5 billion yuan, making it the box office champion during the Dragon Boat Festival and the runner-up during the summer season.

However, Alibaba Pictures' television series production business performed below expectations, with a year-on-year decline of 71.17% to 139 million yuan.

CICC's rating report pointed out that considering the relatively flat performance of Alibaba Pictures' television series business, the revenue forecast for the fiscal year 2024 was lowered by 3.9% to 4.77 billion yuan, and the forecast for the fiscal year 2025 was lowered by 5% to 5.16 billion yuan. However, due to well-controlled operating expenses, the non-GAAP net profit forecast for each year remains unchanged.

Another positive development for Alibaba Pictures is the acquisition of Damai, a subsidiary of Alibaba Group.

On September 19th, Alibaba Pictures announced its plan to acquire the live performance business of Damai from Alibaba Investment Limited, a wholly-owned subsidiary of Alibaba Group, for a price of 167 million yuan. The payment will be made through a private placement of 2.513 billion shares at HK$0.52 per share. Alibaba Pictures expects the transaction to be completed in the fourth quarter of this year, at which time Alibaba Group and its subsidiaries will increase their shareholding to 54.26%.

Damai's main business includes ticketing, on-site services, and hosting performances. As of now, it has served over 1.8 million performances and has more than 100 million users.

According to a media analyst from a securities firm in East China interviewed by Zhitong App (ID: TradeWind01), the demand for offline performances by consumers has always existed, and in the long run, platforms that control the supply of performances upstream will benefit from it. This year, the offline performance market has been booming. According to the China Performance Industry Association, the ticket sales for performances in the first three quarters increased by 454%, and Damai's GMV also increased more than five times year-on-year. It has an absolute advantage in its core business of concert ticketing agency, serving as the total ticketing agent for top stars such as Jay Chou, Mayday, and JJ Lin.

Although the acquisition has not been completed yet, Alibaba Pictures disclosed an additional financial report based on the assumption that Damai has been merged into its business in the half-year performance report.

In the six months ending September 30th of this year, Damai achieved a revenue of 728 million yuan, a year-on-year growth of 586%. If it is included in Alibaba Pictures' financial statements, it will become the third largest business after film investment and production, and film ticketing business, with an overall gross profit margin increase of 3.1 percentage points to 45.7%.