Track Hyper | Massive Increase in Net Profit in 2023H1: What Did CHINA LIT Do?

2022 Market Strategy Keywords "Quality Improvement" are profoundly influencing the performance of CHINA LIT (00772.HK) in the first half of this year.

Driven by this factor, CHINA LIT achieved a staggering 64.8% increase in net profit attributable to shareholders in the first half of 2023, with a 13.5% reduction in costs and a 4 percentage point decrease in the asset-liability ratio to 17%.

The key performance indicators for 2022, "IP Visualization," will also see opportunities for breakthroughs in AI technology, according to CHINA LIT CEO and President Hou Xiaonan, who said, "We see this as the best opportunity given to us by the times, allowing China Literature to be filled with new possibilities."

Quality Improvement: Changing the Quality of Growth

On August 10th, CHINA LIT released its 2023 interim performance report, which showed that in the first half of this year, CHINA LIT achieved a total revenue of 3.28 billion yuan and a net profit attributable to shareholders of 380 million yuan, a year-on-year increase of 64.8%.

CHINA LIT's main business is divided into two parts: online business and copyright operation and other businesses.

Among them, online business includes online paid reading, online advertising, and distribution of third-party online games on the CHINA LIT platform; copyright operation and other businesses mainly consist of the production and distribution of TV dramas, web dramas, animations, movies, copyright licensing, operation of self-operated online games, and sales of physical books.

The financial report shows that in the 3.28 billion yuan total revenue of CHINA LIT in the first half of this year, online business achieved a revenue of 2.04 billion yuan, with the revenue proportion increasing from 56.4% in the same period of 2022 to 62.1%, among which the revenue of self-owned platform products remained the same as the same period of 2022; copyright business and other income amounted to 1.24 billion yuan, accounting for 37.9% of the total revenue.

IP Visualization was the core business of CHINA LIT in 2021-2022, which is also part of the "Great China Literature" strategy and belongs to the first stage of the commercialization of IP value; the second stage is the commodification of IP, and ultimately, the third stage is the intergenerational circulation of IP.

In the first half of 2023, IP Visualization is still in the process of continuous promotion.

The financial report shows that based on "IP Visualization," CHINA LIT launched popular TV dramas "The Ordinary Road" and "Rise of the Gale" in the film and television field in the first half of this year.

Among them, "The Ordinary Road" remained highly popular during its broadcast period, ranking first on Tencent Video's TV drama hot list for 16 consecutive days, first in the prime-time TV drama ratings of China Audio-Visual Big Data (CVB) for 15 consecutive days, and first in the popularity rankings of multiple third-party professional film and television data platforms such as Maoyan, Dengta, and Detawen; "Rise of the Gale" ranked among the top two in real-time viewership on Beijing TV and Jiangsu TV during its broadcast period.

In the animation field, during the reporting period, CHINA LIT aired sequels to classic IPs "Stellar Transformation" and "The King's Avatar"; in the field of comics, while increasing the number of comic adaptations, CHINA LIT focused on improving the supply of high-quality projects, with many popular works such as "The Great Fend Diemaker," "Starting from the Red Moon," and "Super God Pet Shop."CHINA LIT also attempted IP commercialization in the first half of this year, such as launching self-developed blind boxes for "Lord of the Mysteries" and "Battle Through the Heavens." They promoted the game adaptation process of high-quality IPs through two business models: authorization adaptation and independent operation. CHINA LIT collaborated with high-quality game developers in the industry to transform their literary IPs into games. They also authorized popular IPs such as "Battle Through the Heavens" and "Stellar Transformations" to their partners for adaptation.

It is worth noting that during the reporting period, CHINA LIT achieved positive performance changes driven by the key market strategy of "Improving Quality and Efficiency" in the deepwater area in 2022.

"Improving quality" mainly involves reducing marketing expenses for acquiring low return-on-investment users, optimizing distribution channels, monetizing more content through high return-on-investment paid reading products, terminating cooperation with certain third-party distribution partners, and optimizing content supply and distribution channels.

The direct impact of these measures includes achieving a 64.8% year-on-year increase in net profit attributable to shareholders, as well as an 8.6% year-on-year increase in the average monthly paying users of their own platform products and self-operated channels, from 8.1 million in the same period last year to 8.8 million. The asset-liability ratio decreased from 21.0% to 17.0%, and overall operating costs continued to decline.

Of course, there are pros and cons. While achieving improvements in quality and efficiency, overall revenue has also declined.

Empowered by AIGC: New Possibilities for the Future

During the reporting period, there were changes and adjustments in CHINA LIT's management team and organizational structure. What possible impacts could these have on the future development of CHINA LIT?

On May 9th, CHINA LIT announced that Hou Xiaonan, the President of CHINA LIT, would succeed the former CEO Cheng Wu and become the CEO of CHINA LIT, concurrently serving as the President.

On June 19th, CHINA LIT announced the upgrade of its organizational structure, establishing four major business divisions, including the establishment of the Intelligent and Platform Development Division, with AI as a strategic service for various business operations.

During the earnings conference call, Hou Xiaonan stated that in the original organizational structure of CHINA LIT, literary content creation, reading product operation, and various IP adaptations were managed by different departments, which hindered real-time collaboration, especially in terms of visualizing and commercializing textual IPs. Usually, they would select suitable content for development from IPs that have already gained popularity.

In the new organizational structure, Hou Xiaonan said, "We will integrate literary content creation with various reading product platforms and use AIGC technology to cover multiple categories of content, such as animation, audio, and derivatives. This will facilitate the pre-production of IP adaptations, improve the efficiency of IP exploration and production, establish a more unified IP image, attract a wider audience for IPs, and enhance the success rate of IP blockbusters."

Regarding the direction of AI technology's model evolution and application landing this year, Hou Xiaonan stated, "AI technology brings unprecedented opportunities. The company plans to integrate AI into various business processes, such as assisting writers in creation, enriching user interactive experiences, expanding overseas markets for online literature, and developing IPs."Hou Xiaonan believes that the breakthrough development of AIGC (Artificial Intelligence Generated Content) can greatly reduce repetitive labor in the visualization process in the future, allowing resources and energy to be focused on creative, imaginative, and artistic aspects with high added value, thereby enhancing industry productivity.

"The visualization process of textual IP has always been limited by productivity. The original intention of creating the Miao Bi model is to let AI solve some repetitive and labor-intensive physical work in the creative process, saving writers a lot of redundant and tedious work," said Hou Xiaonan.

The so-called Miao Bi model is the "Yuewen Miao Bi" web novel model launched by CHINA LIT in July this year. It also released the first application product based on this large model, the "Writer Assistant Miao Bi Edition." CHINA LIT has designed AI virtual character functions for this and is currently conducting internal testing.

Although Hou Xiaonan believes that through the empowerment of AI technology, Yuewen will usher in unprecedented opportunities, there are still many obstacles in the process of implementing AI technology.

For example, the content generated by AIGC lacks continuity and cannot be directly transformed into smooth and longer visual content through simple steps.

In addition, due to the complexity of the production process of visual content and the high requirements for creativity and professionalism in certain procedures, it is currently difficult for AI technology to meet the production of these steps.

"At present, there is a scarcity of talents who not only understand AI logic and can give precise instructions to AI but also understand content and can tell good stories. Therefore, the application of AIGC in the animation and film industry is not yet widespread," said Hou Xiaonan. "AI currently has limited participation in the script and storyboard stages."

Nevertheless, Hou Xiaonan still insists on the positive value of AI technology. "We have already seen significant efficiency improvements in some process steps that require a lot of repetitive labor through the use of AIGC. Yuewen has a lot of business that can leverage AI technology for development, making it the industry's most promising company to overcome difficulties and empower business with AI technology."