Nomura lowers the target price for CHINA LIT to 44 yuan, maintaining a "Buy" rating

Nomura published a research report indicating that China Literature Group (00772.HK) is expected to achieve a year-on-year revenue growth of 6% to RMB 4.2 billion in the second half of 2025, which is 3% and 1% higher than market consensus and the bank's forecast, mainly due to an increase in intellectual property operation revenue. The non-International Financial Reporting Standards operating profit margin expanded by 0.4 percentage points year-on-year to 5.9%, benefiting from stringent operational expense control, which offset the impact of pressure on the gross profit margin of the intellectual property business.

As a result, China Literature's non-International Financial Reporting Standards operating profit grew by 13% year-on-year to RMB 248 million. However, after accounting for a year-on-year decrease in non-operating income, China Literature's non-International Financial Reporting Standards net profit fell by 20% year-on-year to RMB 351 million, roughly in line with the range implied by its earnings forecast.

The bank believes that the weak performance of China Literature in the second half of last year can mainly be attributed to the poor performance of New Classics Media. It is estimated that New Classics Media's revenue grew by 6% year-on-year to RMB 624 million, but it recorded a loss of RMB 119 million due to fewer series releases and a box office failure of a film. So far, New Classics Media has completed six series and two films, with three more series in the production stage, which the bank believes indicates a positive outlook for New Classics Media's performance in the fiscal year 2026.

Nomura has lowered its adjusted profit forecasts for China Literature Group for 2026 and 2027 by 5% and 7%, respectively, to incorporate more cautious assumptions regarding New Classics Media's performance. The bank reiterated its "Buy" rating but reduced the target price based on a discounted cash flow model from HKD 47 to HKD 44, assuming a weighted average cost of capital of 10.7% and a terminal growth rate of 3.0%. The target price implies a forecast price-to-earnings ratio of 28 times for the fiscal year 2026