CHINA LIT: iReader: The impact of reducing Tencent channels will not further expand (2H23 Earnings Call Summary)

The summary of the 2023 annual financial report conference call for CHINA LIT.HK, for financial report analysis please refer to "China Literature Group: Online Literature Decline, Short Drama Revival? "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1 Key Points from Executive Statements:

• Film Performance: The film "Hot and Spicy" co-produced with Xinli and CHINA LIT ranked top on the 2024 Chinese Spring Festival box office chart, with box office revenue exceeding 3.4 billion RMB. "Hot and Spicy" showcased the extraordinary strength of ordinary people facing life challenges, resonating deeply with a wide audience.
• International Distribution Agreement: Signing an international distribution agreement for "Hot and Spicy" with Sony Pictures marks an important step for Chinese films going overseas.
• IP Incubation and Development: Believing that paid reading business is the most effective incubator for IP, emphasizing the importance of a systematic and holistic development process.
• AI Tools and Content Ecosystem: Empowering creators through AI tools, revitalizing the content ecosystem, launching new blockbusters, and streamlining the development process.
• IP Development System Construction: Prioritizing the construction of a robust IP development system covering all stages of the content lifecycle.

2.2 Business Operations Aspect:

2.2.1 IP Creation

In terms of IP creation, China Literature Group's online reading business made significant progress in 2023, adding 380,000 writers, 670,000 literary works, and over 39 billion characters. New writers played a crucial role in this progress, with the number of new writers earning over 100,000 RMB increasing by 60% year-on-year. Among new books earning over 1 million RMB, nearly one-third were written by new writers.

Furthermore, the average number of subscribers per chapter for works created by post-2000 writers increased by 230% year-on-year to over 10,000. The company continuously enhances content quality and develops the creative ecosystem by strengthening anti-piracy measures, providing intelligent author assistant applications, and enhancing interaction with readers. This led to a 10.1% year-on-year growth in monthly paying users (MPU), reaching 8.7 million2.2.2 IP Visualization and Monetization Business

In the field of IP visualization and monetization, Yuewen Group has also made significant progress by launching a diverse range of high-quality works to meet user demands. In the television and film sector, the company successfully released multiple series including "With the Pride" and "Undercover", with "With the Pride" ranking first on the viewership chart for 16 consecutive days, and "Undercover" becoming the TV drama ratings champion during its broadcast period. These achievements demonstrate the company's strong competitiveness and market influence in the field of content visualization.

2.2.3 Animation Department

In the animation department, Yuewen Group has released new seasons of classic IP series such as "Battle Through the Heavens" and "Stellar Transformations", as well as new animation series "Proud Nine Heavens" and "God's Domain". Particularly, "Battle Through the Heavens Annual Edition" has become a fan favorite, holding the top spot on both domestic and animation popularity rankings on Weibo for three consecutive months.

According to third-party data from Yunhe Data, 6 out of the top 10 most popular online animation series in 2023 are adapted from Yuewen Group's IP, highlighting the company's leading position in the animation market and the high quality of its content creation.

2.2.4 Comics Section

In the field of comics, Yuewen Group's 13 newly released adapted comic series in 2023 have collectively surpassed 100 million in popularity. Through the acquisition of Tencent Comics, the company has further enriched its IP portfolio, including top Chinese comic IPs such as "The Outcast" and "Fox Spirit Matchmaker", strengthening the comic adaptation pipeline and expanding animation series production capacity.

The company plans to use AI technology to enhance the efficiency of adapting online literature into animation series and comics, accelerate the transformation of text-based IP into visual formats, and improve the efficiency of content commercialization, showcasing Yuewen Group's forward-thinking approach in comic creation and innovative technology application.

2.2.5 Gaming Sector

Yuewen Group has made significant progress in the gaming sector, successfully launching licensed games based on popular IPs such as "I Shall Seal the Heavens" and "Swallowed Star". The company also plans to release several other licensed games including "Douluo Continent", "Battle Through the Heavens", and "Daily Life of Chat Group", all of which have received regulatory approval.

Furthermore, for classic games like "New Douluo Continent", the company has effectively enhanced the game's artistic performance and interactive experience, continuously introducing upgraded and improved gameplay to ensure players have an outstanding gaming experience.

2.2.6 IP Merchandise Sector

In the IP merchandise sector, Yuewen Group has introduced a variety of trendy collectibles and products based on popular IPs such as "Lord of the Mysteries", "The King's Avatar", and "Battle Through the Heavens". Products include blind boxes, toy collectibles, accessories, and cards, which have been well-received. The company has expanded its IP licensing scope, collaborated with consumer brands from various industries to drive partner sales, and plans to enter new product categories to explore the synergistic effects between merchandise and various content formats, amplifying the popularity surrounding IPs2.2.7 Content Business

Yuewen Group's content business has reached new heights, achieving breakthroughs through innovation. The company has launched the first large-scale language model (LLM) designed for the online literature industry - the Intelligent Pen and its author assistant application, supporting writers in various aspects of content creation. The continuous evolution of AI technology heralds the potential to unlock significant value in the IP field, paving the way for a wider range of literary works adaptation, text-to-visual format conversion, and accelerating commercialization.

2.2.8 High-Quality Short Drama Field

Yuewen Group has officially entered the high-quality short drama field, launching the Short Drama Star Incubation Program. By establishing a creative fund of over 100 million RMB, the program supports over 100 short drama series and pioneers interactive short drama formats. This program has already brought significant returns, with total revenue from several short drama series exceeding 10 million RMB.

2.2.9 WebNovel Platform Business

Yuewen Group continues to expand in overseas markets, with its foreign language online reading platform WebNovel offering approximately 3,800 works translated from Chinese and around 620,000 locally original works. The company has optimized its AI translation model to improve the quality of work translations, with AI-translated works occupying a significant position in WebNovel's bestseller rankings. AI-driven translation has become a catalyst for multilingual overseas expansion, expected to continue driving the company's growth and establishing a competitive advantage in specific genres in key overseas regions.

3. Q&A Analyst Q&A

3.1 AI Investment and Progress

Q: You mentioned the applications of AI in many areas just now. How much are you currently investing in AI? What progress can we expect this year?

A: Regarding AI, we are closely following the recent developments of GPT and Sora.

Firstly, in terms of assisting writers in content creation, we have launched our proprietary large-scale language model (LLM) called the Intelligent Pen, and introduced the Intelligent Pen version of the author assistant application open to all contracted writers based on this LLM. Currently, its AI function's weekly engagement rate has reached 30%, and has received positive feedback from the writer community. In the future, we will further upgrade the AI functions to enhance the user experience of the application.

Secondly, in addition to empowering the content creation process, we have also introduced AI features that enhance user interaction and experience. Last year, we began testing AI virtual character applications, allowing users to interact with characters from existing stories. We will also officially launch virtual characters of specific IPs, including characters from multiple IPs such as "Doupo Cangqiong," "Joy of Life," "The King's Avatar," etc. These IP characters will also collaborate with other content formats such as drama series, movies, and animations, complementing and echoing each other. We will continue to improve features, such as allowing multiple characters to chat in the same world or small theater. Through these AI virtual characters, we hope to enhance user interaction and expand the influence of IPsIn terms of expansion overseas, our proprietary AI translation model, after professional training and reinforcement of specialized terms and vocabulary, has achieved highly automated translation driven by AI technology, greatly improving translation efficiency (by nearly 100 times) and reducing costs (by over 90%). In December 2023, AI-translated works accounted for 21 out of the top 100 best-selling books on WebNovel. Furthermore, we will expand AI translation to more languages beyond English and Spanish. The accelerated translation speed by AI will boost the growth of content supply in the overseas reading market, and therefore, we will continue to optimize the AI model to drive the overseas expansion of the Cloudary Group.

3.2 IP Licensing and Film & Television Content Pipeline

Q: Regarding IP licensing, what milestones can we share this year in terms of animation, TV dramas, etc.?

A: In terms of IP licensing, last year we successfully obtained regulatory approval for multiple licensed IP games, including "Douluo Dalu," "Battle Through the Heavens," "Zhu Xiu," "Daily Life of the Chat Group," "The King's Avatar," and more. We look forward to the launch of several projects this year, with the expectation to share revenue performance after the game releases.

Additionally, we will continue to collaborate with excellent business partners to license our high-quality IP to top industry players, including series, film production companies, game companies, animation and comic studios, etc. This strategy aims to further amplify the commercial value of our IP.

In terms of TV dramas and films, our film "Hot and Spicy" achieved tremendous success during the 2024 Chinese New Year period, with box office earnings exceeding 3.4 billion RMB and ratings exceeding nine points on multiple platforms. This achievement further proves our judgment and production capabilities for high-quality products. This year, we plan to release 6 to 7 TV dramas, including "With the Phoenix," "Joy of Life 2," and "The Grand Lord," as well as two films "Under One Person" and "Fox Spirit Matchmaker."

In the animation field, we will launch new seasons of "Battle Through the Heavens" Season 3, "Versatile Mage," "The King's Avatar," and new IP series animations. We expect the total number of animation projects this year to exceed last year.

In terms of self-operated game operations, we will release expansion packs for games like "New Douluo Dalu" and are expected to launch two new self-operated games this year, "Battle Through the Heavens" and "The Grand Lord."

Regarding merchandise, we plan to introduce more products based on popular IPs and explore new product categories based on the characteristics of different user groups of various IP content formats. By synchronizing the release of merchandise with relevant TV dramas and films, we aim to maximize the popularity of the IP.

3.3 Situation of the Reading Business

Q: Could the management share some financial information about the reading business, such as revenue, gross profit margin, or other expenses? How will AI investment affect revenue and costs in 2024?A: In 2024, Yuewen Group plans to continue strengthening and optimizing its content ecosystem. The company will focus on improving the operational efficiency of products and communities, as well as enhancing the quality of content incubation. For self-operated platform products, Yuewen Group is committed to enhancing the ecosystem by incubating high-quality content, diversifying content types, cultivating a new generation of writers, and actively combating piracy to enhance overall content quality and diversity.

Regarding Tencent's channel, although most of the company's content currently generates profits through a paid reading model, which has a higher return on investment compared to free reading models, this focus may have a certain impact on Tencent channel's advertising revenue. However, the decline in revenue from Tencent channels in the second half of last year has gradually narrowed, so the company expects no further significant revenue decline on Tencent channels. At the same time, the company is actively exploring cooperation opportunities with new distribution partners to expand the user coverage of high-quality content and enhance user influence.

In terms of cost and expense management, Yuewen Group implemented cost control and efficiency improvement measures last year, achieving significant cost savings. In 2024, the company will continue to focus on operational efficiency and concentrate on the return on investment of marketing expenses. The company is committed to driving business growth through high-quality content, innovative products, focused operations, and effective corporate measures, rather than relying on inefficient user acquisition strategies.

Regarding AI investment, Yuewen Group expects to invest approximately 200 million RMB in the AI field in 2024. This investment amount is higher than last year, but the company will continue to prudently manage other controllable expenses to ensure financial health and investment efficiency in 2024. Through these strategic initiatives, Yuewen Group demonstrates its firm commitment to content innovation and technological investment, aiming to further consolidate its industry leadership position and drive long-term development.

3.3 Outlook for NCM (New Classics Media)

Q: What is the outlook for NCM in 2024? From a long-term perspective, what is NCM's position in the IP business and how does it help other production businesses? How should we view China's leading TV and film production businesses, including NCM and similar businesses?

A: In terms of the outlook for NCM in 2024, it is expected to achieve or exceed a revenue target of over 500 million RMB. The company plans to produce approximately 6 to 8 TV dramas per year and intends to add one to two additional projects each year, making every effort to increase our production capacity. From a long-term perspective, NCM plays a crucial role in the IP business. NCM will help Yuewen Group transform more top-tier textual IPs into TV dramas to further expand the influence and commercial value of IPs.

By producing TV dramas adapted from IPs such as "Joy of Life," "The Longest Day in Chang'an," and "The Rebel," NCM has not only accelerated the production process but also expanded production capacity to a certain extent. In the future, NCM will continue to focus on producing top-tier content, striving to bring more high-quality TV dramas and films to the audience

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