What happened: On the evening of August 20, 2023, China Ruyi (the “Company”) announced that it expects to incur a net loss of approximately RMB259 mn to RMB269 mn in the first half of 2023, compared to a net profit of approximately RMB147 mn in the same period last year. The decline in performance is primarily due to fixed cost expenditures resulting from the active expansion of various segments for the latter half of the year and next year's business development. The Company anticipates launching multiple movie and television productions in the latter half of the year and next year, which will contribute substantial income and profits to the annual performance. It also forecasts significant growth in revenue and profits from the online gaming business in the latter half of the year, with three games launched since June. The company is also poised to vigorously develop its simulation game (SLG), having secured licensing for a Three Kingdoms-themed SLG.
　　Comments and Views: The profit warning issued by the Company aligns with our previous analysis. Given the strong seasonality of the movie industry, especially with major releases concentrated in the latter half of the year, this marks the first instance of a loss since the Company's comprehensive foray into streaming services in the latter half of 2020. We consider this a temporary and strategic loss resulting from the Company's intensified future-oriented expansion. Based on the movies and TV series slated for 2023 release or already released, we project substantial revenue and profit contributions in the latter half of the year. Notably, productions like the inspirational sports-themed movie One and Only starring Yibo Wang and Bo Huang, and the TV series Fireworks of My Heart starring Yang Yang, are expected to generate considerable returns for the Company. Additionally, the war blockbuster Hengyang 1944; the costume detective TV series Rechter Tie; the adaptation of Xiao Sun's martial arts fiction Hero Legends; and the Republic of China era TV series Chang Feng Po Lang featuring Yibo Wang and Qin Li, are set for release. Simultaneously, we anticipate substantial growth in revenue and profits from the online gaming business in 2H23. The Company has provided publication and marketing support for three games which were released since June, and is set to provide such support for several upcoming games, including RPG and two-dimensional card mobile games. The Company will also actively develop simulation game business, and has obtained the publication approval for a licensed Three Kingdoms-themed simulation game. The Company will successively launch a number of well-known IP massively multiplayer online mobile games and other simulation games. All in all, we have great confidence in the Company's long-term profitability.
　　Investment suggestions: Reviewing the Company's trajectory over the past half-year, each step has consistently reinforced the Company's immense latent commercial value to the market. In early July, Tencent's increased stake in China Ruyi and the updated strategic cooperation agreement, followed closely by China Ruyi's acquisition of a substantial 9.8% stake in Wanda Film at a significant discount, coupled with recent strong box office performances of premium movies, are poised to further elevate the Company's future profit prospects and valuation levels. Anchored in China Ruyi's substantial potential for business expansion and operational margin enhancement, we estimate the Company's valuation at 15.0x adjusted 2023 EV/EBITDA, yielding a reasonable market capitalization of around HK$25 bn, equivalent to 24.8x adjusted 2023 P/E ratio. We maintain a “Buy” investment rating along with a target price of HK$2.50.