Maintain "Buy" with TP unchanged at HK$2.50. Anchored in China Ruyi's （the “Company”） substantial potential for business expansion and operating margin enhancement, we estimate the Company's valuation at 15.0x adjusted 2023 EV/EBITDA, yielding a market capitalization of around HK$25 bn, equivalent to 24.8x adjusted 2023 P/E ratio.
　　In 1H23, China Ruyi's revenue performance generally aligned with our expectations. This can be attributed to the pandemic restrictions easing within China and the full recovery of theaters, leading to a substantial rebound in China Ruyi's content production business revenue, surging from RMB0.5 mn in 1H22 to RMB64.6 mn in 1H23. However, there was an 83.7% YoY decline in revenue from streaming platforms. This decline can be mainly attributed to China Ruyi's in-house streaming platform, Pumpkin Films, in 1H23. It primarily generated revenue through subscription fees, while in the same period of 2022 it saw substantial additional income from content licensing transactions. As the film and television industry has now largely returned to normal and is steadily growing, the Company plans to leverage its in-house film and television content rights to expand its streaming platform user base. In contrast, during the same period last year, due to the impact of the COVID-19 pandemic, the Company took a more conservative approach by utilizing licensing agreements to generate additional income, ensuring stable cash flow. Additionally, revenue from the gaming business, which primarily provides distribution and marketing support for two games, saw a 5.1% YoY growth in 1H23. The company's major gaming projects are primarily concentrated in 2H23. Overall, the Company achieved a 23.4% YoY increase in total revenue in 1H23.
　　The net loss in 1H23 was primarily due to substantial capital investment in new film and television content production. Given the cost and revenue recognition lag in the film and television production industry, China Ruyi recognized a total of RMB8.93 mn in amortization of film and TV program rights in 1H23. In contrast, during the same period last year, this amount was RMB1.46 mn, representing a YoY increase of 509.7%. The revenue corresponding to these recognized investment costs is largely estimated to be confirmed in 2H23. Despite recording a net loss attributable to shareholders of RMB2.64 mn in 1H23, its EBITA stood at RMB6.88 mn, marking a 100.3% YoY increase. When excluding the impacts of share-based compensation expenses and fair value changes in contingent consideration payable, the adjusted EBITA reached RMB5.40 million, reflecting a 40.1% YoY increase.
　　Reflecting on the Company's journey up to this point in 2023, each strategic move has consistently strengthened its significant yet untapped commercial potential within the market. Notably, in early July, Tencent's increased investment in China Ruyi, along with a revamped strategic cooperation agreement, was swiftly followed by China Ruyi's acquisition of a substantial 9.8% stake in Wanda Film at a significant discount. These strategic moves, combined with the recent robust box office performances of premium movies, are poised to further enhance the Company's future profit outlook and market valuation. Moreover, with several highly-anticipated games developed in collaboration with Tencent scheduled for release in the latter part of 2023, we hold a strong belief in China Ruyi's revenue and profitability prospects for the remainder of this year.