UBS raises the target price of CHINA LIT to 52 yuan, expects short dramas and animated short dramas to contribute 100 million yuan in profit this year

UBS published a research report indicating that China Literature Group (00772.HK) recently issued a profit warning, expecting that the non-International Financial Reporting Standards net profit for 2025, excluding goodwill impairment, will be between RMB 800 million and RMB 900 million, representing a year-on-year decline of approximately 21% to 30%, which is below the bank's and market expectations, mainly due to reduced profits from New Classics Media. UBS predicts that New Classics Media will record a net loss of approximately RMB 154 million in 2025, and after excluding related impacts, it is expected that China Literature's adjusted net profit for the year will reach approximately RMB 1 billion, roughly in line with market expectations. Profit in the second half of the year is expected to decline moderately on a half-year basis, mainly due to increased marketing and event-related expenses, as well as seasonal factors in the intellectual property business.

UBS has a generally positive view on businesses outside of New Classics Media and remains optimistic about the development of China Literature's short dramas and animated short dramas, expecting them to provide additional growth momentum. This year, there are plans to release approximately 200 works, supporting over 80% year-on-year growth in short drama profits by 2026. Currently, it is estimated that short dramas and animated short dramas will contribute approximately RMB 100 million in profits this year, raising China Literature's target price from HKD 50 to HKD 52. The bank continues to be optimistic about the positive impact of AI on monetization scaling and transaction efficiency, maintaining a "Buy" rating.

The bank has lowered its forecast for China Literature's adjusted net profit last year by 38% to RMB 853 million and slightly reduced this year's adjusted net profit forecast by 8% to RMB 1.42 billion to reflect the uncertainty in New Classics Media's profit outlook