The online literature company lost up to 850 million yuan last year, largely due to a massive charge related to its New Classics Media video acquisition



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<h4>Key Takeaways:</h4>



<ul>
<li>China Literature warned it expects to report a net loss of up to 850 million yuan for last year</li>



<li>Much of the loss owes to a 1.8 billion yuan goodwill impairment charge related to New Classics Media, which China Literature bought for 15.5 billion yuan in 2018</li>
</ul>



Its name may sound relaxing, but recent stock volatility has left shareholders of online reading platform China Literature Ltd. (0772.HK) hardly feeling any of the calm that typically comes from the calming type of good read implied by the company's name.



After peaking at HK$45.50 late last October, China Literature's stock suddenly went into a tailspin that wiped out 20% of its value within two months at the end of last year. It began to rebound early this year, only to suddenly shift gears again and tumble after an &#34;incident&#34; on Jan. 24 involving an uprising of its authors that we'll describe in more detail shortly. Then, investors suddenly piled back in after management unveiled its 2026 strategy, fueling a 27% surge in the stock over two days.



But just as the bulls were returning, the company wrote yet another new chapter for its stock by issuing a profit warning last week saying it expected to report a net loss of between 750 million yuan ($108 million) and 850 million yuan for last year. That was enough to unleash the bears again, as the shares plunged 8% the next day.



The filing disclosed that recoverable goodwill for the company's New Classics Media unit fell below the division's carrying value, necessitating an estimated goodwill impairment charge of 1.8 billion yuan. Excluding that, the company would have reported a non-IFRS net profit of 800 million yuan to 900 million yuan last year, down between 21% and 30% from the 1.14 billion yuan it earned in 2024.



<h4>Headwinds gradually easing</h4>



Despite a steady flow of losses, the string of negative news around China Literature appears to be largely priced into its stock by now. The Jan. 24 incident mentioned earlier stemmed from the company's July 2025 replacement of its decade-old &#34;Four-Round Recommendation PK System&#34; for pushing content to readers with a &#34;Traffic Package Intelligent Distribution Model.&#34; On Jan. 24, authors who form the core of the company's writer base suddenly took to forums alleging unfair traffic allocation and low data transparency under the new system, with mid-tier authors seeing their incomes halved. The controversy simmered until early this month, when China Literature announced modifications, drawing a line under the turbulent chapter.



Then there's the source of China Literature's most recent selloff. It acquired New Classics Media for 15.5 billion yuan in 2018, aiming to use the company's film and TV production capabilities to bring some characters and stories from its huge literary library to the video world. But New Classics Media's contributions were subsequently underwhelming. A recent boom for short-form dramas has been especially ill-timed, since New Classics Media focuses on long-form series and movies. The result has been repeated goodwill impairments that have significantly dragged down China Literature's profits over the last few years.



But the situation is finally improving, and New Classics Media's goodwill impairments have been fully written off. While China Literature's investment didn't provide much of a boost to its business, the recurring impairment drag on its profits is at least in the past. Freed from that weight, the company can move forward unencumbered by the need for future write-downs related to the subsidiary.



<h4>Stagnating core operations</h4>



With legacy issues now subsiding, China Literature's future performance will hinge on its core literature business. That business looks lackluster right now, even showing signs of decline. The company's revenue plunged 24% to 3.19 billion yuan in the first half of 2025 from 4.19 billion yuan a year earlier, while its gross profit fell by a similar 22.6% to 1.61 billion yuan.



Despite that, its net profit jumped 68.5% to 850 million yuan during the six-month period. But the rise wasn't due to anything operational, and instead was driven partly by other gains of 583 million yuan, primarily from the disposal of investments in other companies. The company also benefited from a 20.4% drop in selling and marketing expenses and an 11% reduction in administrative costs, showing its midyear profit stemmed entirely from cost-cutting and non-recurring gains, both unrelated to its core operations.



In his earlier 2026 strategy comments that got investors so excited, CEO Hou Xiaonan outlined three core strategic pillars for this year in an internal communication, namely, Evergreen Content, Intellectual Property + AI, and Globalization.



Evergreen Content focuses on supporting core authors and key genres, elevating short dramas and comics into premium offerings, and deepening IP integration into users' lives using merchandise and collectibles to cultivate long-lasting IP. IP + AI leverages artificial intelligence to enhance efficiency and value in content incubation, premium production, IP development, and global industry expansion. And Globalization aims to build a global engine for multi-language market expansion.



<h4>Strategies under scrutiny</h4>



Despite the initial investor enthusiasm, Hou Xiaonan's new strategy appears somewhat superficial by simply outlining broad principles rather than providing concrete, detailed action plans. It's hard for investors to see how the company can succeed in the future based solely on such broad statements.



At the same time, China Literature seems to be falling steadily behind in the battle for viewers due to growing popularity of short dramas. Despite acknowledging it needs to make more effort in that direction, its eighth-place ranking on brand research organization CNPP's 2026 list of the top 10 production brands suggests that catching up won't be easy.



As to globalization, the current reliance on AI for translating works into other languages to enter new markets has limitations, since such works often fail to capture nuanced cultural context and local linguistic styles effectively. The bottom line is that investors are waiting to see what chapter China Literature will turn to next to revive its stalling growth story.



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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

00772

China Literature Ltd. expects a net loss of up to 850 million yuan for last year, primarily due to a 1.8 billion yuan goodwill impairment charge from its acquisition of New Classics Media. The company's stock has experienced significant volatility, dropping 20% after peaking at HK$45.50, and recently fell 8% following the profit warning. Despite challenges, including a decline in revenue and core operations, the company aims to improve its future performance through a new strategy focusing on content, AI, and globalization.

Will China Literature Turn The Page?