China Literature Limited (772) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the China Literature Limited 2019 Annual Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker. Please go ahead, Ms. Zhou.

Thank you, operator. Ladies and gentlemen, welcome to our 2019 annual results conference call. Joining us today on the call are Mr. Wenhui Wu; and Mr. Xiaodong Liang, our Co-Chief Executive officers; and Ms. [ Lilian Moore ], our Vice President of Finance. For today's call, Mr. Wu will begin with strategic highlights for 2019, Mr. Liang will review the company's business, and Ms. [ Moore ] will go through the financials. We will then open the call for questions. Before we begin, I would also like to remind you that management's comments during the call will include forward-looking statements that are based on our current expectations. All statements other than statements of historical fact during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company. This presentation also contains some unaudited non-GAAP financial results that should be considered in addition to but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. So please do take a minute to read the risk factors and non-GAAP measures discussion in China Literature's 2019 annual results earnings release. I will now turn the call over to our Co-Chief Executive Officer, Mr. Wenhui Wu.

Thank you, Maggie. Hello, everyone. Thank you for joining us today. In 2019, we solidified our leading position in China's online reading space by offering users an interactive reading experience. We brought onboard more Generation Z writers, improved the quality and diversity of our content and genres, and evolved our business model by introducing free-to-read service. While adapting to industry change, we enhanced our existing strategy and strengths that we believe differentiate us from our peers. We continued to nurture and extend our literature creation platform and consumption communities by introducing new technological and community features and continue to support the writer who choose to monetize their efforts via our pay-to-read model. We continued to develop the New Classics Media's position as a leading drama series and film production studio and deepened our relationships with key content partners in entertainment industry. We remain confidently positive about the induced value of high-quality storytellings. And that's the business opportunity for our core activities of our literature creations, our creations and distribution video series production and our content extensions. We are confident because we understand the nearly 3,000 years' history of people that have in various periods over the years. And we observed that the highest quality of long content is generally lasting. Not only it is last but it has the ability to inspire other form of entertainment contents, such as TV series, films and games. Our progress over the past years demonstrates that we create a long-lasting competitive advantages, which is good, currently quality and high barriers to entry. [ We are now right impact on our steep and are yielding immediately, rewarding person creating content. That is large cities and help shape new testings ]. We are confident that this effort will translate into the significant, big future returns. I will now turn the call over to Xiaodong to discuss our key achievements and the strategy.

Thank you, Wenhui. I will now go over result highlights for 2019. During the year, we continued to expand the number of writers and literary works on our platform. As of December 31, 2019, our library contains 8.1 million writers and 12.2 million literature works, including 11.5 million original literary works written by our writers in our platform, 400,000 works sourced from third-party platforms, and 220,000 (sic) [ 280,000 ] e-books. Around 38 billion Chinese characters were added to our platform in 2019. We believe innovation is critical to developing content and is a key driver for our platform's growth. In 2019, much of the content innovation on our platform is contributed by Generation Z writers who help us engage with younger demographics in a distinctively different manner. For example, [Foreign Language] (sic) [ Lord of the Mysteries ], a novel that features untraditional content and clause structures and combined element of dramas and video games, has generated over 2 million user comments and close to 1 million fans for its key characters. Generation Z writers have now already account for 25% of our total platinum and phenomenal rates. We believe novels created by Generations Z writers are still at a very early stage of development and still have enormous growth potential as they expand their influences. We also enriched our content portfolio by promoting diversity. For 2019, we have been promoting new genres, including science fiction, comic fiction, history and short-form novels, which were increasingly in demand and customer satisfaction. We continue to nurture more than this in the literature works, which grew at a much faster rate than our overall content library. Our content continues to stand out in the market. According to Baidu's search ranking, in February 2020, 25 out of the top 30 most searched online novels are created on our platform. Additionally, our literary works have been increasingly recognized by mainstream media. For example, 45 of our literary works and 27 of our writers were recognized with honors and awards from State Administration of Press, Publication, Radio, Film and Television and from the China Writers Association at the national and regional level in 2019. We believe content is only the starting point for an engaging reading experience. We are committed to delivering a supreme experience to our users through operational improvements and technological innovations. For example, we rolled out a new function in late 2019, which allows users to submit their own audio records of select sentences in a novel and listen to and comment on others. The function brought the community closer together by allowing users to bring their voice to the original text and creates more layers of content for engagement. As of December 31, 2019, the most popular literary work has accumulated around 20,000 audio readings and around 140,000 comments related to these audio readings. We also extended our business model in 2019 by launching free-to-read services. The free-to-read model attracts users who are price-sensitive but can tolerate advertisement while reading. We are now distributing free content on Tencent's Mobile QQ and the QQ Browser apps and on our independent free-to-read app, Feidu. So free content is sourced from both our in-house and external partners' libraries. To avoid cannibalizing users from our paid content, we have selected less popular but still high-quality works from our paid apps. We believe high-quality content is our core competitive advantage and the complementary offerings of free and paid service will help us broaden our user base and diversify our monetization channels. Turning to our IP business. We continued to develop New Classics Media's position as a leading drama series and a film production studio. Despite industry headwinds, New Classics Media has demonstrated its unique ability to develop top-tier content with the release of [Foreign Language] (sic) [ Memories of Peking ], [Foreign Language] (sic) [ Awakening of Insects ] as well the first season for [Foreign Language] (sic) [ Joy of Life ] and [Foreign Language] (sic) [ The Best Partner ] in 2019. Each of these drama series ranked top in terms of viewership during their respective broadcasting time slots. While the radio industry in China experienced an adjustment that has impacted New Classics Media's TV station and online radio partners in 2019, and adapt New Classics Media's own ability to release content during the year. We believe this adjustment will eventually benefit the high-quality content providers. We also believe the consolidation of New Classics Media will ultimately amplify the franchising value for China Literature platform and create significant benefits for our entire content ecosystems. For example, [Foreign Language] (sic) [ Joy of Life ], which was produced by New Classics Media and adapted from one of our most popular novels, ranked first among all TV and web series on Baidu's and Toutiao's 2019 search indices. The success of the drama series has rekindled interest in the novel, which again topped the ranking on our bestseller list, 10 years after its original launch, illustrating the virtuous feedback circle from content extension back to the original literature work. Building on this phenomenal success, development for [Foreign Language] (sic) [ Joy of Life ] 2 is already underway. We expect to replicate this success with other suitable IPs and build out a sustainable product pipeline. In 2019, around 115 -- 160 literary works were licensed to third-party partners for adaptation. In addition, we released a number of high-quality animated series, including [Foreign Language] (sic) [ Galaxy Devastator ], [Foreign Language] (sic) [ Cinderella Chef ], [Foreign Language] (sic) [ Martial Universe ] and the new season of [Foreign Language] (sic) [ Battle Through the Heavens ]. Among this, [Foreign Language] (sic) [ Battle Through the Heavens ] Season 3 and its Special Edition 2 generated 1.3 billion views, bringing the animation franchising to over 5.4 billion accumulated video views. A number of our co-produced drama series have also gone on to become very popular in 2019, including [Foreign Language] (sic) [ The Golden Eyes ], [Foreign Language] (sic) [ Pretty Man 2 ] and [Foreign Language] (sic) [ Sweet Tai Chi ]. Our IP-centric monetization model allows us to prolong the life cycle of our IP and monetize it efficiently across various different formats. For example, Douluo Dalu, an adapted one of our flagship literary works for the most-watched domestic animation series in China in 2018 and 2019. [Foreign Language] (sic) [ New Soul Land ], a mobile game adapted from the same IP and operated by ourselves, gained instant popularity after its release and won a number of high-profile awards. These successes have built our confidence that we can amplify value of our IP by joining force with high-quality partners in the entertainment industry. Following the enthusiasm created by the animation series and the game, New Classics Media is also producing our adapted drama series. In addition, to expand our presence in the audio market in China, we and the Tencent Music just formed a strategic partnership, under which Tencent Music will produce audiobooks for our online literary content, and these audiobooks will be made available on both parties' platforms. We believe this collaboration will enrich our audiobook library, expand our content user base, further diversify our monetization models and in turn, attract more writers to create on our platform. Turning to our international business. We expanded our global reach through a variety of new channels. WebNovel, our foreign language website and mobile entity, grew steadily throughout the year and attracted 36 million visits. WebNovel now offer nearly 700 literary words translated from Chinese and 82,000 -- 88,000 original literary works in English and in other local language, representing a significant increase from 13,000 titles in 2018. We also accelerated our presence in Southeast Asia and Africa. We entered into a strategic partner with Singapore Telecommunications Limited, a leading communications technology group in Southeast Asia. We invested in Ookbee U, a leading online literature platform in Thailand. We also formed a strategic partner with Transsion, a leading smart device manufacturer and mobile internet service provider in Africa. We believe these partnerships will help us better explore opportunities and penetrate large overseas online literature market. Looking forward, we will continue to develop best-in-class content, and effectively cater to the evolving tastes of our users. We will further development our literary ecosystems by enhancing our user operations and by building a more emerging community. As New Classics Media is integrated deeper into our operation, we will continue to expand our presence in drama adaptation and production and develop drama sequels for top-performing IPs. In addition to New Classics Media, we are cooperating with top-tier partners in the entertainment industry and are committed to developing our IPs into best-in-class drama series, films, animations, comics and the games to unlock their value. I will now turn the call over to [ Lilian ] to discuss our financial performance. Thank you.

Thank you, Xiaodong. In 2019, our total revenues increased by 65.7% year-on-year to RMB 8.3 billion, mainly driven by the growth in IP operations business. Now let me walk you through the detailed performance by segment. Our online business revenue in 2019 were RMB 3.7 billion, a slight decrease of 3.1% year-on-year, accounting for 44.5% of total revenue compared to 76% last year, revenues from our self-owned platform CapEx growth momentum due to our enhanced content operations and the additional contribution for advertising revenue during the year. We continued to saw declines in revenue from Tencent products, mainly due to adjusting our paying users on this platform, but partially offset by the contribution of online advertising revenue generated in 2019, revenues from third-party platform, which will decrease mainly due to the suspension of cooperation with several distribution partners and a decrease in revenue from certain distribution partners. In 2019, we were able to expand our total user base and increase user value. Average MAU grew by 2.9% year-on-year to CNY 219.7 million driven by the user growth from our self-owned paid reading products as well as the user contribution from our free-to-read product, which was partially offset by the decrease in MAU on Tencent products. As a result of the adjustment in traffic allocation structure within certain Tencent products. Total MPU dropped by 9.3% year-on-year, mainly due to less paying user on certain Tencent products as more users were channeled to free-to-read content. Monthly ARPU reached RMB 25.3, up 5% year-on-year mainly because we enhanced the depth of our content operations, optimized our recommendation system and expanded content distribution channels during the year. Post the acquisition and the consolidation of New Classics Media, which saw a major increase in the size of IP operations revenue, our revenues from IP operations and others amounted to RMB 4.6 billion, which is 2.8x higher than 2018, accounting for 55.5% of our total revenue. The growth was also attributable and cyclical revenue from our co-invested drama series and films and the successful ramp-up of our self-operated games. Turning now to costs and expenses. In 2019, our total growth amounted to RMB 4.7 billion, the majority of which are content cost, production cost of TV series and film rights as well as platform distribution costs. Content cost was RMB 1.5 billion. As a percentage of revenue, it went down to 17.7%, primarily a result of the shift in revenue mix as a greater share of revenue was coming from IP operations business post the acquisition. Production costs of TV series and film rights were RMB 2.1 billion, which is 6.8x higher than 2018 as we consolidate the respective cost of New Classics Media. Platform distribution costs increased by 159.2% year-on-year to RMB 569.5 million due to the costs related to our self-operated online games, as revenue crept up, and the expansion of online reading channel. Our gross profit increased by 44.3% to RMB 3.7 billion, representing a gross margin of 44.2%. The change in gross margin was largely a result of shift in revenue mix post the acquisition, as the lower-margin IP operations business took up a greater percentage. In terms of operating expenses, our selling and marketing expenses were RMB 2.1 billion in 2019, up 60.4% year-on-year as we invested more dollars to promote our online reading content, include free-to-read content, mobile game as well as films and drama series by New Classics Media. Selling expenses as a percentage of revenue decreased from 25.7% in 2018 to 24.8% in 2019. Our G&A expense was RMB 1 billion, up 39.1% year-on-year, reflecting an increase in staff cost and outsource research and development expenses as well as the consolidation of New Classics Media business. As a percentage of revenue, it decreased from 14.4% in 2018 to 12.1% in 2019. Our operating profit increased by 7.1% year-on-year to RMB 1.2 billion. Operating margin was 14.2% -- 14.3%. Non-GAAP operating profit increased by 31.6% year-on-year to 1.6 -- RMB 1.4 billion. Non-GAAP operating margin was 17%. Our net profit increased by 21.9% year-on-year to RMB 1.1 billion, and net profit margin was 13.3%. Non-GAAP net profit increased by 34.2% year-on-year to RMB 1.2 billion, and the non-GAAP net profit margin was 14.5%. Despite the external headwinds, we were able to deliver good profitability and bring mission growth on not only our revenue but our total user base as well. We will continue to strengthen our operating and financial performance by focusing on quality content, community experience and IP operation in the longer term. That concludes the financial-related part. Thank you.

[Operator Instructions] We have the first question coming from the line of Thomas Chong from Jefferies.

Congratulations on a very solid set of results. My question is about 2020 outlook. Can management talk about the recovery trend for our online reading business in terms of the MAU and the paying users trend, given the fact that the low base in the -- in 2019? And my other question is about the coronavirus. Can management comment about the impacts of coronavirus to our online reading as well as on our NCM business? And my final question is about the outlook for NCM. Can management comment about how we should think about the revenue and the margin as well as the pipeline that we have at the moment?

[Foreign Language]

[Foreign Language]

[Interpreted] So Mr. Liang will answer the first question and then part of the third question. And then also the part of the coronavirus, the impact on online reading business. And [ Mr. Cao ] will answer the question on NCM business.

Okay. For the first question about the reading business, you have found that actually, in the second half of 2019, you have found our -- both our MAU, MPU and also revenue increased compared to the first half in 2019. So basically, this is mainly is driven by our content diversification and also our operational efficiency. Much more important is that, as we all know, in the first half last year, some of our content, we lock up some of our content to do a double checking. And also, we released this part of our content from the second half. I think that they will be continually to be released, most of them, in the first half this year. And we think much more of the content are released. And also with the operation efficiency improvement, we believe that we still can have much better growing in the online reading business. Much more important is that during last second half of the year, we found that for the online paying reading business, especially for the -- our own apps, if we focus on the deep operation of our app and also release more good content, actually, we can find a better improvement in the user base and also the payings -- time spending in our platform. So in this year, we are continually introduce this kind of effort. And also, we're adding more and more functions in last year. Basically, in this year, we will have more innovations in this area to give much better improvement of the user base and also the growing of online reading business. At the same time, for the free reading business, actually, we are only launching in the second half of last year. And we believe in this year, we can get a much better position in this area. And also, we can do much more things with Tencent platform. Using this kind of growing to offset in the -- all the online paying readings decline in Tencent platform. So basically, we've seen that in that part in this year, we also have much room to grow in this year. So this is a trend for our online business in this year. And also, for the second question, actually, the epidemic, generally speaking, has some positive impact on our online reading business because people are spending more time staying at home during the outbreak of coronavirus. We have been seeing the rise on both user time and the user consumption compared with the period before the breakout. We also launched promotional activities and the user campaigns to seize the opportunities to acquire new users. So generally speaking, we think that the epidemic have somehow a positive impact for our online reading business. And also, we will take this opportunity to make user have much better user experience and attract more new users. And also, your last question about the outlook for New Classics Media business in this year. I think that New Classics Media achieved a very good performance in 2019 because the whole industry is have a lot of change last year. And most of the peers in the industry, we found that their revenue or their profitability had big challenge in last year. But the New Classics Media, in last year, they achieve a very good growing both in revenue and also in profitability. So this is mainly due to New Classics Media, they are very focused on the high-quality TV series production, and each of their projects are all very successful in last year. And coming back to this year, New Classics Media already built up a very strong pipeline in this year. They have about 8 to 10 TV series in their pipeline. And about half of them already finished up most part of the finished production. And another half will be beginning to production in the first half of this year. So basically, some of the TV series already you have found name in the paid platform and also some of the TV stations like [Foreign Language] (sic) [ Battle Through the Heavens ], like [Foreign Language], like [Foreign Language]. So we have a lot of products already in the pipeline of the online video platform and the TV station. And also from the company side, they have some of the very popular consume this kind of TV series, they also have some of the very popular modern-themed TV series. So it's very balanced pipeline in this year. So we think that this kind of strong pipeline will give us support further deliver a better result in this year. But it still depends on the whole environment and also depend on the impact from the epidemic. So basically, we still have some of the uncertainty. So I will turn over to [ Cao ] to discuss more details about the impact from coronavirus.

[Foreign Language]

[Foreign Language]

[Interpreted] So we will discuss this matter in 2 different parts. The first part is the movie segment. NCM has only planned a few film project in 2020's pipeline. And currently, there is no project that is in shooting process. So all these field -- film projects are scheduled to be released in the second half of 2020. So currently, we haven't observed any impact of coronavirus on these projects. And second part is the TV dramas. Currently, only 1 project shooting with 1 suspended due to the coronavirus outbreak, which is [ increasing ]. But the shooting have already resumed several days ago on March 13. Therefore, the impact is quite in -- limited. And besides, neither scriptwriting nor postproduction is affected by the coronavirus outbreak, we believe the epidemic has limited impact on the business in the short run. While in the long term, we remain confident in NCM's capability to produce high-quality dramas and maintain the leading position in the industry.

We have our next question coming from the line of Eddie Leung from Bank of America.

I have a question on your diversification of revenue strategy. So I remember you guys have been trying to diversify revenues. Could you give us some update on your plan in online games, advertising, audiobooks, given your cooperation with Tencent Music in 2020? [Foreign Language]

Okay. I will answer your question. Actually, we are doing much more diversification for our revenue generation, just as you have mentioned. For the online games, actually, last year, we're beginning to build up our online game pipeline in cooperation with third parties, that we not only just license our IP but also we were involved to the coproduction and the cooperation of the online games -- so Douluo Dalu got a very good performance in last year, mainly due to we do lot of cooperation with our animations and also our books together. So we have got a very good performance in last year. This year, I think that this team is still good handling of operation. So I think this year as well, we continue to be growing and can build more revenue for us in this area. And also, at the same time, we have another 2 this kind of project in our pipeline will be development, and we'll be launching or testing later this year or early next year. And also, at the same time, we also will get some of the online teams' operation revenue share because, in the last 2 to 3 years, we licensed a lot of games. And also, some of the games will be commercially launched in this year. And this kind of game will also share revenues with us. So basically, for online game revenue, I think that we expect that this still can be growing in this year, in long run. At the same time, for the advertising business, actually, it is mainly coming from free reading operation. Actually, it's growing a lot in last year compared to the year before. But it's still at an early stage, and I think that in this year, for the first quarter is not so good because first quarter really just is not a good season for online advertising business. But we believe in the second quarter -- from second quarter and the second half of this year, we still can be generate much more revenue from online advertisement, mainly due to the user base of our free reading products are increased and also the ARPU of the advertisement for each of the free users are also increased. So basically, I think that they will be -- contribute more revenue in this year. Another part of the new business is audiobook. Actually, we already have decent revenues in this part because we're already in cooperation with Ximalaya, like QQ, these 2 platform and also our own platform also have audiobook. But due to these 2 platform, I think it's not big enough. So in this year, we will add to operation -- co-operation with Tencent Music. Tencent Music, they have very huge user base. And also, I believe that they can make much more our book to be converted into audio content and it can be reached to more users. So in this way, we can get much more revenue shares or license fee from this operation. But much more important than that, the content is not only just to be distributed in Tencent Music platform, but also be distributed in our own platform. So basically, I think that this kind of audiobook also can bring some of the new users in our apps and also bring new revenues for us. So I think that this is a new business, but we are also already in operations in the business for many years and expanding through -- also with Tencent Music. I believe in the long run, this will be bringing us much more revenue in this area. So we want to make much more diversified revenues in our top line. And also at the same time, we were keeping to maintain our profitability in all the business.

We have the next question coming from the line of Brian Gong from Citigroup.

Congratulations on the solid results. My first question is about marketing expense. How should we look at the change for, say, 2020 and 2021? Are we going to still spend some money on promoting the free app Feidu? That's my first question. Second question is a follow-up on the New Classics Media. So for New Classics Media, can you remind us how many dramas you released in 2019, 4 or 5? And what K dramas you have high expectation under the pipeline? I will translate myself. [Foreign Language]

[Foreign Language] So for the marketing, actually, I think that in 2019, we are adding more marketing dollars in both free reading apps and also online game. So this is the main drivers for the growing of our marketing dollars. So in this year, I think that we will continue this kind of trend. We need to add in more marketing dollars for free reading app to get much more market share. But again, our policy is that we don't want to bring money. We will keep the growing reach to be maintained. This business are not -- can be breakeven combined with the Tencent platform. So basically, the marketing dollar we're spending in this area will be also convert to revenues for us. So this is the policy for this new business. And also for the second part of the online game business, actually, we still will be spending marketing dollars to convert into revenue and profit in this area because from last yearly periods, we found that the efficient marketing promotion in online games can be -- bring us a very good return. And also, due to there are some of the time lag, that means when we're spending marketing dollars, the user can be growing and our revenue -- the paying users can be growing but the revenue needed to have some time to be consuming all this money. Actually, they have some time lag. But in the meantime, we are -- I think this time lag will be not so important. But overall, we think that all the marketing dollars we are spending, we will keeping to see the investment return on that part, and we still want to keeping our margin in a good position in the long run. So this is for the first question.

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. So in 2019, NCM's revenue were mainly generated by 4 TV dramas, including [Foreign Language] (sic) [ Memories of Peking ], [Foreign Language] (sic) [ Awakening of Insects ], [Foreign Language] (sic) [ Joy of Life ] and [Foreign Language] (sic) [ The Best Partner ]. For 2020 pipeline, we have an abundant inventory of project lineup in the pipeline, around 9 to 10 drama series, including [Foreign Language], et cetera.

And also, I will add some on that part, is that in last year, aside from these 4 TV series, actually, we have some of the revenue from movies. Actually, we have 4 to 5 movies released last year. And some of the movie also got very good box office like [Foreign Language]. So movie is also part of business, but it's not so big in the revenue contribution. It's a small part of the business. And also, at the same time, we also have some of the revenues coming from the cooperation with online video platform that we have. Some of the projects is ordered by the platform. And also, we have some of the content that we are co-operating with them to get some of the license fee. So basically, we still have some of the revenue from that part. But the 4 TV series broadcasting is mainly revenue and profit contribution in last year.

Sorry, just to follow up, how much revenue contribution from the movie production? [Foreign Language]

No more than 20%. So it is not a big number of revenue. And also, the movies -- actually, the movies margin is lower than TV. So even they have a good revenue, but that margin is a little low compared to TV series.

We have the next question coming from the line of Sara Wang from Morgan Stanley.

So I have 3 questions. So first one is on the free reading. Can management share the long-term outlook on the free reading for, for example, both revenue or profit scale? And how should we view this business going forward? And second question is for Xiaodong, maybe, on New Classics Media. So we all know that New Classics Media has been producing very high-quality dramas. So may I ask how many producer teams we have and how many teams do you think will be able to continue to produce the very top dramas going forward? So in other words, what do you think is the capacity of New Classics Media over the long term? [Foreign Language]

Okay. I will answer your first question. For the free reading business, actually, our position in this area is that churn out because of free reading is not proving to be a profitability business until now. Even some of our peers, they're spending a lot of money to get some of our [ learnings ] in the user base, but they are still losing a lot of money. So basically, we think that our target is that -- last year target that we want to launching our free reading products with strategy that we can -- using collaboration with the Tencent platform. Together, this business at least can be not losing money. So last year, we are beginning to do this business to get market shares. This year, we think that we are targeting to get a much better user base. And also, we want to get much better investment return on this business. If this business cannot bring revenue or decent revenue to cover our cost, we wouldn't -- don't like to pay much more dollars to expanding this business. So I think that this year, our target that we want to maintain our position in this market from the user base side and also much more from the profitability of this business. We want to become the first company that can make money in this area, not just losing money in this area. And then maybe after this year, if we can find a very good approach and -- to get a better profitability in this area in next year, our target will be get much more market share on the user base in next year. So I think that this is our step-by-step approach for this -- for reading business outlook.

[Foreign Language]

[Foreign Language]

[Interpreted] So for the past years, NCM has gradually improved their capacity to produce high-quality dramas. So for self-production, in-house NCM is capable of producing 8 to 10 TV dramas. And the company also has a very diversified product line, including the TV drama series, web drama series and the other projects from the video -- online video platforms. And in terms of the team, the company has a very stable in-house team. At the same time, the company has also a very good relationship with the core talent in the industry, including the scriptwriters, the directors and producers.

Maybe just one more follow-up on New Classics Media. So we already see that there are 8 to 10 dramas in 2020 pipeline already. And then do management see further capacity expansion from here maybe over the long term? [Foreign Language]

[Foreign Language]

[Interpreted] Okay. We are slowly building up the capacity because, currently, we have around 10 to -- 8 to 10 projects capacity. But at the same time, because we have a strong and abundant inventory of scripts and cash reserves, we are able to expand that capacity. And also, we have a strong relationship with external partners, including the core -- the key talents and also the online video platform. So we are confident that we can build up the capacity. And also -- sorry, I missed one part in the translation, that we also are building up serialized project in the product line.

We have the next question coming from the line of Yuxiang Wang from CICC.

I have 2 quick follow-ups on the free-to-read model as well as NCM. My first question is that, could management please share more light on the performance of our free-to-read apps as well as Tencent channels? Any numbers on the user base of the free-to-read model? And for the NCM question, I just want to know that -- what is the split of the 8 to 10 projects capacity? [Foreign Language]

Okay. I will answer your first question. For the free reading business, actually, last year, we think that Feidu together with Tencent platform, we got a very good user base growing. Using only half year, the total user base, DAU is more than 5 million already. I think that it's already in a very good place in the market. But actually, we are not focused on the user base. We are much more focused on the operational efficiency of the business. So we are improving the ARPU for this business from 2 -- 20 -- CNY 0.2 per -- ARPU per day to about CNY 0.4 already. So -- and it still can be improved. So basically, we want to make -- the business models can be much better first and then we'll be spending much efforts to expanding the user base. So we will do it step by step. So this is for the free reading apps in the last year. [Foreign Language]

[Foreign Language]

[Interpreted] Okay. It's very difficult to estimate the proportion of the different sales model because, every year, the market changes, and we are adjusting our sales strategy based on the market demand. If we look at 2019, we have a very diversified product line in genres we cover in modern fantasy. And we also have various sales targets. So we're deciding on the sales target based on the influence and also the profitability. So we're deciding our business model and also our sales strategy based on the market demand continuously in 2020.

We have the next question coming from the line of Tian Hou from T.H. Capital.

Management, question is [Foreign Language]. So there are policies regarding the payments of artists and also how many actors can each show have from the government. So I wonder how those policies are going to impact your sales revenues going forward. That's the question.

[Foreign Language]

[Foreign Language]

[Interpreted] So the SAPPRFT stipulated that for all TV and web series -- including web series, the total compensation of the entire cast should not exceed 40% of the overall production cost, and the compensation of leading actors and actress should not exceed 70% of the total cast compensation. NCM is strictly complying with this regulatory requirement, and we believe that the reduction of cast compensation can help control the total production cost, which enables the company to better focus on improving the quality of their work. So for the TV series selling price, we have seen that there's a stable trend. At the same time, NCM is devoting to producing high-quality content, which is in short supply but highly demanded by the market. Both the satellite TV stations and online video platforms are still willing to pay higher prices than market average for premium quality works in order to attract audience and traffic. Of course, for those projects we are scheduled to start production in 2020, we will comply with the regulatory requirements. At the same time, we will strictly control the costs.

We have the next question from Yang Linlin. I would like to transfer the call to Ms. Zhou for any ending remarks. Ms. Zhou?

Thank you, operator. Due to time constraint, we'll have to conclude today's call. On behalf of the entire China Literature management team, I would like to thank you for your participation on today's call.

[Foreign Language]

Okay. Then, Linlin, you can ask your question.

[Foreign Language] The first question is could you give us some color about the price trend of the TV shows? And the second question is -- the IP operation business of Yuewen is growing rapidly, and -- which contains games, animation and the TV shows. How do we expect this growth and the proportion change in 2020? Is there any games that we could expect?

Thank you. I will answer your questions. For the unit price of the TV series, [ Cao ] had mentioned that, actually, after adjustment in 2018, actually, last year, the whole price is stable, and we believe this trend can be -- continue in this year. And also at the same time, due to New Classics Media is focused on the high-quality products in this area, so really, high-quality content can be -- get a much better unit price. At least from us, we don't find any big change in New Classics Media's high-quality products' unit price. So this is for your first question. And for the second one, for the IP operation business, actually, in last year, in 2019, each of the line of business, they are growing. Actually, the largest contribution is still coming from New Classics Media's TV and the movie business. And therefore, New Classics Media for China Literature, the largest growing part, one is coming from the co-investment of the TV series. We have mentioned that in last 2 to 3 years, we do some of the co-investment for the IP license we already sold before. On some of the projects, they are released in recent several years. In last year, there are 3 projects that are released, including [Foreign Language] (sic) [ Joy of Life ]. So basically, all these projects, they give us a very good revenue contribution in this part. So this business is growing very rapidly in last year. And also, at the same time, the game business, especially the gaming from Douluo Dalu is growing -- is launching last year. So it's also kind of built a very decent revenue in last year. Another 2 parts, one is animation. Actually, animation and IP license or IP sold by the selling business actually, they are stable mainly due to further animation part. Even our top line is much stronger than before, but due to how much high requirement for the release and approval of the products, so basically, the commercial release of the product is, at the end of the day, a little bit lower than before. So it is not growing much high, but the pipeline is still there and will be released in this year. And also for the IP selling business, due to we are changing our strategy to focus on the mid-tier of the content selling and IP license instead of top IP, so basically, the amount will be still growing, but the total revenue growing is not so rapid compared to last several years. So coming back to this year, I think that the revenue from this part of the year will be growing mainly driven by online game and also IP and also TV series co-investment business and also animation. So I think that they still have room to growing. And for the new games we have, several of the new game in the pipeline for development, but most likely, it will be commercial launch in later this year or early next year. So I don't think new game will contribute more revenue in this year, maybe will be in next year.

[Foreign Language]

[Foreign Language]

[Interpreted] We have noticed from the public information that the online video platforms are also adjusting their strategy. With the same procurement budget, they are trying to purchase better quality content in order to attract more audience and traffic. And also, appealing drama production is cash driven. With the decreasing cost, more works can be produced. NCM has an abundant inventory of high-quality scripts awaiting to be developed. If the cost for a single project is lowered and controlled, with the same amount of capital, we will be able to produce more premium quality work while ensuring the profitability. Thank you. Thank you. Due to time constraint, we have to close today's call. On behalf of the entire China Literature management team, I would like to thank you for your participation on today's conference call. If you have further questions about the company, please feel free to contact us. Thank you, and goodbye.

Thank you.

Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now. Thank you.