China Literature Limited (772) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to China Literature's 2020 Annual Results Conference Call. A copy of the annual results announcement can be found and downloaded from its Investor Relations website at ir.yuewen.com. [Operator Instructions]. I would now like to hand the conference over to your host today, Ms. Maggie Zhou, Head of Capital Markets and Investor Relations at China Literature. Maggie, please go ahead, ma'am.

Thank you, operator. Ladies and gentlemen, welcome to our 2020 Annual Results Conference Call. Joining us today on the call are Mr. Edward Cheng, CEO; Mr. Monkey Hou, our President; and [ Mr. William Sun ], our Vice President of Finance. For today's call, Edward will discuss the company's strategies, Monkey will review the company's business, and William 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 facts during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties and may not be realized in 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-IFRS financial measures that should be considered in addition to but not as a substitute for measures for the company's financial performance prepared in accordance with So please, do take a minute to read the risk factors and non-IFRS measures discussion in China Literature's 2020 annual results earnings release. I will now turn the call over to our Chief Executive Officer, Edward.

Thank you, Maggie. Hello, everyone. Thank you for joining our earnings calls today. And this is the second time I have shared our earnings results with you. Since the release of China Literature's interim report in August 2020. In our last investor call, we offered a very frank review of the challenges faced by China Literature, including external factors such as the COVID-19 pandemic and market competition as well as internal issues. The latter include both systematic issues and weak integration across our business segments. We proposed 3 major solutions for this, namely upgrades in content, platform and ecosystem. Looking back now, I would say our perceptions were average. If we did not choose to face the challenges head on and do the hard but the right things. And if we use that tried to escape and cover things up so as to complete the so-called smooth transition, our subsequent strategy and the execution would have been very seriously compromised. And there might even be significant deviations in the direction of our development. I could never imagine that in just a little bit more than half year's time, China Literature's team could face up to the historic problems, overcome the difficulties and go all lines to promote strategic upgrades, and have accomplished positive progress in business layouts and in turn, have achieved a turnaround in performance. Based on this experience, we intend to stick to communicating our source very openly and very honestly to our investors in the future and in a very direct and effective way. Turning now to the second half of last year. And for the results we have achieved, the management team now would like to thank all the employees of the company for their dedication and thank all our partners for their support. Now let's have a look at the figures. First, our content upgrade. We saw an increase in both the number and the quality of our writers and [ later ] reworks. As of the end of 2020, we have more than 9 million writers on our platform, with a total of 13.9 million literal works. During the year, we added approximately 46 billion words to our platform. According to the leading China search engine Baidu Search Ranking for in February 2021, 26 out of the top 30 online literature works originated on our platform. And at the same time, our writer ecosystem and IP incubation capabilities have been consistently improved, receiving positive comments for more and more writer. With some of the platinum writers who had left China Literature previously due to various reasons, already deciding to return as well. This has strengthened our reputation as the best partner to writers in China among our peers. Second, our platform upgrade. We have expanded our relationship with the Tencent channels, such as QQ browser and mobile QQ by distributing free to read content to a very wider range of readers. In addition, we established a free reading content decision committee to provide dedicated coordination and management of free content and also to incubate high-quality free literary works and writers. In December 2020, average DAUs for our free reading channels reached approximately 10 million users, and we will continue to explore this field of free reading so as to make more progress in 2021. Third, our ecosystem upgrade. As part of this, we're enhancing the quality and the visibility of our IPs across diverse media formats, including comics, animation, film, TV and web series. And this approach has already landed us a number of blockbusters. For example, following Joy of Life in 2019, the drama series My Heroic Husband, which was jointly produced by New Classics Media, Tencent Pictures and the China Literature Pictures with another successful adaptation from our IP. The drama series ranked #1 on Enlightent's web service playlist during its launch period, enjoying overwhelming market popularity and winning praise from various media, including People's Daily. Its success reflects the blockbusters' power of the 3-way New Classics Media, Tencent Pictures and the China Literature Pictures partnership. And I look forward to seeing more quality works from this cooperation model in the future. Another example is the drama series Soul Land, which was also adapted from China Literature's top IP and produced by New Classics Media. It was ranked #1 on Tencent Video's hot search list and the drama series list with over 4 billion videos views and created a good synergy between the Soul Land animation series and the online games. In addition to the serialize adaptation of our top IPs, New Classics Media has continued to launch high-quality products with modern themes. It is a specialist in this genre. With a title such as My Best Friends Story, the sequel to The First Half of My Life, which was ranked #1 on playlist of Enlightent’s TV series during its period. New Classics Media was also participating in the production of the recent hit movie, Hi, Mom, with box office of over RMB 5 billion, and actually, today, it's box office over RMB 5.3 billion, the second ranking box office sales in the history of China film industry ever. And this success has testified our value judgment on New Classics Media and validated our decision to extend its earn-out mechanism. We believe that New Classics Media will have much more room to grow as part of our ecosystem. And based on this strategy, China Literature has been able to maintain its leading position in the online reading market and enhance its IP operating capacity. Our financial performance picked up significantly in the second half of the year 2020. For the whole year, China Literature has total revenues of RMB 8.5 billion. And the out of the total, the second half saw revenues of RMB 5.3 billion, up 62% from the very first half of the year. Net profit attributed to equity holders of the company and non-IFRS measures for the full year was RMB 917 million. Of this, the second half saw RMB 895 million in net profit, around 40% -- 40-fold increase over the first half. And the numbers give you a flat and one-dimensional picture of our operational activities. And to me, what really matters is organization and the decision-making behind the data. China Literature is now evolving from a digital reading-focused company into a broad-based entertainment company, with unparalleled capacity to cultivate and develop IP through a wide variety of digital offerings, including literature, comics, animation, film, TV series and games. Our organizational strategy and the decision-making are not just targeting half year or 1 year performance, but a sustainable growth for the next 3 to 5 years or even 10 years as creating quality IP content is a long-term task. As you may have seen, our core management team is now stronger and more diverse as we introduced its new leaders in the areas of IT operations, online business, investment, legal and finance. All these new members of our management team have extensive industry experience, and outstanding entrepreneurial spirit in their respective fields and injecting new dynamism into the company. At the same time, we have upgraded our hiring criteria in order to build a team that is passionate about content and dedicated to improve the organizational efficiency of the company overall. In addition, our organizational structure has become more flexible and inclusive. We have established the joint committee between China Literature's Comics & Animation Department and Tencent Comics. And a joint committee between China Literature Pictures, New Classics Media and Tencent Pictures, which have developed the synergies with Tencent Pictures, Tencent Comics and New Classics Media, with common beliefs to start a deeper and closer cooperation. Furthermore, our high level decision-making has become more focused on long-term strategy-oriented than short-term business. We have never valued the overall life cycle value of our IP as much as we do today. Historically, each IP licensing agreement was simply a deal and a sales figure. Today, each IP licensing agreement is with the objective of the beginning of long-term IP life cycle. China Literature will do everything it can to realize the lifetime value of its IPs together with the industry partners, build its ecosystem and create long-term value. The key to strengthening our management team and the redesign our organization structure is to ensure this core concept is put into practice. To support this decision-making mechanism, we have established an IP-focused intermediate business platform, and this has 3 functional segments, including writers service, IP screening and planning and the ecosystem partnerships. Firstly, for upstream writers, this intermediate platform will offer better IP planning and promotional services. Help them build up the reputation in the field of IP adaptation and, in turn, benefit the writer ecosystem. Secondly, as part of our IP operational procedures, we have established more in-depth IP screening and planning mechanism. While screening and selecting suitable IPs for adaptations [ good ] data and the content analysis, we are also providing value-added content planning services. Examples of this, including IP classification and grading for different partners and project planning for IP adaptations. We're also actively developing new themes and genres to be able to lead market demand. Thirdly, we are engaging more closely with our external partners through integrated IP planning and development, we aim to raise IP visibility to create blockbuster IPs across different entertainment formats. The establishment of this IP intermediate platform has standardized our IP licensing procedure and paved the way for industry scale IP development system. Based on this capacity build into the intermediate IP platform we can strengthen ecosystem partnerships, expand production capacity, achieve improvements in quality and quantity and finally increase the value of IPs. [ Predictably ], this is another hard but right thing to do. The road to success is a winding one and a few people are brave enough to take it. And the team here are ready to take on this challenge of doing the hard but right thing order to build our business to last. Looking ahead, we are confident our long-term IP development and unshaken in our determination to reap long-term rewards. The progress we achieved during the second half of the year of 2020 was just at the beginning, we're long-term rather than short-term oriented. And is committed to building an ecosystem that produces, new teachers, quality content. We look for life-enriching, heartwarming stories and content with deep humanity. And finally, I would like to share my personal expectations with you for the future development of China Literature. In the days to come, we will center growth on content, platform and ecosystem, creating a sustainable growth trajectory and laying a solid foundation to explore new business. We hope that more and more users will be enjoying China Literature IP across a very wide range of entertainment media formats from text, comics, animation, film and TV series to games. As we produce consistent IP winners as times goes by, we will also promote partnerships with various industry players to expand our boundaries. We see enormous growth potential of our IP business across segments leveraging our online reading business to create an innovative IP-centric production cycle. IP incubation will become our next growth accelerator. We believe this will lead the company to a very much wider market with more exciting prospects ahead. That concludes my session. Now let's welcome Monkey to brief us on the business development of the company. Thank you all.

Thanks, Edward. Just now, Edward has discussed our strategy and some key business updates. Let me add more detail about our business development during the year. First, let's look at our online reading business. In 2020, total MAU on our self-owned platform products and self-operated channels on Tencent products increased 4.2% year-over-year to 228.9 million. MPU increased 4.1% and year-over-year to 10.2 million. Our paid reading business performed well as we expanded into new channels, strengthened content management and community and made improvements to our recommendation system. In addition, our free reading business started to show results with further expansion of content and user base. Average DAU for our free reading channels reached 10 million in December 2020. We will continue to expand our online reading business through both paid and free business models. During the year, we improved our writer ecosystem and offered writers service and experience that better reflect their needs. New generation, the writers have also become a major group of new writers supply, bring fresh ideas and emerging trends during the year. We're adding content and enhancing the quality of writing on our platform. We introduced functions to improve engagement and [indiscernible] of our reader community such as instant comments and replies, user-generated audio reading of text and user-generated chapters. We improved our recommendation system, allowing user to find their preferred books more quickly. In addition, Big Data analysis tools help our editors to screen and nurture content. Let's move to our IP operations business. In 2020, we licensed around 200 IP rights for adaptation to third-party partners beside the release of top ranking film and drama series as Edward just mentioned. We released a number of adapted animated series during the year. These include new season of Stellar Transformations, [Foreign Language], Martial Universe, [Foreign Language], The King’s Avatar, [Foreign Language], Fighter of the Destiny, [Foreign Language], and the Fulltime Master [Foreign Language] all these animated series received more positive feedback from users. That concludes my session. Now I will hand over to William for financial performance update. Thank you.

Thanks, Monkey. Hello, everyone. It's my honor to attend the first earnings call since I joint China Literature. In 2020, our total revenue increased by 2.1% year-over-year to RMB 8.5 billion. Our online business revenues were RMB 4.9 billion, up 32.9% year-over-year, accounting for 57.9% of total revenues compared with 44.5% in 2019. The revenue increase was contributed by the growth of our self-owned platform products, primarily driven by the expansion of distribution channels as well as users growing willingness to pay for our rating content. On the other hand, we continue to see declines in revenue from Tencent products as we further expanded our free-to-read services and were not aggressive in monetizing our free users through advertisement. Revenues from third-party platforms were also impacted by drop in revenues from certain distribution partners. In 2020, we continue to expand our total user base and increase user spending. Our average MAU grew by 4.2% year-over-year to around 229 million, driven by the user growth from both our self-owned platform products and our self-operated channels on Tencent products. Our average MPUs increased by 4.1% year-over-year to 10.2 million, mainly driven by the growing number of paying users, our self-owned platform products, partially offset by the decrease in paying users from certain Tencent products and small users were attracted free-to-read content. Monthly ARPU reached RMB 34.7, up 37.2% year-over-year, mainly because we improved our content operations, optimized our recommendation system and expanded our content distribution channels during the year. Turning to the IP operations and other business. In 2020, our IP operations and other revenues decreased by 22.5% year-over-year to RMB 3.6 billion, primarily due to the delay in production and release date for the films, TV series and web series during the first half of the year, as impacted by the COVID-19 pandemic, but recovered gradually during the second half of the year. Now let's look at the costs and expenses. In 2020, our total cost of goods sold amounted to RMB 4.3 billion, down 7.8% year-over-year, mainly impacted by lower production costs and partially offset by higher platform distribution costs. Production costs of TV, web and animated series and films decreased by 47.9% year-over-year to RMB 1.1 billion, mainly due to the delayed release of certain products caused by COVID-19 pandemic. Platform distribution costs increased by 109.7% year-over-year to RMB 1.2 billion, mainly due to the expansion of our online reading channels and the improved operation of our online games in 2020. In 2020, our gross profit increased by 14.7% to RMB 4.2 billion, representing a gross margin of 49.7%, up from 44.2% in 2019. We recorded net other losses of RMB 5.3 billion for 2020 compared with net other gains of RMB 453 million in 2019. The other losses for 2020 were mainly consisted of, one, the impairment of provision of goodwill and trademark rights related to the acquisition of New Classics Media of RMB 4.4 billion; two, the net fair value loss of RMB 605 million due to the modification of New Classics Media's earn-out mechanism in 2020; and three, the impairment provision of the company's long-term investment related to certain investee companies of RMB 252 million. In terms of operating expenses, our selling and marketing expenses were RMB 2.5 billion in 2020, up 20.5% year-over-year. As we invested more marketing dollars to promote our online reading content, selling and marketing expenses as a percentage of revenue increased to 29.3% in 2020 from 24.8% in 2019. Our G&A expenses decreased by 13.5% year-over-year to RMB 874 million in 2020. Mainly due to a net reversal of compensation costs related to the severance expense of certain employees and former owners of New Classics Media as we modified its earnings -- earn-out mechanism. As a percentage of revenues, our G&A expenses decreased to 10.2% in 2020 from 10.1% in 2019. As a result of factors mentioned above, our operating loss was RMB 4.5 billion. Non-IFRS operating profit, which excludes share-based compensation, M&A-related impacts, such as net gains or losses from investee companies, amortization of intangible assets and the impairment provision, was RMB 935 million with a non-IFRS operating margin of 11%. Our net loss was RMB 4.5 billion, which was largely attributable to net other losses in relation to the New Classics Media acquisition. Our non-IFRS net profit was RMB 901 million as a non-IFRS net margin of 10.6%. Although 2020 began with a variety of challenges, our businesses yielded strong performance in the second half of 2020, benefiting from the execution -- effective execution and our growth strategy. That concludes the financial-related part. Let's move on to the Q&A session.

[Operator Instructions] We have the first question coming from the line of Brian Gong from Citi Group.

[Foreign Language] So I will translate myself. Congratulations on the solid results. I have two questions. First is regarding the free reading. I noticed that we have reported DAU of 10 million for [ free reading ] as of December 2020? Can management share what was the revenue free reading in 2020? And what could be the DAU target in 2021 and over the long run? And how does management see monetization potentials? And the second question is about the pipeline of New Classics Media for 2021? And how does recently a very successful film Hi, Mom and the drama My Heroic Husband, how does those 2 contribute to the top line and bottom line 2021?

[Foreign Language]

[Interpreted] Yes, I will translate. Total ad revenue was [ better than ] 2019 at the same time ad revenue in the second half year was greater than the first half. Even with the fact we focused on developing the user base, improving retention and incubating, and selecting quality content other than commercialize broadly. And our revenue from free reading are mostly attributable from Tencent products like QQ Browser and the Mobile QQ. In this year, we'll remain focused on developing user base improving retention and increasing our quality content. And in 2021, we will continue to [ curate ] and select quality, free content and improve recommendation systems in order to attract users to spend more time with us. [Foreign Language]

[Foreign Language]

In 2021, we expect to release TV series such as The Golden Hairpin, the Demi-Gods and Semi-Devils and [ The Rival ]. [Foreign Language] Regarding the question for [Foreign Language] since we are one of the 3 original producers of Hi, Mom, in the competitive Chinese New Year holiday season in order to gain better distribution and [ assume ] scheduling resources, we chose a guaranteed box office publishing model, which assists the box office [indiscernible] network and same -- other film publishers. Since the box office revenue is split [indiscernible] and the actual box office revenue which is RMB 5 billion. Because of the revenue and the profit we generated is not much -- it's not very high, but the ROI will be even. Thank you.

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

[Foreign Language] So just two quick questions. One is about the competitive landscape. We have seen some traffic patterns, especially some video companies investing in literature in the past 1 to 2 years. So just wondering how China Literature plans to the defend its leadership position in the industry? And then secondly, perhaps more a technical question. We know that in 2021, as Mr. [ Hou ] also mentioned, there should more IP projects completion. So wondering how that could affect your gross margin on a returning basis?

[Foreign Language]

We have conducted that operation in content innovation and genre diversification. We'll continue to incubate young writers, will further enhance community features by launching more community functions and increase user activity and stickiness. The overall increased ROI through the continuous improvement of our recommendation system. There will be -- this will help to drive users willingness to pay. In addition, we are also expanding the new distribution channels, such as recent public accounts to up the user traffic in the recent system, while so redefine our reading business, we will actively for opportunities in free reading business. As free reading model could bring us more new users, which will is also very important. Regarding the competition for free reading, in the past when we faced this competition from free reading business without a conservative strategy that and even threw considerable resources to promote our free-to-read apps. As we were worrying that this will dilute our brand reputation for high-quality content, but from another perspective, we've seen that free to read apps have already attracted large number of users, which could meet [indiscernible]. We realized that only by gaining the market share, we'll be able to help more users to enjoy more quality content, and we can leverage our reach and high-quality library to make this item. One of our competitive edges is our high-quality content [indiscernible] users business. We have established a free reading content decision committee to provide dedicated coordination and management of great content and to integrate high-quality free literature -- literary works and writers. Meanwhile, we collaborate with the Tencent channels to reach more users in efficient ways as there is no extra user acquisition costs, while only share revenue with Tencent will actually monetize. The average DAU of our free-to-read content reached 10 million in December 2020. Internet industry naturally an intensively competitive, we keep an open mind towards monetization model selection. We believe we should focus on costs, cultivating group writers and the quality content to set a solid foundation for better IP operations, which is also one of our competitive edges. In the future, we'll solidify our paid reading business, we will actively explore the opportunities in free reading business, combining China Literature's advantage in high-quality content and content advantage in user traffic. Thank you. [Foreign Language]

For the [indiscernible] marketing question, I would say the price of profit margin our drama series projects or films are driven by both the quality of the product and the policy and market environment at the time of release. So I think that alone, will not be a guarantee for higher price or higher profit margin.

And we have the next question from Xueqing Zhang from CICC.

[Foreign Language] I will translate myself. My first question is about online reading businesses. We saw revenues from self-operating channels on certain Tencent products as we continue to expand for reading businesses decline. So just wondering what's the strategy for different channels online reading business? And could we share more on the revenue in 2020? And my second question is about IP operations. We saw great achievements in TV dramas and films for IP operations businesses. In terms of -- could we share more color on the progress of cooperation with Tencent games and other game companies recently? And will be a driver for our IP operation revenues?

[Foreign Language]

[Interpreted] Our [indiscernible] operating products -- we intend to incubate more IP from our library. For the Tencent channels, we'll leverage high volume traffic to further expand our users for free-to-read content. And also, we will collaborate with more third parties to fix more opportunities. Our main focus was 2021 to grow user base especially the users of free-to-read services. So we can expand the reader base for our stories and serve our IP operation business in the long run.

[Foreign Language]

[Interpreted] This is Edward. I would like to take your second question. So as mentioned in my prepared remarks, in the second half of last year, we have gone through a turnover in our business. We converted our business from a pure reading business into a comprehensive IP adaptation and operation business on the basis of online reading. And we are devoted to converting more of our IPs into more adapted formats like drama series, films, games, animations and comics and others. So we will also continue to strengthen our collaboration with external business partners. And to produce and present more content products for our users. And at the same time, that will bring us more commercial value to us and to our business partners. So we believe internally, we will continue to strengthen our capability for the content creation, and we will be able to produce more synergies among different IP-adapted formats. As Monkey mentioned, we continue to strengthen our capability in the aspect of free reading and paid reading. And on the basis of that, we will be able to -- this will lay a very solid foundation for our IP adaptation business. So first of all, let me talk about our comics and animations business. So China Literature and Tencent Comics have established a joint project team and set up efficient communication and collaboration mechanism to execute a systematic IP planning. The joint project team has set a strategic target, which is to produce 300 comics in 3 years, and it is expected that over 100 comics will be launched in 2021. And also China Literature, Tencent Pictures and New Classics Media, with third parties will continue to work together to adapt more China Literature IPs into high-quality premium drama series. So we believe that by releasing more and more synergies between the animations and comics and the drama series, the IP value will be further maximized. And that would lay a very solid foundation for the games business. So we will be able to attract more business partners in the gaming industry and attract them to help them strengthen their research and development. So in terms of the game business, so first of all, Tencent Games is interesting in our IP, and we will have more opportunities to collaborate with Tencent Games in IP licensing. And in addition, we will continue to introduce more key game players outside the Tencent ecosystem into China Literature ecosystem for more collaboration in more dimensions. We will be able to have more fullness, more categories of games, including MMORPG, SLG and other genres of games. So we, together with various game industry players will explore the library of China Literature's treasure house of IP and present more adaptations. So for instance, as you know, the Joy of Life, the drama series was a big hit co-produced by New Classics Media, Tencent Pictures and China Literature. So on the basis of that, the adapted game Joy of Life is expected to be released in 2021. So we believe this game will also be able to benefit from the success of the drama series. And in 2021, we are devoted to the diversification of adaptive genres and quality of IP adaptation and enhance our financial returns along with ERP life cycle. We will always continue to strengthen our capabilities. So I would like to share one more example with you, which is the which is the Soul Land, which is a high-quality drama series produced by New Classics Media. This also drives the operation of the same IP adapted game Soul Land. So that is the synergy among these different adapted formats I'm talking about. So thank you for your question.

Ladies and gentlemen, due to time constraint, I would like to hand the conference back to our host for any ending remarks. Please take over, ma'am.

Thank you, operator. Due to time constraints, we will now 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 conference call. If you have further questions about China Literature, please feel free to contact us. Thank you, and goodbye.

Thank you.

Thank you.

Thank you.

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