China Literature Limited (772) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to China Literature's 2026 Interim Results Conference Call. A copy of the interim results announcement can be found and downloaded from its Investor Relations website, 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.

Thank you, operator. Ladies and gentlemen, welcome to our 2026 interim results conference call. Joining us today on the call are Mr. Xiaonan Hou, our CEO; and Mr. Jackie Xu, our VP of Finance. For today's call, Mr. Hou will discuss the company's strategies and business highlights, and Mr. Xu 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 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-IFRS financial measures that should be considered in addition to, but not as a substitute for the 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-IFRS financial discussion in China Literature's 2026 interim results earnings release. I'll now turn the call over to our Chief Executive Officer, Mr. Xiaonan Hou.

Thank you for joining us on today's earnings conference call. Before we go over our financial results, let me share a few thoughts on the industry landscape and our strategic priorities. Over the past year, we have had multiple in-depth discussions about where the content industry is headed. In particular, 2 structural shifts stand out. One is the continued rise of fragmented content consumption. The other is the revolutionary reshaping of the entire content ecosystem by AI. In response to these trends, we turned our insights into action and made decisive strategic moves. We started with live action short dramas, kept up with the technology wave, and finally incubated a brand new content format, the AI animated drama by integrating AI deeply into the creative process. In the first half of this year, our short drama and AI animated drama businesses delivered exceptional growth with combined revenues exceeding RMB 430 million, over 3x that of the same period last year, accounting for 27% of our IP operation revenues and serving as a key contributor to the 42% year-on-year increase in IP operation revenues. More specifically, our short drama business delivered a steady stream of hit titles in the first half of 2026, achieving a blockbuster rate 4x the market average, while maintaining a balance of male and female-oriented genres across our content portfolio. We also built a scalable approach to developing blockbuster IP into serialized short dramas, validating the potential of serialized IP operations in the short drama sector. Meanwhile, leveraging the AI technology, we adapted over 1,000 online literature titles into AI animated dramas, among which 46 titles surpassed 100 million views each. 367 titles exceeded 10 million views each, and the proportion of titles reaching 1 million views was 5x the industry average. In our view, this high hit rate reflects not only our ability to anticipate industry trends, but also the strength of our premium IP library and the deep creative ecosystem we have built across the IP value chain over the years. AI tools are undoubtedly pushing content supply into a new era defined by greater scale and speed, but this doesn't diminish the value of content. On the contrary, it reinforces the scarcity and value of premium IP. Visual content has become easier to produce, but only stories with cross-generational appeal that truly touch people's hearts will remain the foundation for sustainable monetization. Powered by our IP plus AI engine, we harness the synergy between technology and creativity to accelerate the high-quality transformation of stories from text to visuals, opening up the next decade of IP value creation. That mission guides us as we look into the future. With that, let me now walk you through our operating highlights for the first half of 2026. First, in IP incubation, our online reading ecosystem continues to serve as a super reservoir of premium content. In the first half of 2026, our platform attracted 240,000 new writers, generated over 460,000 online literature works and added more than 30 billion characters, securing a strong source of content supply. Emerging generation writers are gaining momentum. Among newly signed writers who generated more than RMB 1 million in revenue during the first half, those under 30 accounted for 57%, representing a 49% increase year-over-year. Promising works continue to emerge. On Qidian, the number of titles receiving user collections rose 37% year-over-year, while the number of titles receiving monthly tickets grew 26% year-over-year. With the return of a series of top-tier platinum and phenomenal writers, 2 new titles attracted more than 200,000 readers each on their first day of launch, setting new records for debut performance on the platform. Meanwhile, we have accelerated the transformation from text to visuals. In the first half of 2026, while solidifying our traditional strength in film, drama series and animation, we also stepped up our efforts in emerging segments such as short dramas and AI animated drama, resulting in exceptional growth. In the premium drama series and film segment, several drama series adapted from China Literature's IPs premiered this year, including top-tier titles such as Blossoms of Power, [Foreign Language], The Heir, [Foreign Language] and Ashes to Crown, [Foreign Language]. They all ranked among the top titles on platform popularity charts during their respective broadcasting periods. Meanwhile, we also released our self-produced drama series, No Pain, No Gain, [Foreign Language], The Devil Between Us, [Foreign Language] and Lady Liberty, [Foreign Language]. These titles broke new ground across genres such as urban and crime dramas winning both critical acclaim and strong audience traction. In the animation segment, we released sequels of classic animated titles, including Battle Through the Heavens, [Foreign Language], The Outcast, [Foreign Language], Almighty Mage, [Foreign Language] and Stellar Transformations, [Foreign Language]. All these titles ranked among the top titles on platform popularity charts during their respective broadcasting period. Among them, The Outcast, [Foreign Language] achieved a popularity index of over 21,800 on Tencent Video, making it the most popular 2D animated series on the platform in the past 3 years. According to Enlightent, since the start of this year, 8 out of the top 10 animation series cumulative uses across all platforms were adopted from China literature IP, further demonstrating our market influence in animation content. In the short drama and AI animated drama segment, as mentioned earlier, we achieved major breakthroughs. In the first half of 2026, we launched over 90 short dramas with many breakout hits. In male-oriented genres, The Invisible Bodyguard, [Foreign Language] was a blockbuster with a popularity index exceeding 100 million and total views across all platforms surpassing 5 billion. In female-oriented genres, sequels of our original Sweet Wife, [Foreign Language] IP performed strongly, and setting a benchmark for commercialization. In the AI animated drama segment, our top-tier title, Three Thousand Shelters, [Foreign Language] surpassed 3 billion views across all platforms, driving the original novel into the top 10 of the best seller ranking on Qidian. We also explored opportunities to develop premium AI animated drama platforms, launching Qidian Theater, Qidian Xu Chang, and ToonScroll in China and overseas, respectively. All these achievements were driven by China Literature's extensive IP library, strong creator ecosystem and robust capabilities in IP development across the industry chain. Next, let me turn to IP commercialization. In the first half of 2026, our IP merchandise business continued to maintain rapid growth with GMV reaching RMB 780 million, representing a year-over-year growth of more than 60%. This growth was driven by our continued enhancement across all core areas: product, channel, operation and ecosystem. On the product front, we strengthened our presence in the light and soft merchandise category characterized by high frequency purchases and strong repeat purchase rates, while expanding into new categories such as plush toys, lifestyle products and precious metals. Our design excellence and supply chain efficiency enabled us to deliver a steady stream of high-quality products, positioning "Yuewen Goods" as one of the leading brands in China's anime merchandise market. On the channel front, we strengthened our self-operated online sales network, including mini programs, live streaming rooms and flagship e-commerce stores. We also optimized our offline store network and deepened collaboration with our channel partners. These efforts led to improvements in both channel profitability and brand control. We also continued to strengthen our sales velocity and supply chain management, improving inventory turnover efficiency and turning sales growth into solid profit contribution. On the operational front, we launched campaigns around iconic IP characters, driving deeper fan engagement and stronger consumer conversion. During the first half, we organized the Glory Pilgrimage [Foreign Language] pop-up event in 4 cities to celebrate the birthday of Ye Xiu, the leading character of The King's Avatar, [Foreign Language]. We also launched The Outcast Boy Group, [Foreign Language] bringing the IP to a broader audience through idle style marketing and deepening the emotional connection between the IP and users. On the ecosystem front, we accelerated the expansion of our overseas channels. Together with our partners, we opened our first global collectible toy concept store in Singapore, while selected products on the overseas online store for Lord of the Mysteries [Foreign Language] sold out shortly after launch. The popularity of our hit merchandise further amplified the appeal of our IPs, driving users back to our content ecosystem, spanning online reading, animation and drama series. Now, let me share an update on our progress in AI. At China Literature, AI is not confined to a single application. We have deeply integrated it into every stage of the content creation journey from the spark of inspiration to user reach around the world. Recently, we launched the Buddy series of AI agents purposely built for the creative content industry and upgraded 3 core products: NovelBuddy, [Foreign Language] DramaBuddy, [Foreign Language] and IPBuddy [Foreign Language] to provide content creators and operators with a comprehensive suite of AI-powered tools. NovelBuddy is designed for online literature creators. In addition to AI-assisted writing support, it also provides copyright production and antiplagiarism services, helping safeguard creators right. DramaBuddy focuses on AI animated drama production, covering the entire process, including creative ideation, content production and project management enabling the scalable production of premium AI-animated dramas. IPBuddy serves as the all-seeing eye of our in-house copyright team, enabling the value assessment of a title within minutes and greatly improving the efficiency of selecting IP for adaptation and commercialization. Meanwhile, AI has accelerated our global expansion. As of the first half of 2026, more than 30,000 AI-translated works were available on our WebNovel platform, contributing 40% of the platform's novel revenue during the first half of the year, and enabling Chinese stories to reach global multilingual audiences more efficiently. We remain firmly convinced of the transformative power of IP and AI. Over the past 2 decades, the Internet lowered the barriers to literary creation and paved the way for China Literature's growth into the company it is today. We believe that over the next 2 decades AI will raise the ceiling for creators and drive a substantial value enhancement of the entire content ecosystem. Deeply integrating AI into the creative process to drive growth is a key strategic priority for our future. We see AI as an amplifier of IP values with the power to make great stories reach their true, full potential. We also recognize that the more capable AI becomes, the scarcer and more valuable original human creativity will be. That is why China Literature will continue to strengthen its support for original creators, ensuring that technology empowers creativity and that great stories thrive for generations to come. This concludes my remarks. Now, I'd like to invite Mr. Xu to present our financial performance. Thank you.

Thank you, Mr. Hou. Hello, everyone. In the first half of 2026, our total revenues increased by 10.7% year-over-year to RMB 3.53 billion. Let's start with our online business. Online business revenues were RMB 1.84 billion compared with RMB 1.99 billion in the first half of 2025, mainly due to competitive pressure, which led to increased proportion of free-to-read content and shifted content distribution from online reading for short dramas and AI animated dramas on our self-operated products within the Weixin ecosystem. In terms of operating metrics, our total average MAUs were 134.1 million compared with 141.3 million in the first half of 2025. The decline was mainly due to our ongoing shift of core content distribution to our own platform products, leading to continuous drop in MAUs on certain channels as user activity fell. Average MPUs were 8.2 million compared with 9.2 million in the first half of 2025, mainly because we distributed more free content on our self-owned platform products. Monthly ARPU increased 4.5% to RMB 32.7, reflecting a mix effect as lower ARPU users shifted to free content during the first half of 2026. Now turning to IP operations and other businesses. In the first half of 2026, revenues from IP operations and others increased by 40.3% year-over-year to RMB 1.69 billion. Within this segment, revenues from IP operations increased by 41.9% year-over-year to RMB 1.61 billion primarily driven by rapid growth across multiple business lines, including short dramas, AI-animated dramas, TV and web series and IP merchandise products. In particular, revenues from short dramas and AI-related dramas exceeded RMB 430 million, up 2.3x year-over-year. This accounted for approximately 27% of IP operations revenues and has become a new growth engine for our IP businesses. Our IP merchandise business also maintained strong growth momentum, with GMV increasing over 60% year-over-year to RMB 780 million. Revenues from the others category, mainly generated by sales of physical books, increased by 14.4% year-over-year to RMB 77 million. Now let's look at costs and expenses. In the first half of 2026, our cost of revenues increased by 10.2% year-over-year to RMB 1.74 billion, primarily driven by higher production costs for short dramas, AI-animated dramas and TV and web series, which was in line with revenue growth as more content was released during the period. As a result of the foregoing, our gross profit increased by 11.1% year-over-year to RMB 1.79 billion. Gross margin was up from 50.5% to 50.7% year-over-year. Our selling and marketing expenses increased by 9.6% year-over-year to RMB 1.01 billion, mainly driven by higher marketing and promotional spending to support the expansion of our IP businesses. As a percentage of revenues, our selling and marketing expenses decreased from 28.9% to 28.6% year-over-year. Our G&A expenses increased by 15.5% year-over-year to RMB 560 million, reflecting higher personnel and administrative expenses related to scaling our IP businesses. As a percentage of revenues, our G&A expenses increased from 15.2% to 15.9% year-over-year. Our net other losses were RMB 25 million compared with net other gains of RMB 583 million in the prior year period. The change was mainly due to RMB 134 million in late payment tax surcharge incurred by a subsidiary of the company during the first half of 2026, compared with RMB 598 million of net gains on the deemed disposal of an investee in the first half of 2025. As a result of the above factors, our operating profit was RMB 271 million compared with RMB 826 million in the first half of 2025. On a non-IFRS basis, operating profit was RMB 367.2 million compared with RMB 449 million in the first half of 2025. Our income tax expense increased from RMB 150 million to RMB 225 million, mainly due to RMB 166 million in supplementary income tax payments by a subsidiary of the company, together with a late payment tax surcharge of RMB 134 million, which was recorded in our losses. These tax-related items reduced our profit by RMB 300 million. Our net profit to shareholders was RMB 135 million, compared with RMB 850 million in the first half of 2025. On a non-IFRS basis, our net profit to shareholders was RMB 259 million compared with RMB 508 million in the first half of 2025, largely due to the RMB 300 million tax-related impact discussed above. That concludes our financial review part. Let's move on to Q&A session.

[Operator Instructions] Your first question comes from Maggie Ye with CLSA.

[Foreign Language] [Interpreted] We have witnessed the rapid growth of short drama and AI-powered animated drama in China. So wondering, what is management's latest view on the industry's long-term growth trend and your outlook for China Literature's revenue opportunity in this segment? Additionally, as AI-generated content scales on China Literature's platform, how do management expect the substitution effect on the traditional reading consumption to persist?

[Foreign Language] [Interpreted] This is CEO of China Literature. So thanks for your question. I will take your question regarding the short dramas and AI-animated dramas. So we believe the mass production and traffic-driven growth model for short dramas and AI-animated dramas is rapidly fading, and the trend is shifting from quantity to quality and competition our focus is on story telling quality and hit making consistency. It represents a structural advantage for top-tier players like China Literature, with rich IP reserves and premium content production capabilities. And China Literature has the largest original literature IP library in China, addressing the industry core problem source, which is the shortage of compelling stories. Our proven methodology for hit making is already delivering results. In the first half of the year, the hit rate of our short drama was 4x the market average. And for AI-animated dramas, the rate of titles exceeding 1 million views was 5x the industry average, and 46 titles each exceeded 100 million views. On the ecosystem front, we launched Project Spark Craft [Foreign Language] especially for AI-animated drama business. The project plans to invest over RMB 100 million in building up the industry ecosystem across 4 dimensions: IP cooperation, platform support, systematic training and funding. Our in-house developed AI agent DramaBuddy, purpose-built for AI-animated dramas has also served over 200 studios, providing technical support for ecosystem. In response to this trend, China Literature's strategy is very clear, that is we leverage our rich IP reserves to embrace the entire ecosystem. We are proactively strengthening our capabilities in 2 critical procedures, including the development of script and IP, as well as user acquisition and commercialization, while outsourcing the visual production to external studios. This asset-light model of controlling both upstream and downstream, while outsourcing the midstream allows us to rapidly scale production capacity by leveraging the industry ecosystem, an approach that is suitable to China Literature at this stage. We believe that AI-animated dramas represent a natural extension of IP from text to video formats, complementing our premium literature business. Since the beginning of this year, various adaptations have been continuously feeding back positively into literature works. The adaptations of short dramas and AI-animated dramas, in particular, have demonstrated strong momentum. For example, one of our blockbuster AI-animated dramas, Three Thousand Shelters, [Foreign Language] has surpassed 3 billion views across all platforms, directly driving the original novel back into the top 10 of the bestseller ranking on Qidian. Following the release of our short drama, I Really Didn't Want to Be Reborn, [Foreign Language]. The original novel exceeded a 100,000 average subscribers per chapter, validating that high-quality visual content can channel incremental users to our online reading business. While some noncore readers may migrate to AI-animated dramas, the core value of AI-animated dramas lies in reaching more audience in addition to the original users and breaking through the boundaries of IP formats, unlocking the value of visualizing China Literature's best IP library and creative ecosystem, and this is our greatest opportunity. If we look at the entire IP library of China Literature, the proportion of IP that has been developed so far is less than 0.1%. As AI tools continue to lower the barriers to content production, there remains enormous room for growth in both the speed and scope of IP development going forward.

The next question comes from [Zhi Zhou] with Guangfa.

[Foreign Language] And I will translate the question myself. I want to ask about the competitive dynamic and mutual displacement between manga dramas and short dramas in terms of distribution channels. How are the distribution channels for the 2 formats distributed overall? For example, the share between Hongguo and self-developed apps and mini programs. What are the overseas strategies for your manga dramas and short drama going forward?

[Foreign Language] [Interpreted] China Literature CEO, Mr. Hou, will take this question. So our short dramas and AI-animated dramas are distributed on a full set of industry channels, including leading platforms such as Hongguo, Douyin, Kuaishou, Tencent Video Accounts and Bilibili as well as self-owned mini programs and apps. In addition, we are currently in discussions with long-form video platforms as well. Regarding potential partnerships, in the first half of the year, over half of our short-form dramas and AI-animated dramas were launched on Hongguo. We do not rely on any single channel decisions on which platform a specific title is to be distributed on and whether to adopt a paid-for-free model are made by our operation team based on each title's content features and the marketing timing. As the landscape of the distribution channels, the video platform continues to evolve, we will remain agile in adjusting our channel strategy accordingly. This year, we launched our overseas premium AI-animated drama platform ToonScroll and plan to release over 1,000 titles within the year. We are also exploring the development of AI-animated dramas based on overseas original IP. The rationale behind this strategy is clear. First, as the global market for short dramas and AI-animated dramas is vast, and China has built up proven expertise in short-form content production that is readily exportable. Second, AI-animated dramas are predominantly centered around genres such as anime, isekai, fantasy and these categories inherently carry stronger cross-cultural appeal and face lower barriers to be accepted by international audience. Third, AI has significantly reduced content production costs, making large-scale overseas expansion economically viable. In general, our overseas short drama and AI-animated drama business remains in its early stage of exploration. We will provide timely updates to the market as we make meaningful progress going forward. I mean, I would also like to note that the AI-animated drama industry is growing very rapidly, and the market potential is enormous. AI-animated drama represents one of the most direct use cases for AI-generated video technology, and AI empowers the entire workflow of video production, including pre-production where it assist in topic analysis, script generation, and scene design, filming where it enables virtual production and virtual set rendering and post production where it delivers intelligent editing and automated visual effect composition. Every stage is being redefined by AI. We expect the boundary between human-created and AI-generated short dramas to become increasingly blurred over time, which will fundamentally reshape content creation. The future forms of short dramas and AI-animated dramas may probably extend far beyond what we can imagine today.

Your next question comes from Rebecca Xu with Morgan Stanley.

[Foreign Language] I will translate myself. My question is regarding the online reading business. Could management help us break down the key drivers behind the weakness in the first half, which factors are temporary and which are -- which may reflect more structural changes? And also, could management share the medium or long-term outlook for the online reading business? And what are the key drivers for that?