China Literature Limited (C2X.F) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to China Literature's 2025 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 2025 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 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 measures discussion in China Literature's 2025 interim results earnings release. I will now turn the call over to our Chief Executive Officer, Mr. Xiaonan Hou.

Thank you, Maggie. Good evening, everyone, and welcome to today's earnings call. Before we dive into our results for the first half, I would like to take a moment to share some observations and reflections on the industry. In the first half of 2025, China's IP industry experienced explosive growth and a profound ecosystem transformation shaped by three key trends. First, premium IP continues to increase in value. The traditional model of incubating high-quality TV series and film content based on literary IP remains robust and is constantly producing top-tier works with widespread influence and commercial success. Second, the rapid emergence of short dramas is reshaping content consumption, driving higher conversion efficiency and creating powerful new monetization opportunities for the massive library of mid- and long-tail IP. This has significantly accelerated the unlocking of IP value and driven diversification in digital content consumption. Lastly and most notably is the growing popularity of physical and scenario-based IP merchandise products such as trendy toys, collectible cards, and goods. This demonstrates how IP is deeply embedding itself into the daily life of users, serving as a key medium and a true social currency for emotional connection, companionship, and social identity. Together, these three trends highlight the rapid development of China's IP industry during the first half of 2025. With our unique position as an industry pivot, exceptional IP innovation capabilities and expansive IP library, we are ideally situated to capitalize on this industry wave. Beyond that, we also have the potential to lead the upgrade of China's IP ecosystem and unlock new growth opportunities. With that, I will now review the performance and progress of our businesses during the first half of 2025. In terms of IP incubation, our online reading content ecosystem continues to thrive. In the first half of 2025, our online reading platform added 200,000 new writers and 410,000 new literary works, together contributing 20 billion Chinese characters. High-quality writers and literary works on our platform are growing steadily, with the number of newly signed works generating over RMB 1 million in revenue, increasing by 63% year-over-year. While the number of newly signed writers with over 10,000 average subscribers per chapter rose by 45% year-over-year. This vibrant content ecosystem is driving higher in community engagement with the number of works receiving over 10,000 monthly votes during the first half, increasing by 20% year-over-year and those surpassing 1 million monthly votes surging by 200% year-over-year. Thanks to these efforts, revenue from our online business grew by 2.3% year-over-year to RMB 1.99 billion, with MPU increasing by 4.5% year-over-year to 9.2 million. In terms of IP visualization, our IPs are performing strongly across premium TV series, animation, and comics as well as the rapidly growing short drama segment, enabling us to build a distinct competitive edge. In the premium TV segment, several top-tier TV series adapt from our IPs premiered in the first half of the year, including Flourished Peony, "Si Jin", "The Glory" and "I am Nobody", Season 2, [indiscernible] 9:45, which all ranked first in popularity during broadcasting. According to Enlightent data, 6 out of the top 10 long-form dramas by cumulative views across all platforms in the first half of 2025 were adapted from our IPs. During the summer season in July, our self-produced premium drama series, The Narcotic Operation; Sao dú feng bào, debuted on Tencent Video, achieving a popularity index of over 28,000 and earning reviews from multiple mainstream media outlets. We have several additional premium drama projects planned for release in the second half of the year. In the animation segment, we released a new series of our classic animation franchises such as Battle Through the Heavens; Dòupò Cangqióng, Stellar Transformations; Xing chén biàn, and Martial Universe; Wu dòng qián kun, all ranking highly on platform popularity charts during their respective broadcasting runs. Notably, the annual series, Battle Through the Heavens; Dòupò Cangqióng topped Tencent Video's paid content chart in the first half. According to Enlightent data, 8 out of the top 10 animation series by cumulative views across all platforms in the first half of 2025 were adapted from our IPs. In the comics segment, we maintained our leadership with top-tier IPs while continuously introducing high-quality new works that enrich our content ecosystem. Classics like The Outcast; Yi rén zhi xià, and The Fox Spirit Matchmaker; Hú Yao Xiao Hóng Niáng continue to lead the industry, showcasing their enduring influence. Meanwhile, standout new titles adapted from our IP, such as Dao of the Bizarre Immortal; Dào Gui Yì Xian broke into the top 20 paid bestsellers list within 2 months of release, the fastest rise ever for a new title. Another adaptation, Martial Evolution: Start by Awakening the King of Monsters; Wudào jìnhuà: Cóng juéxing guàishòu zhi wáng kaishi, also topped new release charts for 4 consecutive months since its April debut, demonstrating its exceptional popularity and growth potential going forward. Our short drama segment achieved robust growth in the first half of 2025, with a significantly increased blockbuster hit rate. This success is underpinned by our rich IP library, strong creator partnerships, and deep engagement across the IP industry chain. According to Enlightent data, we produced two out of the top 10 short dramas by viewership across all platforms in June 2025. One title generated record-breaking grossing of over RMB 80 million, ranking second on Enlightent's viewership charts with over 3 billion views this year. Another title topped Enlightent's weekly charts during its broadcasting run, surpassing 1 billion views in its first month of release. In March, we further upgraded our short drama business by opening more than 2,000 online literature IPs for high-quality adaptation. We released an initial batch of 300 IPs and invited screenwriters and producers across the industry to collaborate. Going forward, we will remain committed to our IP-centric quality-driven strategy, strengthening our competitive edge while driving the high-quality development of the short drama industry. Next, I will go over IP Commercialization. In the first half of 2025, physical and scenario-based IP merchandise products such as trendy toys, collectible cards, and goods saw explosive growth, reflecting a profound advancement in mass cultural consumption habits. Riding this wave, our IP merchandise business achieved a major breakthrough with total GMV reaching RMB 480 million in the first half, almost reaching last year's full-year total of RMB 500 million. Growth was driven by our continued dedication to product development, channel development, user engagement and licensing expansion. Product Development advanced rapidly across the entire value chain, accelerating new product launches to 3 to 4x last year's pace while continuously rising quality. Channel Development has continued to make steady progress with our online live-streaming rooms and offline stores expanding their reach. Notably, our Tmall flagship store, ranked first on Taobao's Trending Goods Store Dark Horse List during the 618 shopping festival. We now partner with nearly 10,000 online and offline distributors. Additionally, we are offering our channel development capabilities to empower others. Engagement is also deepening with fans and creating social media fans, as we leverage themed events from top-tier IPs like The King's Avatar; Quánzhí Gaoshou. Lord of the Mysteries; Guimì zhi zhu, and Dao of the Bizarre Immortal; Gui Dào Xiu Xian and combine them with new product launches. We have partnered with 230 brands to expand the influence of our IP through licensing collaborations. Now turning to online games segment. We continue to license premium IPs to partners, the top-tier project, Douluo Continent: Soul Hunting World; Douluo Dàlù: Wuhún Juéxing received well-spread gamer passion following its July launch. Additionally, multiple licensed adaptations such as The Hidden Ones; Yi rén zhi xià and Lord of the Mysteries; Guimì zhi zhu have obtained publication licenses and are expected to debut in the near future. Finally, I would like to share the progress we have made in new technologies. We have been actively embracing AI and integrating AI across all business lines. In the first half of the year, we introduced the industry's first AI-powered knowledge base for online literature, Smart Pen Tongjian; zhì néng bi tong jiàn building upon our existing AI tools available on the Writer Assistant [indiscernible] creation platform. This feature enables full-text comprehension and Q&A for works spanning tens of millions of words, offering valuable support for writing, plot development, and inspiration for long-form content creation. Since its launch, interactions between writers and AI have increased by 40%, driving daily active users of Writer Assistant up by over 40% year-on-year with weekly AI usage approaching 70%. Our AI translation models have also significantly expanded the global reach of Chinese literary works. In the first half of 2025, revenue from AI-translated works on our international reading platform, WebNovel grew by 38% year-over-year, accounting for over 35% of total novel revenue on WebNovel. We are also actively exploring AI applications across multiple content formats, including animation, comics, video, audiobooks, radio dramas and digital avatars, with the aim to unlock the vast potential of transforming mid- and long-tail text IPs into multimedia formats. The year of 2025 will be a pivotal world for the fostering strong growth momentum, the rapid rise of short dramas, the breakout popularity of trendy toys, and the spreading influence of goods culture are driving diverse content types and consumption patterns into the mainstream at a very fast pace. This evolution not only highlights the vibrancy of cultural consumption market, but also reaffirms the fundamental core principle. Our phenomenal growth stands from creative transformation and development of premium IP. With this historical opportunity in front of us, we will capitalize on our vast IP library, extensive experience, and the cross-industry synergies we have cultivated over multiple years to reshape and lead the development of the industry going forward. We are committed to becoming the core engine and key architects of China's IP ecosystem evolution. This concludes my remarks. Now I would like to invite Mr. [ Xu ] to present our Financial performance. Thank you.

Thank you, Mr. Hou. Hello, everyone. In the first half of 2025, our total revenue was RMB 3.2 billion compared with RMB 4.2 billion in the first half of 2024. Our online business revenues increased by 2.3% to RMB 2 billion, mainly due to revenue growth of self-owned platform products. For clarity, the growth rate here is calculated on a year-over-year basis, as well as all subsequent growth rates we mentioned. Breaking down further, revenues from our self-owned platform products increased by 3.1% to RMB 1.7 billion. Mainly due to our focus on improving core product operations and continued production of high-quality content. Revenues from our self-owned [indiscernible] channels on Tencent products decreased by 25.6% to RMB 97 million, mainly due to a decrease in advertising revenues. This is a result of continuous refinement of content distribution practices on Tencent channels and prioritization of distribution through core pay-to-read products. Revenues from third-party platforms increased by 23.1% to RMB 142 million. This reflects the increasing value of our high-quality content for our partners. In terms of operating metrics, our total average MAUs were RMB 141.3 million, compared with RMB 176 million in the first half of 2024. Breaking down further. MAUs on self-owned platform products declined by 2.5% year-over-year from RMB 105.3 million to RMB 102.7 million, but remained stable compared with RMB 102.3 million on a six-month basis. MAUs on self-operated channels on Tencent products were RMB 38.5 million, compared with RMB 70.7 million in the first half 2024. This is primarily due to optimization of operational efficiency, which involve distributing more content through core pay-to-read products, average NPOs grew by 4.5% to RMB 9.2 million, mainly due to growth in membership users following the launch of additional membership content since the second half of 2024. Monthly ARPU decreased by 1.3% to RMB 31.3%. This is due to a mix effect from lower ARPU contributions by newly acquired membership users. Now turning to IP operations and other businesses. Revenues from IP operations and others decreased by 46.4% to RMB 1.2 billion. Within this segment, revenues from IP operations decreased by 48.4% to RMB 1.1 billion. This was mainly due to lack of new TV series or film releases in the first half of the year which highlights natural production timelines and scheduling patterns to TV series and film projects. Several of our new businesses have been developing rapidly in particular IP merchandise business, which generated strong growth with GMV increasing to RMB 480 million, closely approaching last year's annual total of RMB 500 million. Revenues from the others category, mainly generated by sales of physical books, increased by 41.9% to RMB 68 million. Now let's look at costs and expenses. Our cost of revenues decreased by 25.1% to RMB 1.6 billion. Primarily due to the absence of new TV series or film releases, which resulted in no corresponding production costs being recognized during the period. Our selling and marketing expenses decreased by 20.4% to RMB 922 million, mainly due to a decrease in marketing and promotional expenses associated with TV series and films. Our G&A expenses decreased by 11% to RMB 485 million, primarily due to lower employee-related expenses. Our net other gains were RMB 583 million compared with net other losses of RMB 4 million in the first half of 2024. Net other gains of this period were primarily resulted to our investment activities. As a result of the above factors, our net profit to shareholders increased by 68.5% to RMB 850 million. On a non-IFRS basis, our net profit to shareholders was RMB 508 million, down from RMB 702 million in the first half of 2024. This was mainly influenced by the uneven release scheduled for TV series and films, New Classics Media within this year. Excluding this impact, non-IFRS net profit increased by 35.7% to RMB 545 million from RMB 402 million in the first half of 2024. This concludes our financial review part. Let's move on to Q&A.

[Operator Instructions] Your first question comes from Xueqing Zhang with CICC.

[Interpreted] My question about the IP merchandise business. The company continued to advance your IP merchandising in the first half of this year. We are so impressed by the IP operations that occurred at the time and space of the original novel, The King's Avatar. Could the management review the current progress of our IP merchandise business from the perspectives of premium IPs product development and channel development. And could management provide an outlook on the future development priorities?

[Interpreted] Thank you. I will take your questions. As you mentioned, this July, we held The King's Avatar; Quánzhí Gaoshou 2025 Glory World Invitational theme tour in Zurich, Switzerland, echoing the glory game tournament in Zurich featured at the end of the original story, events received enthusiastic feedback from users since we initially announced the event. Offline, thousands of fans of The King's Avatar traveled to Switzerland specifically to participate in the event. Online social media engagement, surpassed our expectations with Switzerland travel-related content connected to The King's Avatar significantly increasing. [Interpreted] On that note, app only alone is the number of posts under the topic The King's Avatar national team surged by nearly 10,000 within this 1 month. This initiative also serves as one of our ongoing efforts to deepen the emotional connection between IP and fans, bring IP to real life and amplify the influence of IP.

[Interpreted] I will further elaborate on the merchandise business from several aspects. First of all, in terms of IP, as we have a rich library of IP content, merchandise products adapted from our top-tier IP such as The King's Avatar; Quánzhí Gaoshou, Lord of the Mysteries; Guimì zhi zhu, Dao of the Bizarre Immortal; Guiyì Xiandào, The Outcast; Yi rén zhi xià, and The Fox Spirit Matchmaker; Hú Yao Xiao Hóng Niáng all delivered outstanding performance. [Interpreted] Additionally, we will soon start to launch customized merchandise products for some of our mid-tier IP. Beyond our self-owned IP, we are also considering introducing some high-quality third-party IP such as anime IP, Dave IP, and independent fashion toy artists IPs for merchandise development. Secondly, in terms of product type, we have covered almost all categories, including good collectible cards, blind boxes, or figures, plush toys, such as metal et cetera, and continue to explore new categories such as vinyl plush toys or jointed doors and others while also developing new gameplay and the formats like Ishibekoji, which is a popular 5-star format originated from Japan. [Interpreted] Currently, we have seen the potential in categories like plush toys and bond, joints, and doors, where users demonstrate strong demand for UGC creation, DIY door customization and nurturing experience with merchandise products. To capitalize on this, we will enter these categories and create merchandise that can strengthen the emotional bonds between users and products. In terms of distribution channels, we have established an integrated online and offline distribution network that continues to expand. [Interpreted] Currently, we operate more than 10 self-owned live streaming rooms that will continue to grow and our e-commerce flagship store topped The Dark Horse list during the 618 shopping festival with users passion for consuming goods on our mini program surging steadily. At the same time, we've opened approximately 10 self-operated stores in ACG commercial districts across Hangzhou, Beijing, and Shanghai. [indiscernible] Changsha and Chengdu with additional offline stores in Guangzhou, Shenzhen, Wuhan, Nanjing and other cities progressively underway. We also collaborate with around 10,000 online and offsite distributors. [Interpreted] In addition, we continue to deepen our efforts across product design, user operations, licensing partnerships and strategic investments. In terms of product design, our artwork is leading the domestic market regarding both quantity and quality, accelerating the product launches to 3 to 4x the previous year's pace and enabling 3 to 4 patches of new product launches per IP per month in this year. [Interpreted] In terms of user operations, we strengthened the emotional bonds between IP and fans through a series of activities, stopping social media sensation and amplifying IP reach and influence. In terms of licensing, we have established collaborations with around 230 consumer brands spanning various inventories such as goods, electronics, food and beverage and other sectors, embedding our IP into different aspects of daily life offline. [Interpreted] In terms of strategic investment, our earlier investments in PayCard China's leading collectible card company and crossing the top-tier card distributor in Europe and in U.S. have accelerated the GMV growth of our card business. This year, we have completed the investment in [indiscernible] the leading brand in the fashion plush toy segment positioning us for further breakthrough in this category. [Interpreted] Looking into the future, we will remain dedicated to deepening our presence in the merchandise sector. By leveraging our distinctive competitive edges in our IP library, product development, channel distribution and user operations. We aim to capture a larger market share within the merchandise industry worth hundreds of billions RMB. Thank you.

Your next question comes from Maggie Ye with CLSA.

[Interpreted] My first question is related to the operation of our classic IPs on the platform. What are management's top priorities and KPIs this year? And can you share with us your latest thoughts on how to extend the life cycle of our classic IPs and further enhance their commercial value?

[Interpreted] Thank you for your question. So first of all, we will continue to release new content for our classic IPs to keep their popularity at a high level. Through long-term and diversified adaptations into animation, we will be able to continuously inspire fans enthusiasm towards our classic IPs. [Interpreted] For instance, in terms of animation, popular IP franchise, such as Battle Through the Heavens; Dòupò Cangqióng, The Outcast; Yi rén zhi xià and The Fox Spirit Matchmaker; Hú Yao Xiao Hóng Niáng will continue to release sequels and new animation content for IP such as The Guardian, [indiscernible] which has been adapted into a blockbuster series and broadcasted at the beginning of the year and another IP called Dao of the Bizarre Immortal; Dào guiyì xian, which also has accumulated a great number of fans will be unveiled soon. [Interpreted] In terms of drama series and films, more sequel to household titles like Joy of Life; Qìng Yúnián and my Heroic Husband; zhuì xù will also be released. We will focus on the quality of adapted works due to reputation and their impact on our IP value. [Interpreted] Secondly, we will make further breakthroughs in merchandise business launch new products with more diversified designs, superior craftmanship and a broader range of categories for our classic IP such as The King’s Avatar; Quánzhí Gaoshou, Lord of the Mysteries; Guimì zhi zhu, Dao of the Bizarre Immortal; Dào Guiyì Xian, The Outcast; Yi rén zhi xià, The Fox Spirit Matchmaker; Hú Yao Xiao Hóng Niáng et cetera, and at the same time, collaborate with consumer brands across various industries through licensing partnerships, transforming IP into a wide range of offline consumer products to make IP deeply resonate with users and IP images more vivid and multidimensional in users' mind. As our merchandise business is still in the early stage, we are focused on GMV and product reputation.