Maoyan Entertainment

HKEX:1896

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and good evening, ladies and gentlemen. Welcome to Maoyan Entertainment's First Half 2022 Earnings Conference Call. A copy of the interim results announcement can be found and downloaded from the company's Investor Relations website at ir.maoyan.com. [Operator Instructions] I'd now like to hand the conference over to your host today, Ms. Michelle Yu, IR, Senior Manager at Maoyan Entertainment. Please go ahead, ma'am.

[Michelle Yu, executive]

Thank you, operator. Good morning, everyone. Thank you for joining us on Maoyan Entertainment's First Half 2022 Earnings Conference Call. Joining us today are Mr. Peter Zheng, our CEO; Mr. [ Leon Lee ], our Financial Director; and Ms. Xia Zheng, our IR Director. The presentation will be conducted in English and the question-and-answer session will be conducted in both Chinese and English.

Before we begin, I would like to remind you that the management's comments during the call will include forward-looking statements that are based on our current expectations, 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. The 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 in our first half 2022 earnings release.

And with that, let me now turn the call over to Peter.

[Zhihao Zheng, executive]

Thank you, Michelle. Welcome, everyone. To begin with today's meeting, I would like to share with you that we complete the first half of 2022 with a solid performance underpinned by our enhanced business resilience and profitability. Despite the macro environment challenge and uncertainty due to the resurge of COVID, our content service business achieved encouraging progress, and our online ticketing service business remained stable. I would go over those developments and our outlook in a great detail after briefly reviewing the movie industry environment.

China's movie industry has gone through a lot of difficulty over the past 2.5 years and has proved resilient. Recent indicators show that total box office of China movie industry was RMB 17.18 billion over the past 6 months, decreased by 37.7% year-over-year. In particular, from March to May, COVID-related lockdowns were instituted in many major cities and movie theater operation rate was dropped to below 50%.

Many movies slated for the screening were delayed, leading to 80% decrease in gross box office year-over-year. Against this tough environment, we continue to effectively improve our stability in the production, promotion and distribution of entertainment content.

During the period, Maoyan partnered on 15 movies, acting as a lead distributor of 6 of those productions. The percentage of our contribution to China's gross box office has recovered to almost the same level we saw in the same period of 2019. This demonstrates our solid position as the leading promoter and distributor of domestic movies.

Furthermore, we proactively enhanced our engagement in top-tier movie during the half season period. To name a few, we participated in Embrace Again [Foreign Language], G-Storm [Foreign Language], which remarks the first and the second, respectively, at the box office for the New Year's Day 2022. And then we also are involved in 3 movies among the top 5 in the Spring Festival holiday, including the film title, Too Cool To Kill [Foreign Language], for which we serve as both the producer and the lead distributor, which has been the year's highest grossing comedy movie up to now with a box office of RMB 2.6 billion.

With all those offers, we delivered solid results in both financial and the business operations in our entertainment content business sector. And this increased revenue contribution helped further optimize our revenue structure.

Although the revenue of this business drive recorded a year-over-year decrease due to the negative impact of the COVID, it performed better than the movie market, dropping smaller percentage points than the China gross box office. In addition, we have seen the signs of recovery since June as the pandemic situation improved with operating rate of the movie theaters gradually recovered to over 80%.

To better address the sequential step-up in the entertainment demand, we are well-positioned with abundance of the rich, diverse movie content. In addition to the already released movies, the Maoyan has engaged such as Lighting Up The Stars [Foreign Language], Moon Man [Foreign Language], Warriors of Future [Foreign Language]. There are many other movies we have either been scheduled for release or in scheduling title, including Give Me Five [Foreign Language], Better Man [Foreign Language], Full River Red [Foreign Language], and so on.

Moreover, our momentum in TV series and online movie production was also strong. Our improved production capability has resulted in great performance with many of our production. Out of Court [Foreign Language], our self-developed legal drama TV series, has consistently received [indiscernible] after its exclusive release on Youku in July. Meanwhile, several partial movie productions such as Hello, The Sharpshooter [Foreign Language], Leverage [Foreign Language], and Babel [Foreign Language], has been broadcasting on different platforms and all have performed well.

In the same vein, we're looking forward to the release of another online movie, The King of Hot GUO [Foreign Language], in the near future.

Also, we were highly attentive to the improvement of our capability in movie promotion, distribution, utilizing our rich distribution experience. We continued to make our distribution, production, and service more useful and valuable to our partners, particularly in a top operation environment. The popularity of our service too gained massive traction. For example, during the reporting period, our proved quality promotion campaign for nearly 80% of the movies with box office of RMB 100 million.

Moving ahead, we will continue to make relentless effort to further optimize our production capability, enhance our industry insight, strengthening our platform infrastructure, upgrade our tailored solution for the movie promotion.

Turning to our online ticketing service business. During the first half of the year, we continued delivering high-quality service and implement effective cost control initiatives to solidify our position as the lead movie ticketing service provider. By utilizing our industry know-how and operational advantage, we helped more than 70% of movie theaters nationwide to improve customer acquisition efforts through different approaches, such as membership, promotion, package sales, and so on. This was along acting as exclusive ticketing provider for the 12th Beijing International Film Festival [Foreign Language]. We offered our audience with the premier ticketing service. This accomplishment not only demonstrates our value, but also underscores our leadership in providing full support for industry in recovery and sustainable development.

Additionally, our live entertainment business continued to grow and develop. We strengthened our operation capability, deepening our exploration on local entertainment category, such as talk shows, immersive theater experience, family show, and music festival, et cetera. During the reporting period, the GMV of our live entertainment recovered to over 80% of the same time period last year. We also achieved breakthrough growth in certain verticals, such as, for example, the GMV of talk show tripled compared to the same time period last year. We have been proactively exploring new form of live entertainment to better align with user interest and preference and make steady progress in many productions.

Moving to our advertisement and other service business. Although the advertising industry is facing great challenges as well, we continue to improve our commercialization effort and efficiency by expanding our distribution channel covering more market dimensional scenarios and engage in innovative marketing campaign. By the end of June, the total user of Maoyan mini program ecosystem exceeded 600 million. Going forward, we will further leverage Maoyan's full channel marketing capabilities and continue to provide custom build and extensive service to our cloud.

Before I wrap up, I would like to mention our Maoyan Research Institute. Its value to the industry is rapidly gaining recognition as we deliver prized experience to our industry partners. By offering them with valuable market information and insights such as in-depth academic-related reports, we help them to better understand the market and the industry development trend.

In conclusion, looking at the market from today's perspective, we believe user demand is still very strong. With the effort of all the partners in the industry and the release of the more quality content, China's movie industry is well on its way to achieve the long-term goal to become a thematic power hub. We always believe our best investment is the one we make on ourselves, to build our core capability. And continuing to achieve/advance our business development, we will further unlock Maoyan's value in the entertainment industry through mining and producing premier content.

And with positive future value, building the high-quality infrastructure and explore new opportunities across the industry value chain, we believe this will lay the foundation for our health sustainable growth over the long term.

Thank you, everyone, for your time. Now I will turn it to [ Leon ] to work through the detail of our financial results.

[Unknown Executive]

Thanks, Peter, and hello, everyone. I will now walk you through our financial highlights for the first half of 2022. Please note that all the financial numbers we are presenting today are in RMB and all percentage changes are on a year-over-year basis unless otherwise stated.

As Peter just mentioned, China's entertainment industry faced immense challenges due to the severe impact brought by the resurgence of the COVID-19 pandemic for the first half of 2022. Given tough and demanding conditions, we are pleased to deliver solid first half results. In addition to outperforming China's movie market, we made encouraging stride in our content service business in terms of number of movies we participated in as well as the related box office performance, and our online entertainment ticketing services business remained stable.

Our total revenue decreased by 33.8% year-over-year to RMB 1.2 billion for the first half of 2022. This decline was primarily due to the negative impact brought by the COVID-19 pandemic, including off-line disruptions in many major cities in China, leading to a temporary closure of movie theaters and a reduction of content supply.

Revenue from our entertainment content services business decreased by 19.2% year-over-year to RMB 533.4 million for the first half of 2022 from RMB 660.1 million in the same period last year. The decrease was primarily due to the postponement and rescheduling of several movies in which we participated during the pandemic, particularly from March to May. Under such circumstances, our content services business demonstrated a strong resilience with a relatively small yearly revenue decrease rate, which outperformed the year-over-year decrease rate of China's gross box office.

Our solid performance was mainly driven by 2 factors: first, since the beginning of this year, we have been deepening our penetration in top-performing movies released during major seasons; second, benefiting from our rich and diverse content results that we accumulated in the past years, we quickly captured rising and recovering market demand in China. Since the market recovery commenced in June, movies in which we participated have been or will be released been progressing steadily in the second half of 2022.

Revenue from our online entertainment ticketing business decreased by 41.6% year-over-year to RMB 592.3 million for the first half of 2022 from RMB 1.01 billion in the same period last year. This reduction was mainly due to the pandemic's negative impact for the first half year, resulting in disruptive off-line activities and a sharp decline in the operating rates of movie theaters nationwide. Revenue from our advertising services and other businesses for the first half of 2022 decreased by 47.9% to RMB 65.7 million. The decline was mainly due to a decrease in advertisement placement as a result of contraction of demand in China's advertising market since the pandemic outbreak in early 2020.

Gross profit for the first half of 2022 decreased by 40.5% year-over-year to RMB 622.4 million. The gross margin declined to 52.2% in the reporting period from 58.1% in the same period last year. The change in our gross profit and gross profit margin were primarily caused by the reduction in revenue combined with a relatively stable absolute amount of fixed cost within our cost of revenues.

Selling and marketing expenses for the first half of 2022 decreased by 14% year-over-year to RMB 275.8 million, primarily due to our strengthened expense control measures, especially a decrease in user incentive expense.

General and administrative expenses for the first half of 2022 increased slightly by 0.2% year-over-year to RMB 179 million. Operating profit for the first half of 2022 was RMB 184.7 million compared to RMB 509.5 million in the same period of 2021. Net profit for the first half of 2022 was RMB 151.9 million compared with RMB 387.1 million in the same period of 2021. We realized an adjusted net profit of RMB 233.7 million compared with RMB 484.2 million in the same period last year.

We continue to have a strong net cash position. As of June 30, we have cash and cash equivalents and other bonds bank deposits of RMB 1.9 billion. In conclusion, despite the adverse impact and huge challenges that we experienced during the first half year, we were still proactive and worked dedicatedly to improve our service capabilities and further refine our operating efficiency.

Moving into the second half of 2022, we are optimistic about the bright future of China's entertainment industry in the long run. We will continue to improve our capabilities across all business lines by optimizing our revenue drivers and further expanding our exploration with new initiatives for monetization. With our effective cost structure and prudent risk control, we believe Maoyan will stay strong and resilient in face of future uncertainties and challenges.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] In the case of any discrepancy, management's statements in the original language will prevail. [Operator Instructions] Our first question comes from Xueqing Zhang at CICC.

[Xueqing Zhang, analyst]

[Foreign Language] And now I will translate myself. Since the COVID-19 is gradually under control and as operations also return to normal, how does the company view the box office performance for the summer vacation? Also, could management share your impact on the coverage in the second half of the year and [indiscernible] box office across. Thank you.

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

[Interpreted] Thank you. I will make a brief translation. Speaking of data, the gross box office for the first half year was RMB 17.18 billion, which is 38% decrease year-over-year, especially the gross box office from March to May 2022 dropping sharply by around 80% year-over-year. From both data, we can see that China's media industry was severely impacted by the resurgence of COVID during the period. However, beginning in June, we started to see the signs of market recovery. As of today, the summer holiday box office has increased to about RMB 8 billion, exceeding the same period last year. And the movie theaters opening rate has rebounded significantly to over 80% since early June, and content supply has steadily reduced such as Lighting Up The Stars, Mozart from Space, Moon Man, and the Warriors of Future. Those movies have released in succession and got excellent performance.

All this not only shows the increasing market demand for entertainment, but also demonstrates China's film industry's strong resilience and vitality. And also, our bonus listing yesterday is also a positive signal of China movie industry's development. And from the policy perspective, the government has provided significant support for the industry, like the 5-year plan for the development of Chinese films, which clearly outlines the goal to increase the total number of screens in China to over 100,000 by 2025, and a minimum of 50 domestic movies with gross profit exceeding RMB 100 million.

Those objectives not only set a direction for all filmmakers, but also enhance our confidence in the recovery and the long-term development of the industry. And also, the China film administration has released a series of measures to accelerate the market recovery and encourage movie consumption. Also, the Ministry of Finance and many local offices have provided various policy support to help reducing the theater's difficulty and enhancing the industry's confidence.

Meanwhile, all the industry partners, including Maoyan, have actively responded to the pandemic impact and resumed our promotion capability to be well equipped with a rich platform to support content supplies. We will continue to work with them to improve our online ticketing business capabilities and promotion services. And to sum it up, with the encouraging performance of the summer holiday box office this year following the market recovery, it's crucial to further enhance market confidence.

And when pursuing long-term development with stability, we strongly believe that in the long-term growth of China's movie industry, we can finally achieve the goal of movie powerhouse. Operator, next question, please.

[Operator]

Our next question comes from Rebecca Xu from Morgan Stanley.

[Rebecca Xu, analyst]

[Foreign Language] My question is that can management share more color about your results of the movies as well as TV series?

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

[Interpreted] Before I move to more details of the platform, I would like to share our thoughts and strategy on movies election and engagement. These are the foundation of us to achieve sustainable growth in the content sector and to deliver quality movies with rich results.

First of all, Maoyan has reached diverse resource of content, both in 2019 and 2021. We participate in at least 40 or 50 movies released each year. It's very impressive in terms of total movie numbers and the penetration rate of top tier movies. And after years of operation, Maoyan has penetrated across the entire movie industry value chain, acting as the content producer, promoter and also the distributor.

In terms of the production of movie content, our main strategies include, firstly, we cooperate with all industry partners regarding many kinds of movie launches, enabling us to see as many high-quality movie content as possible. We review hundreds of projects each year, including negotiating and cooperating. So the more movies we are involved in, the richer our resources are and also the more possibility we can utilize our professional and the high value expertise to discover the excellent ones.

And also, we deepen our participation in key projects, leveraging our resource advantage, our capabilities in data analysis and promotion, we are able to judge with more accuracy high-quality content. And furthermore, with our ongoing efforts to strengthen our promotion and distribution capabilities, we have been the leading promoter and distributor of thematic movies. By leveraging that, we can also increase our coverage of top-performing movies and explore more investment opportunities and can improve the strengthened synergy between our promotion and distribution ability and platform services.

While based on these strategies, we have gradually developed our capabilities as we can see, we can understand, we can get in, and finally, we can deliver the quality content. Our goal is to provide the audience with more premium content that tells the story of China well. Maoyan can hard work and deliver hit titles, but we will not back our success solely on these blockbusters.

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

[Interpreted] According to our movie platform, many movies that are produced or distributed by Maoyan are ready for further development. For example, Give Me Five, The Procurator, Post Truth, et cetera, have been released or will be soon released. More than that, Full River Red, The Tipping Point, High Forces, and the Journey to the West. And so all these movies are also progressing well and we believe will make great contribution to the box office.

And secondly, we have also achieved a remarkable performance in movie self-development and have established rich movie reserves. For example, Be Somebody, which developed by Maoyan and released last year won several awards and nominations in this year's Hundred Flowers Awards and Huading Awards.

Within our results, movies in several stages are progressing well, such as Better Man and Who's The Suspect. These movies are expected to be released subsequently. Also, there are many more in development that will progress in smooth way. Thank you. Operator, next question, please.

[Operator]

Our next question comes from [ Xu Chengdong ] from GF Securities.

[Unknown Analyst]

[Foreign Language]

[Zhihao Zheng, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language] I will translate my question. Can the management share with us your development strategy and outlook for the year 2022?

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

[Interpreted] Okay. We have been continuing to think and review our strategy, especially considering the resurgence of COVID adversely impacted the industry. I would like to share with you some of our strategic thinking and new exploration and some preliminary results.

Firstly, talking about the content service business, which is the key strategy of our development in recent years. Starting in 2016, we established a strategy to expand our service from ticketing to content business. And since 2018, we have provided comprehensive service to many movies each year and have become the leading promotion and distribution service provider. We participate in many top tier movies in hot season, and we also established our unique promotion and distribution system with continuous innovation.

For example, our service such as Maoyan real-time [indiscernible] scheduling, Maoyan real-time [indiscernible], our same period performance comparison, et cetera. They all have become the industry indicators with increasing authority. And our recent years of development, we're determined to start our self-development business in 2019, and now we have achieved encouraging performance. We [indiscernible] movies that we did not produce as [indiscernible], On Your Mark, and [indiscernible], which all got excellent performance in both market recognition and box office.

Now we also have a rich pipeline of self-development projects. And during this progress, we have also established healthy and deeper relationships with many partners. And based on strategy and execution, our content service business achieved breakthrough growth in 2021. And also our content services business also recorded an industry-leading performance in terms of numbers of movies and the box office contribution in the first half of this year.

Despite all these developments, we believe that the most important thing is that we have gained from the private projects those experiences and those resources. This will enable us to achieve a long-term growth and maintain sustained profitability. Also, we have been committed to further strengthening the added value of content and better combining this with our data analysis and other business resources. Take this summer as example.

Following the movie release, we also launched an IP-related character digital blind box and immersive theater shop.

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

And secondly, speaking of our online ticketing business. That has always been our important business sector, providing us with ongoing stable revenue and cash flow and generating strong synergies with other businesses.

You can see that the competitive landscape for the online ticketing business has stabilized in recent years with Maoyan established in an industry-leading position. And we have been confident for developing our online ticketing business to enhance our service capability and optimize our ticketing technical systems. And we always cooperated with theaters in terms of aftersales service, data support, business analysis, and advertising and others, to help improving the theater capabilities in service and monetization.

And moreover, the live entertainment business is also the business sector that we have recently been focusing on and will further accelerate its development. We started this business line in 2018. And by the end of 2019, we achieved second place and the fastest growth rate in this market. In recent years, we have noted that the market is demonstrating the characteristics of like demassification, lower tier, and diversification. We believe that the whole market has a huge potential. By leveraging our competitive advantages, such as user base automation across all our business lines, we are able to provide comprehensive service across all stages of our live performance.

And in the first half of this year, many programs that we participated as lead distributor or investor have progressed well. For example, The Grand Expedition, a show that first dated in Shanghai and will be launched in other cities soon. That show achieved a great performance, and we will launch a series of this theme which is developing, such as The Grand Theater, The Grand Museum, and The Grand Music. We believe that a new format suitable to the era will be born by integrating culture and music with eating, drinking, and laughter. That is the beauty of the market and also creates infinite imaginable possibilities.

And that's our answer. And operator, please move to next question.

[Operator]

Our next question comes from Yiwen Zhang from China Renaissance.

[Yiwen Zhang, analyst]

[Foreign Language] Can management share about our progress, our partnership with Tencent and Meituan? Also can you discuss about our future cooperation with these 2 companies. Thank you.

[Zhihao Zheng, executive]

[Foreign Language]

[Xia Zheng, executive]

[Interpreted] Our contracts with Tencent and Meituan will expire at the end of September this year. I would like to share with you the in-depth completion over the years between Maoyan and these 2 companies as well as our progress on the agreement renewals.

Tencent and Meituan are our strategic shareholders and important partners. We have been working together to strengthen synergies by integrating our respective resources and advantages. From this perspective, we are irreplaceable to each other. Take Tencent for example, Maoyan has been playing a very important role with our unique advantage in the overall industry with Tencent. We have also proved our irreplaceable position in Tencent's pan-entertainment ecosystem.

Like in the movie sector, we have formed a solid relationship by interacting Maoyan's rich ticketing experience and vast promotion and distribution capability and Tencent's leadership in IP and video platforms and also as a music platform. While in terms of the live entertainment business, we have established a powerful and seamless partnership by leveraging Tencent's strength in actors' copyright and IP, as well as our advantages in ticketing services.

To sum it up, Maoyan and Tencent have maintained a close and solid partnerships across all aspects of the business. And we believe that by further integrating our advantages in many aspects, we can collaborate together with quality content delivery and underlying facilities and capabilities.

And in terms of our cooperation with Meituan, it's more simple. As Maoyan originated from Meituan, we have been empowered by Meituan's technical service capabilities, along with the growth of Maoyan. We were able to provide the added value to make a globalized business sector to invest collaboration like in infrastructure, joint membership, marketing, et cetera.

To conclude, we will continue to maintain our deepened partnership with Tencent and Meituan, and we are confident about the continuous traffic support and the cooperation in the future. So far, the whole process is moving forward smoothly. Once we reach the final terms, we will disclose the details in accordance with the applicable laws and regulations. And thanks for all of your questions and I think it's the end of this meeting.

[Operator]

Thank you. That does conclude today's question-and-answer session. At this time, I will turn the conference back to Michelle Yu for any additional or closing remarks.

[Michelle Yu, executive]

Thank you once again for joining us today. If you have any further questions, please contact our IR Team directly or TPG Investor Relations. Thank you.

[Operator]

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect.