China Literature (00772) Report Interpretation

Overview

This quick note reviews China Literature's 1H26 results and weaker 2H26E outlook. Nomura highlights a tax-driven net-profit miss and softer online-reading trends, while noting strong growth in IP operations and maintaining its Buy rating and HKD44 target price.

Core views

China Literature reported 1H26 revenue of CNY3.5bn, up 11% year-on-year and broadly in line with Bloomberg consensus. Non-IFRS operating profit rose 10% year-on-year and the operating margin was stable at 8.8%. The main disappointment was non-IFRS net profit, which fell 49% year-on-year to CNY259mn and was 25% below the CNY347mn consensus. Nomura attributes this chiefly to CNY300mn of supplementary tax payments and surcharges for prior years. On an adjusted basis that adds back this item, non-IFRS net profit would have been about CNY560mn, up 10% year-on-year, with a broadly flat 15.8% margin. The forward guidance was weak. Management guided to 2H26E revenue of CNY3.7-3.8bn; the CNY3.75bn midpoint implies a 10% year-on-year decline and is below the pre-results Bloomberg estimate of CNY4.0bn. Nomura attributes the shortfall mainly to online business, which management expects to decline 20% year-on-year in 2H26E. Management also guided to FY26E adjusted net profit of CNY800mn, 35% below the prior Street estimate of CNY1.2bn. Online reading remained under pressure in 1H26. Revenue declined 7% year-on-year to CNY1.84bn. MAU fell 5%, mainly because of churn in self-operated channels on Tencent products, although the decline in the company’s self-owned platforms narrowed from a 17% fall in 2025. MPU declined 11%, versus a 1% decline in 2025, as more free-to-read content on self-owned platforms led price-sensitive paying users to leave. The paying ratio consequently fell 0.4 percentage points to 6.1%. Average monthly online-business ARPU nevertheless rose 4% year-on-year because lower-ARPU users shifted to free-to-read content. IP operations provided the main offset. Segment revenue rose 42% year-on-year to CNY1.61bn. Excluding New Classic Media, Nomura estimates proprietary-IP sales increased 28%, supported by short dramas, AI-animated dramas and IP merchandise. Revenue from short dramas and AI-animated dramas exceeded CNY430mn, up 2.3 times year-on-year and representing an estimated 30% of proprietary-IP revenue. IP merchandise GMV increased more than 60% to CNY780mn. Despite the weaker guidance, Nomura maintains its Buy rating and HKD44 target price. Its valuation uses a DCF, assuming a 10.7% WACC and 3% terminal growth rate, with cash flows discounted back to FY26F. The report notes that the stock was trading at 13x FY26F P/E, based on FY26F EPS of HKD1.42.

Analysis framework

Nomura compares reported revenue and profit with year-earlier, prior-half and consensus figures, then separates the tax-related earnings distortion from underlying profitability. It evaluates the revenue outlook through online-reading and IP-operations trends, including user, monetization and product metrics, and values the company using discounted future cash flows.

Methodology notes

• Valuation methodsDCF (Discounted Cash Flow)

  Discounted cash flow valuation

  Nomura derives its HKD44 target price by discounting projected cash flows back to FY26F, using a 10.7% WACC and 3% terminal growth rate.

• Industry AnalysisVolume-price decomposition

  Online-reading user and monetization analysis

  The report explains online-reading revenue through MAU, MPU, paying ratio and ARPU, linking changes in free-to-read content to paying-user churn and average revenue per user.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Literature (00772.HK)

  Primary covered company; online-reading weakness is partly offset by growth in IP operations.

  Strengths

  IP operations grew 42% year-on-year, with short dramas, AI-animated dramas and merchandise supporting proprietary-IP growth.

  Weaknesses

  Online-business revenue fell 7% year-on-year; MAU, MPU and the paying ratio declined.

  Comparison

  1H26 revenue was broadly in line with consensus, but non-IFRS net profit was 25% below consensus and FY26E profit guidance was 35% below the prior Street estimate.

  Risks

  Competition from free-to-read players, slower rollout of new blockbuster content, and regulatory risks in online literature and TV/film/short-form and animation-drama production.

Key data

• 1H26 total revenueCNY3.531bnUp 11% year-on-year; 1% below CNY3.549bn consensus.
• 1H26 non-IFRS operating profitCNY310mnUp 10% year-on-year; operating margin stable at 8.8%.
• 1H26 non-IFRS net profitCNY259mnDown 49% year-on-year and 25% below CNY347mn consensus, mainly due to CNY300mn of supplementary tax and surcharges.
• 2H26E revenue guidanceCNY3.7-3.8bnCNY3.75bn midpoint implies a 10% year-on-year decline and is below the prior CNY4.0bn Street estimate.
• FY26E adjusted net-profit guidanceCNY800mn35% below the prior Street estimate of CNY1.2bn.
• IP operations revenueCNY1.614bnUp 42% year-on-year in 1H26.
• Short dramas and AI-animated dramas revenueMore than CNY430mnUp 2.3x year-on-year and estimated at 30% of proprietary-IP revenue.
• IP merchandise GMVCNY780mnUp more than 60% year-on-year in 1H26.

Impact & implications

Nomura sees the 1H26 earnings miss as largely tax-related on an adjusted basis, but regards the weaker 2H26E and FY26E guidance as evidence of pressure in online reading. Strong IP-operations growth, particularly in short-form and AI-animated drama content and merchandise, remains the report's key operating support for its maintained valuation and Buy rating.

Risks

• Competition from free-to-read players could intensify.
• New blockbuster content could roll out more slowly than expected.
• Regulatory risks could affect online literature and TV, film, short-form and animation-drama production businesses.