Online Reading Monetization Weakens; Nomura Downgrades China Literature to Neutral

Overview

Nomura believes China Literature continues to make progress in in-house IP commercialization, but deteriorating monetization in online reading and uncertainty over NCM revenue and profitability have led it to downgrade the rating from Buy to Neutral.

Core views

The key downside stems from increased free-reading content, an expansion in AI-driven content supply, and competition for user time from fragmented visual entertainment such as AI animated dramas, resulting in the loss of price-sensitive paying users. Key support comes from expansion in short dramas, AI animated dramas and IP derivatives: in-house IP operations continue to grow rapidly, but not enough to fully offset weakness in online reading and the impact of one-off tax charges on profitability.

Analysis framework

The report assesses fundamentals using 1H 2026 operating data, segment revenue trends and earnings forecast revisions, and applies DCF valuation to set a 12-month target price.

Methodology notes

• Valuation methodsDCF

  Discounted Cash Flow Valuation

  Using a weighted average cost of capital of 10.7% and a terminal growth rate of 3.0%, the report discounts cash flows to FY2027 to derive a HKD25 target price.

• Operating AnalysisSegment and User Metrics Analysis

  Trends in Revenue, Monthly Active Users and Monthly Paying Users

  Online reading revenue, MAU, MPU, and the performance of in-house IP and NCM businesses are used to assess monetization capability and earnings trends.

Asset mapping & comparison

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

• China Literature (0772.HK)

  Directly covered company

  Strengths

  Possesses a large library of text-based IP, with rapid growth in commercialization of in-house IP across content formats; expansion in short dramas, AI animated dramas and IP derivatives provides growth momentum.

  Weaknesses

  Online reading revenue, MAU and MPU are declining; NCM's revenue and earnings visibility remains limited due to weakness in the long-form video and film markets.

  Comparison

  The target price implies approximately 19x FY2027 P/E, versus the current valuation of approximately 17x cited in the report.

  Risks

  Competition from free-reading platforms, delays in the release of hit content or underperformance versus expectations, and regulatory risks affecting online literature, film and television, short dramas and animated dramas.

Key data

• Rating RevisionDowngraded from Buy to NeutralMainly due to weaker online reading revenue and paying users.
• Target PriceHKD25Previously HKD44; based on DCF valuation.
• Closing Price and Implied UpsideHKD22.32; +12.0%Closing price date: 2026-08-14.
• 1H 2026 Online Reading RevenueYoY -7%Further deterioration from YoY -1% in 2H 2025.
• 1H 2026 MAU and MPUMAU YoY -5%; MPU YoY -11%User losses in self-operated channels weighed on the user base.
• 2H 2026 Online Reading ForecastMPU YoY -15%; revenue YoY -20%Reflects continued competitive pressure from free reading and alternative content.
• 1H 2026 IP OperationsRevenue YoY +42%Driven jointly by NCM's growth from a low base and approximately 28% growth in in-house IP operations.
• Short Drama and AI Animated Drama RevenueExceeding CNY430mn, up 2.3x YoYApproximately 30% of in-house IP business revenue.
• IP Derivatives GMVMore than CNY780mn, YoY +60%+Reflects expanding commercialization of derivatives.
• Forecast Revisions2026/2027 revenue forecasts -8%/-7%; adjusted net profit forecasts -45%/-23%Due to lower online reading and NCM revenue and profitability, as well as one-off tax charges.

Impact & implications

Deterioration in online reading reduces visibility on near-term earnings and constrains valuation support from in-house IP growth. Continued high growth in short dramas, AI animated dramas and IP derivatives, or a faster-than-expected stabilization in online reading paying users, could improve market expectations; conversely, intensified competition from free reading will continue to depress monetization and earnings forecasts.

Risks

• Intensifying competition from free-reading platforms could further erode user engagement and willingness to pay.
• New hit content may launch more slowly than expected, or IP adaptations may underperform expectations.
• Continued weakness in the long-form video and film markets could cause NCM revenue and profit improvement to fall short of expectations.
• Regulatory changes related to online literature, film and television, short dramas and animated dramas.
• Non-recurring items such as one-off supplemental tax payments and late-payment surcharges may continue to affect profitability.

What to watch

• Quarterly changes in online reading monthly active users, monthly paying users and paid conversion rates.
• The proportion of free-reading content and the extent of user migration to alternative content such as AI animated dramas.
• Revenue growth in short dramas and AI animated dramas and their share of in-house IP business.
• Continued growth in IP derivatives GMV and expansion of online and offline channels.
• The release progress of four dramas in 2H 2026, NCM revenue recognition and profitability improvement.
• The company's latest management guidance on stabilization in online reading and growth in in-house IP.