In just five days, Litian Pictures (09958)'s stock price soared by more than 75%.
It is worth noting that on September 15, the company issued an announcement stating that its controlling shareholder Yuan Li intended to sell shares.
According to the announcement, the company was informed by Yuan Li (the company's executive director and controlling shareholder) that Yuan Li has entered into a non-binding letter of intent regarding the possible sale of shares of Litian Century Media Co., Ltd. (100% owned by Yuan Li) and/or Yuanshuai Investment Co., Ltd. (100% owned by Tian Tian, who is Yuan Li's spouse and company director). As of the date of this announcement, the details of the possible sale (including the number and price of shares involved) are still under negotiation and no formal agreement has been reached.
A cliff-style decline in performance
Behind Litian Pictures's rapid rise in a short period of time, its fundamentals are not hard-core.
In the first half of this year, the company achieved revenue of 77.1 million yuan, a year-on-year increase of 352.09%; losses attributable to shareholders of 6.849 million yuan, a year-on-year decrease of 48.31%; and a basic loss of 0.02 yuan per share.
Looking at the year from year to year, the performance of Litian Pictures has fluctuated quite clearly. From 2017 to 2022, the company's revenue was $379 million, $386 million, $391 million, $455 million, $305 million and $23 million respectively; net profit was $57 million, $68 million, $77 million, $70 million, -75 million and $295 million, respectively.
Overall, the company's performance can be divided into two parts. From 2017 to 2020, both revenue and profit showed an increasing trend. However, since 2020, it has been declining, and not only has revenue declined sharply, but the profit side has also shown a loss.
The cliff-style decline in performance is, on the one hand, related to changes in the drama market, and on the other hand, it is impossible not to mention the company's business model.
As far as the drama market is concerned, there have been significant changes in the drama market in recent years. On the face of it, it's just a broadcast platform shifting from a television station to a video platform, but the resulting changes in production methods, distribution methods, and procurement systems have had a profound impact on drama companies.
For example, in terms of production, in recent years, the production of series has moved from focusing on film and television companies to focusing on video platforms. Video platforms have become the biggest producers of content, and the proportion of customized dramas dominated by them is getting higher and higher.
However, under the core principle of reducing costs and increasing efficiency, video platforms do not leave much profit margin for customized dramas.
Industry insiders said that from a market perspective, the current drama market industry chain is fragmented. Currently, most of the so-called hit dramas are homemade dramas on various platforms. Drama companies only produce them; they can only get a small amount of production fees. Profit margins are relatively low, so performance has naturally declined.
As can be seen from the semi-annual reports of listed companies, in the first half of the year, the performance of major A-share and Hong Kong-stock drama companies was generally poor. Profits of some companies fell by more than 50%, and losses were common in the industry. Under the shadow of the industry, Litian Pictures's performance also showed a downward trend.
The business model is bound to be difficult to get through
In addition to the influence of the industry, although Litian Pictures' business model has been implemented, there are still major problems. Once the industry's popularity fades, the shortcomings of this model will gradually become apparent, and it is bound to be difficult to develop.
According to the Zhitong Finance App, Litian Pictures has two main businesses: making its own products and buying out TV drama broadcasting rights licenses. Among them, buying out TV dramas is its most important revenue pillar. In 2017 and 2018, Litian Pictures contributed more than 90% of the company's total revenue to the company's total revenue. Since 2019, the share trend of this sector has “changed”, and as of 2022, the company still accounted for more than 60% of the company's revenue from buying out TV series. However, the broadcast rights revenue for homemade TV dramas has not improved significantly; it is only tens of millions or even millions of yuan.
Litian Pictures' home-made dramas and buy-out dramas are sold mainly to satellite TV stations.
In terms of advertising revenue and ratings, the current pattern of television stations in China is “one super five,” that is, CCTV plus five major provincial TV stations.
According to estimates by consulting firm Frost & Sullivan, in 2018, the total advertising revenue of Chinese television media was 95.9 billion yuan, of which CCTV's advertising revenue was close to 60 billion yuan, accounting for more than 60%. Five provincial TV stations, Hunan TV, Zhejiang TV, Oriental TV, Jiangsu TV, and Beijing TV, account for 28%; all remaining TV stations together account for less than 10%.
Without considering other circumstances, there is a strong correlation between TV show ratings and ad revenue. TV stations with the most popular TV series can theoretically attract the largest number of viewers, and the advertising period is always in short supply.
The five TV channels clearly belong to the first tier of provincial TV channels. Their advertising revenue exceeds 70% of the TV's overall advertising revenue. The reason behind this is that most TV stations have fallen into the “low ratings” or even “zero ratings” dilemma.
Obviously, as a TV series publisher, Litian Pictures's preferred downstream customers are CCTV and 5 TV. However, according to public information, few series were released in the first round by the company on CCTV or the Big Five TV stations. Most of them were broadcast on second- and third-tier TV stations, and they were still broadcast in the second and third rounds. Even from 2021 to 2022, the company did not have the first TV series broadcast on satellite TV; almost all of them were screened on multiple rounds.
There is not much commercial value left for TV dramas after the first broadcast. Even TV dramas such as “Journey to the West,” “The Biography of Zhen Yu,” and “Know It or Not,” which continue to sell for a long time and have a high rerun rate, will have to be broadcast for many years to reach the same level of revenue generated by the first broadcast.
The works that Litian Pictures buys out and distributes are all broadcast in a second round or multiple rounds. In terms of revenue, it's not as good as the first broadcast, and Litian Pictures still sells to some second- and third-tier TV stations, which further limits the company's revenue level.
More importantly, as far as the industry chain is concerned, the first and last ends of the TV drama industry, that is, content and channels, are the core of the entire industry and the link with the highest added value. Both the content side and the channel side have a relatively large voice. Instead, the middle distributors are unable to get a discount on both sides, and their position in the industrial chain is relatively weak. Litian Pictures is in the distribution process, and its own bargaining power is not strong.
Moreover, Litian Pictures is still a “buy-out second-round publisher”. It buys TV series that have already been broadcast from film and television companies and then resells them to second- and third-tier TV stations. The commercial value is very low. Essentially, Litian Pictures was unable to seize the high-quality series broadcast in the first round, nor was it able to sell platforms with high gold content, making it difficult for its performance to grow.
Another major drawback of a weak voice, reflected in financial reports, is the surge in accounts receivable. From 2017 to 2022, the company's receivables and notes were $194 million, $376 million, $531 million, $473 million, $475 million, $282 million and $155 million respectively. It was difficult to repay, resulting in a major reduction in the company's financial quality.
Furthermore, the failure to recover funds in a timely manner causes the company to lack competitiveness in purchasing high-quality dramas. It can only broadcast inefficient series and platforms in multiple rounds. As a result, the company's performance growth is weak, and it will no doubt fall into a vicious cycle.
In summary, although Litian Pictures's stock price has been rising rapidly in recent days, there is no solid fundamental support behind it, so I'm afraid its strong rise will not be sustainable.