CICC has issued a research report maintaining its forecast for China Literature's (00772) non-IFRS net profit for 2026 and 2027, following adjustments to revenue and gross profit structures due to the net recognition of New Classics Media's custom dramas. The current share price implies non-IFRS price-to-earnings ratios of 18.8 times for 2026 and 16.8 times for 2027. The firm reaffirmed its Outperform rating and HK$43.5 target price, corresponding to non-IFRS P/E ratios of 27 times for 2026 and 24 times for 2027, representing a potential 43% upside.

The company reported its 2025 results, achieving revenue of RMB 7.366 billion and a non-IFRS net profit of RMB 858 million, which aligned with both the brokerage's and market consensus expectations, as well as prior guidance. CICC's key observations are as follows:

Online business remained stable, while New Classics Media has a substantial pipeline for 2026. Online business revenue was relatively steady at RMB 4.047 billion, supported by solid operations of its proprietary platform, continuous optimization of content quality, and a stable base of writers.

IP operations revenue fluctuated in 2025, primarily influenced by the release schedule of New Classics Media's series and box office performance of film projects. Looking ahead to 2026, series such as "Young and Promising" and "Eliminating Evil" have already aired. The pipeline includes upcoming series like "Princess Shang," "A Thousand Miles of Rivers and Mountains," "Detective Moments," "Love Has No Myth," "Life at This Moment," and "Sword Coming," along with films including "New Year's Crime" and "Detective." The report anticipates that custom dramas will dominate, projecting New Classics Media's 2026 profit at RMB 350 million, with close attention to the release schedule.

Expense control was relatively stringent, and impairment of goodwill related to New Classics Media has been fully accounted for. The company's gross margin for 2025 stood at 46.1%. Due to fluctuations in the release schedule of film and television projects, selling expenses decreased year-on-year, while administrative expenses saw a slight decline due to cost control measures, reflecting disciplined management.

IP derivatives business achieved a breakthrough, with significant progress in both short dramas and AI-generated comic series. The gross merchandise volume of IP derivatives surpassed RMB 1.1 billion in 2025, doubling year-on-year, as production and operational efficiency continued to improve. Over 120 short drama titles were launched throughout the year, with top-performing projects generating peak revenue exceeding RMB 80 million. The company indicated during its earnings call that it plans to release over 200 short dramas in 2026. The AI-generated comic series business, launched in the second half of 2025, achieved annual revenue exceeding RMB 100 million.

The brokerage believes the company benefits from comprehensive IP ecosystem development and deep integration of AI technology, focusing on high-quality IP monetization with promising long-term value potential. Risks include uncertainties in content projects, slower-than-expected growth in online reading users, underperformance in IP operations revenue, and potential delays in project execution amid technological changes.