Rising Digital Consumption And Tencent Synergy Will Foster Cross-Media Breakthroughs

Key Takeaways

• AI-driven content creation and merchandising are unlocking rapid, high-margin revenue growth from China Literature's vast IP library through multimedia adaptations and product expansion.
  
• Expanding digital subscriptions, personalized content, and favorable regulatory trends position the company for sustained, diversified, and recurring income streams across multiple channels.
  
• Reliance on a shrinking user base, volatile IP success, and limited global footprint exposes China Literature to unpredictable growth, monetization challenges, and heightened business risk.

Catalysts

An investment holding company, operates an online literature platform in the People’s Republic of China.

• Analyst consensus sees AI enhancing content creation and user engagement, but with AI-fueled tools now driving over 40% increases in writer activity and rapidly enabling large-scale, low-cost adaptation of mid
• and long-tail IP into short dramas and multimedia, the true revenue and margin expansion could be exponential as China Literature unlocks value from its vast IP library at unprecedented speed and scale.
  
• While most expect IP merchandise to diversify revenue, analysts broadly overlook the explosive early-stage growth-GMV for merchandise is already nearly at last year's annual total in six months and expected to tap a multi-hundred-billion-RMB market, with rapid product expansion, deepening offline reach, and influential collaborations (such as with top plush toy brands), setting the stage for outsized, margin-accretive growth as merchandise becomes a pillar of net profit.
  
• As digital content consumption accelerates across China and emerging global markets, China Literature is uniquely positioned to achieve far stronger recurring revenue growth than expected through direct-to-consumer subscription models, further boosted by expanding AI-driven personalization, sustained MAU stabilization, and membership-driven increases in ARPU and loyalty.
  
• The company's unrivaled, continually replenished IP library-evidenced by a 63% leap in newly signed works generating over RMB 1 million and a 45% rise in new top-performing authors-provides a self-reinforcing flywheel for IP monetization across games, animation, film, and international licensing, supporting accelerating high-margin revenue streams and reducing revenue cyclicality.
  
• With strengthening regulatory support for copyright and anti-piracy, industry consolidation, and deepening integration with Tencent's ecosystem, China Literature is set to achieve improving operating margins and bargaining power as legitimate content providers are further favored and cost synergies unlock additional sustainable earnings growth.

China Literature Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on China Literature compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming China Literature's revenue will grow by 11.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.9% today to 20.8% in 3 years time.
• The bullish analysts expect earnings to reach CN¥2.1 billion (and earnings per share of CN¥2.0) by about August 2028, up from CN¥136.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.4x on those 2028 earnings, down from 290.0x today. This future PE is greater than the current PE for the HK Media industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

China Literature Future Earnings Per Share Growth

Risks

• The significant year-over-year decline in total revenue from 4.2 billion RMB in the first half of 2024 to 3.2 billion RMB in the first half of 2025 highlights cyclical volatility and dependency on uneven large-scale TV or film releases, which exposes China Literature to unpredictable earnings and cash flow, pressuring both revenue and net margins.
  
• The drop in monthly active users (MAU) from 176 million to 141.3 million in the first half year-on-year suggests waning engagement and adoption, possibly reflecting demographic headwinds and rising competition from alternative digital entertainment, which reduces the company's user base and limits its ability to drive sustainable revenue growth.
  
• The ongoing decrease in average revenue per user (ARPU) by 1.3% to 31.3 RMB and the heavy reliance on membership growth, coupled with free content alternatives and subscription fatigue, point to underlying structural challenges in user monetization, putting persistent pressure on revenue growth and profitability.
  
• Despite strong performance from a handful of classic and top-tier IPs, there is a high revenue concentration risk, as success remains disproportionately dependent on a limited number of franchises; any underperformance in these flagship properties can lead to sharp earnings volatility and margin compression.
  
• Limited evidence of successful global expansion, with the majority of financial and engagement metrics concentrated in China, means China Literature remains exposed to domestic regulatory risks such as increased censorship and market saturation, thereby constraining its ability to diversify and scale international revenue, which could restrict long-term earnings potential.

Valuation

• The assumed bullish price target for China Literature is HK$48.35, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of China Literature's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$48.35, and the most bearish reporting a price target of just HK$22.9.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥9.9 billion, earnings will come to CN¥2.1 billion, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$42.12, the bullish analyst price target of HK$48.35 is 12.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.