User Decline And IP Risks Will Hinder Prospects

Key Takeaways

• Competition from alternative digital formats and a shrinking youth demographic could cause lasting declines in user engagement and revenue growth.
  
• Overdependence on top creators, rising competitive costs, and increased copyright risks may lead to unstable margins and weakened earnings sustainability.
  
• Expanding digital content demand, scalable IP monetization, AI-driven efficiencies, deep industry partnerships, and a robust content pipeline are driving sustained growth and revenue diversification.

Catalysts

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

• The accelerating shift of user attention toward short-form video and alternative digital entertainment formats continues to siphon engagement and time away from online literature platforms, which is likely to result in declining monthly active users and could structurally suppress top-line revenue growth for China Literature over the coming years.
  
• Ongoing demographic headwinds, particularly a shrinking youth population in China, threaten to reduce the future addressable market for online reading and digital IP consumption, which may result in persistent stagnation or decline in the company's core user base and limit its ability to grow monetizable paying users, negatively impacting long-term revenue and earnings visibility.
  
• Platform overreliance on a handful of blockbuster IPs and top authors exposes China Literature to significant concentration risks; any loss of key intellectual property or migration of leading creators to competing platforms could result in material volatility in revenues and compression of overall net margins.
  
• Fierce competition from well-capitalized technology and entertainment giants, such as ByteDance and Tencent itself, is likely to escalate user acquisition and retention expenses while driving up author royalty and content acquisition costs, putting sustained pressure on profitability and potentially eroding net margins over time.
  
• Rising copyright infringement and ongoing platform disintermediation-where authors increasingly bypass intermediaries to self-publish or monetize via social media-could erode China Literature's ability to maintain exclusive, high-quality content inventory, undermining licensing revenue and long-term earnings sustainability.

China Literature Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on China Literature compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming China Literature's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.9% today to 18.4% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.5 billion (and earnings per share of CN¥1.47) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 19.6x 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 explosive growth of China's IP industry, driven by increasing consumption of digital content, strong demand for premium IP adaptations across multiple media formats, and deepening user engagement, provides a secular tailwind that can support long-term revenue growth and enhance the monetization prospects of China Literature's vast content library.
  
• The rapid expansion and commercial success of IP merchandise-including trendy toys, collectible cards, and products based on top and mid-tier IPs-demonstrates a scalable business model with large addressable market potential and significant GMV growth, which can improve earnings and serve as a new engine for revenue diversification.
  
• The company's sustained investment in AI-powered content creation, writer tools, translation, and personalized recommendations is enhancing platform engagement, broadening the global reach of its IP, and driving efficiency in producing and localizing content, with the potential to improve both top-line revenue and operating margins over time.
  
• Cross-industry synergies and deep partnerships, such as integration with Tencent's ecosystem and strategic licensing collaborations with hundreds of consumer brands, lower customer acquisition costs, amplify IP influence, and expand multi-channel sales opportunities, all of which support long-term profitability and user growth.
  
• The steady growth in the number of high-revenue-generating new works, rising engagement metrics (such as community voting and average subscribers per chapter), as well as successful serialization and adaptation of both established and new IP, indicate a healthy content pipeline and sustained IP value, which underpin future licensing income and recurring revenue streams.

Valuation

• The assumed bearish price target for China Literature is HK$26.08, which represents two standard deviations below the consensus price target of HK$38.22. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be CN¥8.1 billion, earnings will come to CN¥1.5 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$42.12, the bearish analyst price target of HK$26.08 is 61.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.