China Literature (00772.HK) delivered first-half results that painted a sharply divided picture—weak online reading offset by strong IP operations—prompting two major foreign investment banks, UBS and Citi, to issue research reports with diametrically opposed target price adjustments. UBS maintained its “Buy” rating but slashed its target price from HK$50 to HK$29.5, a 41% cut. Citi, by contrast, raised its target from HK$23 to HK$25, also maintaining a “Buy” rating.
UBS’s research report noted that China Literature’s first-half performance was weak, primarily dragged down by the online reading segment, with overall revenue declining 7% year-on-year. However, intellectual property (IP) operations emerged as the brightest spot, with revenue surging 42% year-on-year, driven by strong growth in short dramas, AI comic dramas, and IP merchandise. UBS expects pressure on the online reading business to persist into the second half, as user attention shifts from online reading toward short dramas and AI comic dramas, with the attrition concentrated among non-core users within the Tencent ecosystem.
Citing weakness in online reading and its subsidiary New Classics Media, UBS lowered its full-year revenue forecast for China Literature by 10% to RMB 7.26 billion (approximately NT$30 billion), and slashed its adjusted profit forecast by 44% to RMB 801 million (approximately NT$3.5 billion). The bank also cut its adjusted earnings per share estimates for 2026–2028 by 19% to 44%.
Short drama and AI comic drama operations stood out as the most impressive growth engine in the first half. According to UBS data, revenue from this segment surged 2.3x year-on-year to RMB 430 million (approximately NT$2 billion), with monthly AI comic drama output already reaching 100 titles. Short drama production capacity is expected to exceed 200 titles in 2026. Management disclosed that less than 0.1% of the group’s IP library has been developed to date. UBS views this as evidence of enormous monetization potential for the IP business, and believes AI technology is poised to accelerate production efficiency and capacity release. The bank forecasts that China Literature’s IP operations revenue (excluding New Classics Media) will grow 27% year-on-year in 2026, contributing approximately 44% of total revenue.
Citi offered a different interpretation of China Literature’s first-half results. The bank noted that first-half earnings were slightly better than its own forecasts but fell short of market expectations. Positive factors included the strong performance of short dramas and AI animated dramas, as well as growth momentum in IP merchandise GMV, which rose 60% year-on-year. However, the online business remained under pressure from intensifying competition. Citi expects China Literature’s revenue to gradually decline in the second half and is closely monitoring the cannibalization impact of AI animated dramas on other entertainment formats—including long-form dramas and online reading.
Citi identified near-term catalysts following the earnings release, including the August launch of the Lord of the Mysteries game and China Literature’s continued use of its ample RMB 9.9 billion (approximately NT$41 billion) in net cash for share buybacks. Citi raised its target price from HK$23 to HK$25, reflecting the inclusion of higher net cash and earnings revisions.
Looking at the specific financial figures disclosed by China Literature, first-half revenue reached RMB 3.531 billion, up 10.7% year-on-year, while gross profit came in at RMB 1.792 billion, up 11.15%. IP operations revenue grew 41.9% year-on-year during the period. Revenue from the new short drama and AI comic drama track exceeded RMB 430 million in the first half, up 2.3x year-on-year. Notably, the hit rate for short dramas was four times the market average, and 46 AI comic dramas surpassed 100 million views each. The IP merchandise business also maintained strong momentum, with first-half GMV reaching RMB 780 million, up more than 60% year-on-year.
Market reaction to the results was positive, with China Literature’s share price rising more than 3% at one point after the announcement to HK$21.4 (approximately NT$88), on turnover of HK$43.3 million (approximately NT$200 million).
It is worth noting that the core divergence between UBS and Citi lies in how they weight the growth potential of the IP business. UBS places greater emphasis on the revolutionary efficiency gains AI technology brings to IP development, arguing that even with near-term earnings downgrades, the long-term monetization opportunity remains substantial. Citi takes a more cautious stance, remaining vigilant about the risk that AI animated dramas could cannibalize traditional businesses, while acknowledging that the company’s strong cash reserves and buyback capacity provide support for the share price.
China Literature is a leading online reading and IP incubation platform in China, operating well-known brands including Qidian and QQ Reading, with a presence in film and television production through New Classics Media. In recent years, as the short drama market has exploded and AI content generation technology has rapidly matured, China Literature has been actively converting its vast IP library into new content formats such as short dramas and AI comic dramas to open up new growth curves.