Reading Group: A feast for a lot of porridge?

This article was first published on the WeChat public account: Hong Kong stocks. The content of the article belongs to the author's personal opinion and does not represent the position of Hexun.com. Investors should act accordingly, at their own risk.

Since the beginning of this year, the new economic stocks of Hong Kong stocks have been listed on the market. The listing of Mito has brought long-lost fresh blood to the Hong Kong market. Then, the popularity of the public in the recent days has ignited the climax of the new economy.

After the public listing, the public rose, I believe everyone remembers.

The trend of Zhong An Insurance after listing went up by 50% in just a few days.

For the public opinion, the market has some differences. Some people believe that Fintech's future, and the security behind the three horses, but some people think that the future is too vague, not clear, so do not dare to bet. But even so, the situation of Zhongan IPO is:

Pricing is at the upper limit of the range, raising $1.5 billion, and has received nearly 400 times oversubscription, freezing the market with 200 billion yuan of funds, becoming the highest number of new shares in the Hong Kong market in the past two years.

It is conceivable that the popularity of reading texts will not be as good as the public, because after reading the text, it will be the son of Tencent.

In fact, there are already many companies in the Hong Kong stock market that have been listed by Tencent. Why do you say that reading a text is the son of Tencent?

First, Tencent now holds 65% of the shares in the text, and even if it is diluted after the listing, it will hold no less than 50% of the shares, absolutely holding, while other companies, Tencent is only a shareholding, financial investment. Second, before reading the text, it was within the Tencent system. It was separated from the inside and the relationship with Tencent was never broken.

Therefore, reading the text is Tencent's flesh and blood. As you can imagine, for Tencent, everyone has already become more and more popular. Now that the text has come, the mass base must be very good, and its business is easier to understand than Zhongan. The growth is also visible. Such a new economic stock will inevitably be hot.

Second, a feast of rushing - how many porridge, how should we subscribe?

Such a popular new economic stock, it is normal for retail investors to have a hard vote, but what is even more tragic is that Tencent’s announcement is equal to the world:

This is a local tyrant!

For every 1256 shares held by Tencent, one share of the reading shares can be given priority.

What does this mean?

Tencent today's closing price of 354.6 yuan, assuming that reading 100 shares, investors must hold about 125,000 shares, that is, nearly 44.52 million Tencent, only to get a reading. Assuming that there are 200 shares in the first reading, investors must hold about 250,000 shares, or Tencent, which is close to 88.65 million yuan, to get a single reading.

Is this not a local tyrant?

Of course, retail investors spend 445,000 to buy 1256 shares of Tencent, and they can also get a reservation:

However, it does not make sense. The price of odd stocks is much lower than the market price.

So, how do small people operate?

According to the public information disclosure, the financial scale of the reading group is between 600 million US dollars and 800 million US dollars (about 4.68 billion to 6.24 billion Hong Kong dollars). How much can these financings be publicly offered? We assume 10%, and that only 400-600 million can be split. On this basis, we have to plan for those who own Tencent's stock tyrants, and there are only a handful of them left.

Fortunately, the Hong Kong market is still very popular with Xiaosan. If there is too much oversubscription, it will start a replenishment mechanism and expand the share of public subscription. For example, when Zhongan went public, the multiple of the public subscription will be nearly 400 times. After the callback, The proportion of public offerings has increased to 20%.

In addition, in May 1997, the China Securities Regulatory Commission and the Stock Exchange issued a joint announcement requiring the underwriters to divide the public subscription into two groups, A and B. Group A is allocated to investors with a subscription amount of HK$5 million or less, and Group B is allocated to investors with a subscription amount of HK$5 million or more. Both groups allocate shares on an arm's length basis. This measure enables small share subscribers to obtain a higher success rate and protect the interests of retail investors.

Under this mechanism, the best strategy for Xiaosan is - the one-handed party, that is, only one hand.

For example, Zhong'an, the number of investors who subscribed for one hand reached 17,745, and the number of people who subscribed for 2 hands reached 9,825, and the winning rate was nearly 55%. The number of investors with a market capitalization of nearly 300 million yuan is 170, with a winning rate of 0.6% or nearly 30,000 shares. The market value of the relevant shares is only 1.8 million yuan.

Third, the subscription is not only a rush to read the text - how deep is the moat to read the text?

1. The competitiveness of reading texts

When talking about whether a company has a sustainable competitive advantage, it is actually talking about whether the company has a deep moat.

When Buffett chose the company, he emphasized the moat. Buffett pointed out: "If you choose a company with an economic moat, it will be equivalent to buying a cash cow that can not be invaded by competitors in the next few years." Buffett's investment in Coca-Cola and Gillette has great appeal. Outstanding product traits and strong sales channels make them highly competitive, just like forming a moat around their corporate economy castle.

So is there a moat in the reading group? As an online literature platform, reading texts is a literary work, so the quantity and quality of literary works directly determine the depth of the platform moat.

According to the information given in the reading, as of December 2016, the reading group's content library has a total of 8.4 million works of more than 200 subjects, including 8 million original works of its own platform, and about 10 million works in the entire online literature market. The Department’s own original content market share is 80%.

According to Baidu's search index rankings, 9 of the top 10 most popular novels in 2016 are from the Reading Group's content library.

It can be seen that the dominance of the quantity and quality of online literary works gives a deep and wide moat to the text, but we must pay more attention to the people who dig into the moat, the authors of online literature, who are the soul behind these literary works. At present, there are 5.3 million writers on the reading platform, accounting for 88.3% of all online literature writers in China. In 2016, the 50 most popular online writers in China signed 41 letters.

So how does reading text attract, nurture and retain these outstanding writers?

First of all, why are writers willing to join the online platform? Because successful online literature writers earn more than traditional literary writers. According to the data, the average income of the top 10 online literature writers in 2016 was about 32.3 million yuan, almost twice the average income of offline writers of 17.3 million yuan. Secondly, because the network platform is different from the traditional offline publishing, the network platform has more freedom and openness, and provides opportunities for various types of writers, which can be business hobbies or professional writers.

So what is the platform that attracts online writers? As a writer, of course, I hope that my work can be seen by more readers, receive more attention, and eventually become a burst, so as to maximize the benefits.

Therefore, reading the largest audience of online literature readers in China is naturally the first choice for writers. (As of the first half of 2017, the total number of monthly active users of the self-owned platform and self-operated channels of reading text reached 190 million, accounting for about network literature users. 57.6% of the scale, of course, also benefit from the support of Tencent's father behind the reading, Tencent, which has a large number of users, can provide better channels and traffic for reading.

However, because the threshold of online writing is low, the quality of writers is naturally uneven, and the quality of the writer directly determines the quality of the work, which in turn affects the reader's experience and consumption. Therefore, reading a text has a mechanism to screen and cultivate potential. writer. Specifically, it looks for and traces possible successful writers through reader feedback, fan enthusiasm, and the commercial quality of the work. Based on these data, reading the text divides the writer into four levels. The readings are then provided with different levels of promotional support depending on the level of the writer, such as media exposure and promotion of his work on the platform.

The text is obtained through the work or the author's appointment. The former is authorized to obtain a particular work, and the latter is authorized to obtain all works of the author for a period of time. The work lasts for about 20 years and the author is about 5 to 10 years. The contract is divided into buyouts and revenue sharing (the revenue sharing model allows authors to obtain revenue from online reading and intellectual property licensing), while contract terms are determined by the author's popularity and the ability of the work to be liquidated.

Finally, after reading the excellent online literature, the text is obtained through the realization of IP (online reading, authorizing or self-developing film and television drama games, etc.).

In this way, it can be said that both the writer and the reading are complementary. Writers need to read the large platform to promote the works, while reading the text requires excellent online literature to attract more readers, constantly expanding the influence of the platform, and then more authors join the reading platform to create more s work.

Under this model, I believe that a Matthew effect has been formed, and the stronger the stronger, the moat of reading the text will become deeper and deeper, and the competitiveness will become stronger.

2. The growth potential of reading the text - the future of IP realization

Since I have already thought that the status of reading the text in the network of literature will become more and more stable, then the final value of the text will fall on the potential of the realization of online literature.

At present, the main business of Reading Group is divided into three parts:

Online reading, copyright management and paper books.

In the first half of 2017, Yuewen Group achieved revenue of 1.924 billion yuan, an increase of 92.6% over the first half of 2016. Among them, online reading is the bulk of revenue, accounting for 84.9% in the first half of 2017 (72.3% in the first half of 2016), and the growth rate reached 126.0%, exceeding the group's overall revenue growth rate of 92.6%; copyright operating income accounted for total revenue. 8.1%, a growth rate of 43.5%.

I think online reading is still the main driving force for the growth of reading income. First, China's online literature market is growing rapidly, and is expected to grow from 4.6 billion yuan in 2016 to 13.4 billion yuan in 2020, with a compound growth rate of 30.9%.

Second, in recent years, the protection environment of intellectual property rights in China has been significantly improved, and the willingness to pay for online literature users will gradually increase in the future. Because only literary creators get a reasonable return, they are willing to continue to create new works.

In 2016, the loss of revenue from the existence of pirated online literature content was about 11.4 billion yuan, more than double the revenue of the online literature market in 2016. If this part of the loss can turn into income, then the income of the entire online literature market will increase substantially.

According to the data of the reading, the proportion of monthly paid users has been increasing in recent years, which proves that the awareness of the payment of online literature users in China is gradually increasing. Although the ratio is still low (only 6.0% in the first half of 2017), I believe there is still much room for improvement in the future.

At the same time, the copyright management of reading texts will become the main force of future revenue contribution. Because the filming, gamification and derivative development of literary works IP will be a very big trend.

In fact, the realization of Chinese literary works has a certain scale, such as the famous Jin Yong novel series, a total of 15 pieces, many works have been made into TV series, adapted into games, etc., of which the "The Condor Heroes" TV series actually It has been remake up to 11 pieces.

And now the IP adaptation of online novels is getting more and more fierce in China. The licensing fee can be said to be rising rapidly. From 12 years old, less than 1 million episodes of "Biography" rose to 17 years of 9 million episodes of "Selected Heaven" . Yesterday, there was new news. iQiyi signed an exclusive customization agreement for the online drama "Tomb Notes 3" with an authorization fee of 288 million yuan. And "Tomb Notes 3" plans to shoot 12 episodes, then the single-set licensing fee will reach an astonishing 24 million yuan.

However, China's IP realization is still in the stage of initial development. Unlike the United States, which already has a mature IP realization model - "Fiction - Screenwriter - Movie - TV - Audiovisual Publication - Game - Anime - Doll - Peripheral - Star - Fans - Community".

Like the well-known "Harry Potter", the paper book has been selling well since its publication in 1997. It has been adapted and filmed 8 films, sweeping the global $7 billion box office in 10 years. After the novels and movies became popular, Harry Potter was also developed into stage plays, games, stationery, toys and clothing, and even opened two theme parks in the United States and Japan. The commercial value of Harry Potter is said to have exceeded $20 billion.

I believe that China's future IP realization will inevitably follow the path of the United States, and gradually establish a mature IP realization mode, and a large amount of IP reserves behind the reading will make it the biggest beneficiary.

And reading texts now not only do IP authorization, but also accelerate the expansion of the entire industry chain, self-developed and adapted works, because the self-developed profit margin will be higher, and can reduce the restrictions of film and television producers, game producers.

In 2015, he cooperated with Yiyou Network to develop the "Australia Jiuzhongtian" page tour; in 2016, he and Tencent Video, Dongshen Film, and 哔哩哔哩 jointly produced the animation "Full-time Master"; in 2016, he also joined Tencent Pictures and Penguins. The film industry, etc., launched the "Choice of Heaven" TV series starring Lu Han.

After obtaining the funds raised by the listing, the reading will increase the independent development of IP.

Luo Li, vice president of the Reading Group, also said that the paid reading business should not be the main force forever. The IP development revenues such as animation, games, film and television, and peripherals are the new growth points. It is planned to use the five-year period to make the downstream end. Income is equal to upstream income.

3. The performance of the first half of the reading is amazing. Can the future continue?

In the first half of 2017, Yuewen Group achieved revenue of 1.924 billion yuan, an increase of 92.6% compared with the first half of 2016. The revenue growth rate is faster than the 59.1% of the whole year of 2016 (2015 is the acquisition of Shanda Literature, so the income growth rate has no comparative significance) . The substantial increase in total revenue was mainly due to the high growth rate of online reading revenue (up 126.0% in the first half of 2017).

And when we look at the income statement, we find

Both the cost side and the sales cost side of the reading text have been greatly improved.

In turn, the gross profit margin and net profit margin have increased significantly. The net profit for the first half of 2017 was 213 million yuan, and the net profit margin reached 11.1%, while the net loss for the first half of 2016 was 2.38 million yuan.

As investors, what we need to know is what is behind the dramatic improvement in the profitability of reading and whether this improvement can be sustained.

As can be seen from the chart below, the increase in gross profit margin is mainly due to the amortization of intangible assets, employee welfare expenses and the reduction of inventory costs recognized as expenses. It is difficult to judge whether these items can be reduced in the future.

However, the largest proportion of income costs is the content cost, which is the fixed or income-sharing copyright fee paid to the writer, and the future trend of this part of the cost is better.

I believe that with the expanding status of the online literature market and the increasing content realizing ability, the text will be able to obtain a greater voice in copyright fees, thereby reducing the cost of content and improving the profitability of the group.

The sales cost of reading text is mainly used to promote the brand of reading and the core mobile application QQ reading, and as the reading status of the network literature becomes more and more stable, the sales expenses will be gradually reduced.

In addition, the reading text is gradually increasing the proportion of self-developed and adapted works business (higher profit margin), and there is room for improvement in the future net interest rate.

end

Finally, let's see if the valuation of the reading is attractive.

The current income growth rate of reading text is 90%. We assume that the current compound growth rate of reading texts by 2019 is 60%, then the revenue in 2019 will reach 10.49 billion yuan, the net interest rate will increase to 15%, and the net profit in 2019. It reached 1.57 billion yuan, combined with the status of reading a text in the network of literature, giving a 30-fold valuation, the corresponding market value of 55 billion Hong Kong dollars.

Looking at the Hong Kong stock market, companies like Ali Pictures, which have far-reaching profits, have a market value of 33 billion. By comparison, the valuation of reading texts can be said to be quite attractive. Looking at the A-shares, the second-in-command of the Internet Literature (SH: 603533) landed on A shares on September 21, and continuously harvested the daily limit. Its revenue in the first half of 2017 was 790 million yuan, a year-on-year increase of 62.6%; net profit was 68.35 million yuan, an increase of 233%. The market value is about 8.9 billion yuan, and the dynamic PE has reached 70 times.

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