China Great Wall: The performance of the media industry is relatively flat and the profitability has slightly declined. The valuation of the media sector has room for improvement.

China Great Wall released a research report stating that the current performance of the media industry is relatively flat, the industry's profitability has declined, and the valuation of the media sector has elasticity. However, by firmly focusing on the fundamentals, with improving policy trends and continuous iteration of AI technology capabilities, the quality, variety, and innovation of content supply in the media and internet industry are expected to continue to rise, driving the industry's prosperity to continue to improve. It is recommended to pay attention to sectors and companies with strong certainty in future performance. China Great Wall's main points are as follows: The performance of the media industry is relatively flat, and the industry's profitability has declined. The rise and fall of the media industry in 24Q3/24M10 Shenzhen Stock Exchange respectively were 23.06%/5.16%, ranking 6th/5th among all the Shenzhen Stock Exchange industries. The industry is mainly benefiting from the improvement of market sentiment driven by policy and AI application progress. In terms of performance, the media industry achieved operating revenue of 121.7 billion yuan in 24Q3, a year-on-year decrease of 3.2% and a decrease of 3.2% from the previous quarter; achieved a net profit attributable to the parent company of 6.568 billion yuan, a year-on-year decrease of 37%, with the decline expanding continuously since 24Q1. The media industry's performance is relatively flat, and the industry's profitability has declined. As we enter the end of 2024, sector valuation will gradually switch to 2025. The current media industry valuation for 2025 is only 19.95x. Looking ahead, (1) driven by policies such as "Cultural Strong Country" and "Cultural Overseas," the high-quality content of the media industry is expected to enter a stable period, and as an industry with demand driven by supply, its fundamentals are expected to improve; (2) the promotion of consumption policies is expected to improve the macroeconomic situation; (3) the continuous iteration of large models' underlying capabilities, with AI visual application effects expected to benefit from it and drive the improvement of domestic AI application users' mentality, thereby accelerating the commercialization process of AI applications, which is expected to bring valuation elasticity to the media industry. Game sector: Q3 industry scale reaches a new high, sector maintains resilience. In 24Q3, China's gaming market's actual sales revenue reached 91.766 billion yuan, a quarter-on-quarter increase of 22.96%, and a year-on-year increase of 8.95%, reaching a historical high. Chinas self-developed games' overseas market actual sales revenue reached 5.169 billion US dollars, a year-on-year increase of 21%, and a quarter-on-quarter increase of 15%, both significantly accelerated from 24Q2. Driven by this, the gaming sector achieved revenue of 23.608 billion yuan in 24Q3, a year-on-year increase of 6.3% and a quarter-on-quarter increase of 4.2%, maintaining strong resilience. Recommendations (1) Game overseas market: Beijing Ultrapower Software; (2) Strong fundamentals: Kingnet Network, 37 Interactive Entertainment Network Technology Group, Giant Network Group; (3) Turnaround in difficulties: Perfect World. Film and theater sector: 24H2 box office did not meet expectations, expecting top content performance in 25 years. China's summer box office continued to underperform, leading to a decrease in industry sentiment. Due to the lack of high-quality top content releases, the number of blockbuster films has significantly decreased, resulting in China's box office continuing to disappoint since the summer season. Looking ahead, content supply is expected to catalyze industry growth. Currently, major films for the 2025 Spring Festival season are gradually scheduled for release. According to Maoyan Professional Edition, "Fengshen Part II: War Fire West Qi" and "Boonie Bears: Reboot" are both scheduled for release on January 29, 2025. In addition, many high-quality films such as "Detective Chinatown 1900," "Ne Zha: Demon Child Nao Hai," and "Jiaolong Action" are expected to be released during the Spring Festival season. Expecting the performance of new products to drive the industry's overall performance and related company earnings to stabilize and rise. Advertising and marketing sector: macroeconomic downturn pressures revenue and profits, top companies maintain resilience in performance. In 24Q3, the advertising and marketing sector achieved revenue of 41.7 billion yuan with a year-on-year growth of 1% and a quarter-on-quarter growth rate down by 3 percentage points. The decrease in the growth rate of advertising and marketing revenue in 24Q3 is mainly due to macroeconomic pressures in China from 24Q1-3, leading to tight budgets for upstream advertisers due to insufficient domestic consumption demand. In addition, affected by the operating leverage effect, the advertising and marketing sector achieved a gross profit of 4.815 billion yuan in 24Q3, a year-on-year decrease of 10%; with a gross profit margin of 12%, a year-on-year decrease of 1.41 percentage points. Looking ahead, with the continuous introduction of domestic stimulus consumption policies, China's macroeconomy is expected to improve marginally, and industry revenue and profits are expected to reach a turning point. In addition, the top companies in the industry maintain resilience in performance. It is recommended to pay attention to companies like Focus Media Information Technology and BlueFocus Intelligent Communications Group. Investment recommendation Related targets: Beijing Ultrapower Software (300002.SZ), 37 Interactive Entertainment Network Technology Group (002555.SZ), Kingnet Network (002517.SZ), G-bits Network Technology (603444.SH), Perfect World (002624.SZ), Focus Media Information Technology (002027.SZ), Wanda Film Holding (002739.SZ), Beijing Enlight Media (300251.SZ). Risk warning: macroeconomic fluctuations risk; media industry content policy risk; AI+ application landing below expectations; media industry content market monetization below expectations.