Guosen: Media prosperity reversal in sight after 25 years, new technology and mergers and acquisitions driving valuation growth.

Guosen released a research report stating that looking forward to 2025, the short-term media business sentiment is at a low point. In the medium term, under the effects of base number, improvement in content supply, and changes in external macroeconomic expectations, business sentiment is expected to gradually pick up from the bottom, with potential for upside in the context of overselling, undervaluation, and low allocation background. In the medium to long term, the new technology trend represented by AIGC is gradually becoming clearer and is expected to continue to catalyze the performance of the sector. Guosen's main points are as follows: Market performance has been weak at first but is expected to improve, with low business sentiment, valuation, and allocation levels. From the beginning of the year to now, the media sector (Shenwan Media Index) has fallen by 5.54%, underperforming the Shanghai and Shenzhen 300 Index by 15.65 percentage points. In terms of market ranking, the media sector ranks 22nd out of 31 industries in the first level of Shenwan's classification. Individual stocks have shown outstanding performance in dividend stocks from the beginning of the year to the end of September, while small and medium-sized stocks and AI themes have performed more prominently since the end of September. In the first three quarters of 2024, listed media companies in the A-share market saw a year-on-year increase of 0.40% in operating income and a decrease of 32.58% in net profit attributable to shareholders. While revenue has been stable with some increase, net profit has declined significantly, resulting in an overall low business sentiment. Currently, the Shenwan Media Index has a TTM-PE ratio of 37x, which is at the 60th percentile of the past 5 years. Valuation is still at historically low levels; compared horizontally within the TMT sector, it is only higher than telecommunications and significantly lower than computers and electronics. The proportion of holdings by public fundraising institutions is 0.79% (0.81% in the same period last year), slightly higher than the holdings during the epidemic period in 2022, reaching a historical low. The turning point in business sentiment is approaching, with mergers and acquisitions/restructuring and cultural expansion assisting in the upward trend. Gaming regulation policies remain stable, with a total of 1,163 game licenses issued from January to October, a year-on-year increase of 38%. As base effects fade and gaming expansion drives, the industry's growth rate has bottomed out again since August 2024. With base effects and new product profit releases, the performance of listed companies is expected to rebound. From January to October, the film market achieved a box office revenue of 38.368 billion yuan, a year-on-year decrease of 22.05%. The decline is mainly due to the supply cycle and base effects of domestic films. Starting in Q4, repairs on the supply side are expected to drive an upward turning point in box office market sentiment. Focus is on top content production and theater channels. The advertising market saw a small growth in the first three quarters. Weak macroeconomic expectations by advertisers are the main reason for the slowdown in ad spending growth. With policy support, ad spending growth is expected to bottom out and rise. The trend of novelty toys such as action figures, blind boxes, trading cards, and IP derivatives is still hot, with high growth rates and continuous category innovation. Mergers and acquisitions are expected to accelerate sector performance and valuation recovery, while cultural expansion is expected to further enhance growth prospects. Multi-modal and end-side acceleration, AI applications transitioning from landing to commercialization, are worth looking forward to. Overseas giants like OpenAI and Meta, as well as domestic AI giants like ByteDance, Kuaishou, Alibaba, and Tencent, are quickly landing AI applications. AI multi-modal video generation capabilities are rapidly evolving; from the cloud to the end, AI capabilities on smartphones, AR/VR glasses, and other end devices are continuously improving, accelerating AIGC's user end access. In terms of scenarios, various AI applications like Chatbots, AI Agents, AI search, social networking, education, tools software, etc., are continuously enriching and landing. Large-scale user applications are constantly emerging domestically. Companies like Applovin and Palantir, representing the enterprise, have also verified the commercial potential and value of AI in revenue and secondary markets. Targets: 1) From the perspective of business sentiment reversal: - a) In the gaming sector, grasp the product cycle and performance, recommended stocks include Kingnet Network (002517.SZ), Giant Network Group (002558.SZ), Shanghai Yaoji Technology (002605.SZ), Bilibili (09626), XD INC (09626), etc. - b) In the film and television sector, with the recovery at the bottom in sight, recommended channels include Wanda Film Holding (002739.SZ), MAOYAN ENT (01896), and content providers such as Beijing Enlight Media (300251.SZ), Zhejiang Huace Film & TV (300133.SZ). Media end focus on advertising growth brought by economic recovery (Focus Media Information Technology (002027.SZ), Mango Excellent Media (300413.SZ), etc.); recommended novelty toy ventures include POP MART (09992), CHINA LIT (00772), Shanghai Yaoji Technology, etc. Meanwhile, pay attention to the publishing sector for opportunities with high dividends and low valuations. 2) New technologies represented by AIGC are expected to continue to catalyze the sector's performance, with a focus on IP, AI Agents, and scenario applications. Also, keep an eye on investment opportunities in mergers and acquisitions/restructuring under policy initiatives. Risk warning: Lower-than-expected performance, lower-than-expected technological progress, regulatory policy risks, etc.