Orient: Full-stack AI entertainment tools are gradually being launched, platform products are expected to achieve excess profits.

Orient published a research report stating that the Byte Entertainment app's high growth is driving the overall increase in entertainment market duration in China. The firm believes it is necessary to continue monitoring the integration results of other major platform companies. It also believes that short dramas and comics will be the next content industry to benefit significantly from the improvement of AI capabilities after AI audio reading. Full-stack production tools will allow AI short drama producers to become content producers. Platforms with upstream novel IP reserves and accumulated traffic will find it easier to achieve excess profits in the later stages. The firm recommends focusing on platform-type companies in the entertainment sector, as they will benefit from the additional profits enabled by AI on production capacity. Orient's main points are as follows: High growth of the Byte Entertainment app is driving the overall increase in entertainment market duration in China Due to the driving force of AIGC and AI algorithms, the fastest-growing areas are video (short dramas), reading (AI audio novels), and music. Byte integrates AI and copyright middle-tier capabilities in the above fields to enhance its subsidiaries, increasing its market share. The firm believes it is necessary to continue monitoring the integration results of other major platform companies. The gaming sector has a sufficient reserve of new products, and platform-type products benefit from AI editors Byte's development in the gaming sector lags behind the market, leaving more room for development for various enterprises. In the short term, by 2026, there will be a sufficient reserve of new games, making the market more similar to the supply competition structure of 2024. Price wars may be waged in the high ARPU race track, with new products that engage in price wars easily succeeding; low ARPU long-lasting old games remain unchanged. In the long term, enterprises with high DAU products are promoting game AI editors. The firm believes that the combination of UGC and AI is the current intermediate state, accumulating users and a large number of low-cost data for future supply-side breakthroughs in AIGC. Platform-type enterprises that have obtained entry tickets are more likely to stand out in the post-AIGC era. Short dramas are expected to benefit significantly from the global traffic revenue increase brought by AI full-stack production tools The firm believes that after AI audio reading, short dramas and comics will be the next content industry to benefit significantly from the improvement of AI capabilities. The emergence of full-stack production tools will shift the direction of AI short drama production from being led by technical personnel in 2025 to being led by content producers in 2026. There will be significant improvements in expanding themes, production efficiency, and global adaptation. Because the short drama track is currently in a high-growth phase, the firm believes that both Byte and the industry as a whole will benefit. However, in the long term, the firm believes that platforms with upstream novel IP reserves and accumulated traffic will find it easier to achieve excess profits in the later stages. Investment recommendation The firm recommends focusing on platform-type companies in the entertainment sector, as they will benefit from the additional profits enabled by AI on production capacity. Investments related to games include TENCENT, Giant Network Group, XD INC, Kingnet Network, Zhejiang Century Huatong Group, NetEase; Investments related to short dramas and novels include COL Group Co., Ltd., CHINA LIT; Investments related to music include Tencent Music. Risk warning Investment flow tax or policy changes such as high sales tax rates may impact high-tech enterprise qualifications, investment flow tax, etc. Byte's market share growth may impact other entertainment manufacturers, and the actual performance of content products is highly uncertain.