Industrials: Focus on gaming going global, mini-program games, and AI applications; position around earnings delivery and content pipeline

Industrial released a research report stating that it is focusing on gaming going global, mini-program games, and AI applications, positioning around earnings delivery and content pipeline. In H1 2026, revenue from gaming and advertising marketing and net profit attributable to parent grew year-over-year, with profitability performance diverging within the sector. It is recommended to focus on companies with product R&D, publishing and operations, and commercialization capabilities, centered on the following three main lines: 1) Gaming sector. In H1 2026, overseas revenue from self-developed games was US$12.372 billion, up 30.22% year-over-year; mini-program mobile game revenue was RMB31.657 billion, up 36.01% year-over-year. 2) Content and IP. High-quality content reserves and IP have broad development space across film and television, gaming, short dramas, and derivatives. 3) AI applications. Businesses such as AI marketing and short dramas are growing rapidly. Industrial's main views are as follows: Performance review: In H1 2026, media sector revenue grew steadily, with gaming driving a recovery in net profit attributable to parent In H1 2026, the media sector's operating revenue was RMB260.515 billion, up 1.44% year-over-year; net profit attributable to parent was RMB24.071 billion, up 10.21% year-over-year; net profit attributable to parent after deducting non-recurring gains and losses was RMB17.258 billion, down 7.31% year-over-year. In Q2 2026, operating revenue was RMB130.117 billion, down 0.03% year-over-year; net profit attributable to parent and net profit attributable to parent after deducting non-recurring gains and losses were RMB13.120 billion/RMB9.135 billion, up 22.18%/down 0.46% year-over-year, respectively. Performance diverged across sub-sectors, with gaming and advertising marketing achieving dual growth in revenue and profit. In H1 2026, the gaming sector's revenue and net profit attributable to parent grew 20.03% and 65.68%, respectively, with profit growth significantly outpacing revenue growth; advertising marketing revenue and net profit attributable to parent grew 7.93% and 23.48%, respectively. The publishing sector's revenue and net profit attributable to parent fell 10.82% and 18.43%, respectively; digital media revenue grew 5.46%, while net profit attributable to parent fell 39.23%, with revenue growth not yet translating into profit growth; film and television cinema revenue fell 30.84%, and net profit attributable to parent turned from profit to loss; television and broadcasting revenue fell 6.80%, with profit after deducting non-recurring gains and losses still in loss. In Q2 2026, gaming revenue and net profit attributable to parent grew 19.72% and 74.34%, respectively, with profit growth further accelerating; advertising marketing revenue grew 0.15%, while net profit attributable to parent fell 3.31%, with Q2 operating performance under somewhat more pressure than the H1 overall level. Market review: Index and valuation retreated from year-end, fund allocation remains underweight As of the close on September 4, 2026, the SW Media Index was 706.57 points, down 13.80% from the end of 2025; PE-TTM was 35.34x, down 8.08x from the end of 2025. According to statistics on funds' top holdings, after excluding Hong Kong stocks, in Q2 2026 the media sector's top-holding market value accounted for about 0.45% of the top-holding market value of all A-shares, down about 0.53 percentage points from 0.98% in Q1 2026 and down about 0.96 percentage points from 1.41% in Q2 2025. During the same period, the benchmark allocation ratio of the media sector's market value to total A-share market value was about 1.09%, with funds underweight by about 0.63 percentage points. Both the sector's valuation and allocation levels have retreated; going forward, attention should be paid to earnings delivery and changes in capital allocation. Risk warnings: Changes in policy and regulation, product performance of games and film/television short dramas falling short of expectations, and macroeconomic fluctuations.