Investment Rating - The report maintains a "BUY" rating for iQIYI, indicating a potential return of over 15% over the next 12 months [16]. Core Insights - iQIYI is expected to see a recovery in both revenue and earnings in 4Q25, with total revenue projected to grow by 2% year-over-year (YoY) and 1% quarter-over-quarter (QoQ) to RMB6.77 billion, driven by the recovery of membership and content distribution businesses [1][8]. - The forecast for non-GAAP net income in 4Q25 is RMB93 million, a significant improvement from the non-GAAP net losses recorded in previous quarters [1]. - The target price for iQIYI has been adjusted to US$2.75, based on an 18x multiple of the 2026E non-GAAP EPS, reflecting a 36.8% upside from the current price of US$2.01 [3][11]. Financial Performance Summary - Revenue for FY23A was RMB32,018 million, with a YoY growth of 10.4%. However, FY24A revenue is expected to decline by 8.7% to RMB29,225 million, followed by a further decline of 6.7% in FY25E to RMB27,263 million [2]. - The adjusted net profit for FY23A was RMB2,984.1 million, which is expected to drop to RMB1,512.2 million in FY24A and further to RMB264.1 million in FY25E [2]. - Gross margin is projected to decrease from 27.8% in FY23A to 20.9% in FY25E, before recovering to 23.3% in FY26E and 24.2% in FY27E [2]. Business Forecasts and Valuation - iQIYI's revenue for FY25E is forecasted at RMB27.3 billion, with a slight increase in FY26E to RMB27.9 billion and FY27E to RMB28.4 billion [9]. - The non-GAAP net profit is expected to significantly improve from RMB0.3 billion in FY25E to RMB1.0 billion in FY26E and RMB1.3 billion in FY27E, reflecting a recovery trend [9]. - The valuation of iQIYI is based on a target PE multiple of 18x for 2026E non-GAAP EPS, which is at a discount to the sector average of 24x due to intense competition in the video streaming sector [11].

Summary of the Conference Call on China's IP Merchandising Economy Industry Overview - **Industry**: China's IP (Intellectual Property) Merchandising Sector - **Current Stage**: The expert describes China's IP ecosystem as being in the early stages with significant growth potential, contrasting it with the more established ecosystems in the US and Japan [2][3] Key Insights 1. **Growth Potential**: - The expert expresses a positive outlook on the growth potential of China's IP merchandising market, which is currently in a structural upcycle [2] - The rise of emotional consumption has been a key driver for the rapid development of China's IP economy in recent years [2] 2. **Consumer Demand**: - There is an increasing consumer demand for IP products, particularly among younger demographics whose purchasing power is on the rise [2] - The expert anticipates sustained strong growth supported by a richer supply of both domestic and international IPs [2] 3. **IP Lifecycle and Monetization**: - Differences between content-driven IPs and character/emoji-based IPs affect monetization depth and lifecycle durability [3] - Content IPs often depend on major releases, while character-based IPs have shorter lifecycles but lower entry barriers for consumers [3] 4. **Domestic vs. International IPs**: - Domestic IPs have gained momentum but still lag behind international IPs in terms of recognition and operational sophistication [3] - Recent hits like "Ne Zha 2" and "Nobody" showed strong short-term traction but lost interest quickly post-release, indicating a need for better IP operations [3] 5. **Operational Excellence**: - Effective IP operations are crucial for sustainability, with the absence of a standardized operating playbook noted [3] - Disney is cited as a benchmark for leveraging theme parks and offline experiences to maintain engagement during content gaps [3] Beneficiaries in the IP Value Chain 1. **Key Players**: - The expert identifies leading domestic IP operators such as China Literature and top game/media content developers as key beneficiaries [4] - Alifish, leveraging Alibaba's ecosystem, is highlighted for its operational leverage and potential for sustained share gains in the sublicensing business [4][6] 2. **Expansion Opportunities**: - Alifish's initiatives to expand into consumer retail and evolve into a full-chain IP operator could unlock larger growth trajectories [7] Risks and Challenges 1. **Market Risks**: - Key risks to the sector include evolving competition, fast-moving technology trends, uncertain monetization, and rising costs of traffic acquisition [8] - Specific risks for Damai include macroeconomic headwinds, slower-than-expected growth in live entertainment, and competition from ticketing platforms [9] 2. **Regulatory Environment**: - Regulatory changes could lead to project delays or earnings volatility, particularly in the film and drama sectors [9][10] Valuation and Recommendations - **Price Targets**: - Damai Entertainment Holdings is rated as a "Buy" with a price target of HK$1.29, while China Literature is also rated as a "Buy" with a price target of HK$50.00 [22][30] - **Investment Outlook**: - The report maintains a positive outlook on both companies, emphasizing their strong underlying business momentum and growth potential in the IP commercialization space [7][10]

Summary of Conference Call Notes Industry Overview - The report focuses on the **SMID (small-mid cap) Internet/Media sector in China** and reflects recent secular changes in the industry [2][4]. Key Companies and Ratings - **Damai**: Maintained an Overweight (OW) rating; price target raised from HK$0.58 to HK$1.20, reflecting a 107% increase [3][15]. - **37 Interactive Entertainment (37IE)**: Maintained OW rating; price target increased from RMB 23.00 to RMB 25.90, a 13% rise [4][15]. - **Maoyan**: Downgraded from OW to Equal-weight (EW); price target adjusted from HK$7.50 to HK$8.00, a 7% increase [6][15]. - **JOYY**: Maintained EW rating; price target raised from US$40.00 to US$62.00, a 55% increase [4][15]. - **IQIYI**: Maintained EW rating; price target increased from US$2.10 to US$2.30, a 10% rise [4][15]. - **Focus Media**: Preferred over Weibo due to expected growth from self-help initiatives [6]. Core Insights - **IP Derivatives Demand**: There is a growing demand for IP derivatives in China, with Damai positioned to benefit from its domestic sub-licensing business [3]. - **Long Video and Live-Streaming**: These sectors are entering a more favorable policy environment, with valuations currently below historical levels. Price targets for JOYY and HUYA have been lifted due to improving trends [4]. - **Gaming Sector**: Smaller game companies are experiencing a re-rating due to successful new titles, leading to raised earnings forecasts for 2025/26 [5]. - **Film Industry Challenges**: Film companies may face difficulties in re-rating due to muted industry growth and weaker visibility for fundamentals, leading to downgrades for Maoyan and others [6]. Additional Insights - **Branding Advertising**: The branding advertising industry is not expected to recover immediately, but Focus Media is seen as a better investment compared to Weibo due to its strategic initiatives [6]. - **Valuation Adjustments**: The report includes various valuation adjustments for companies based on earnings revisions and shifts to sum-of-the-parts (SOTP) valuation methods [15]. Market Performance - The report provides a detailed analysis of stock price performance over different time frames, indicating significant variances in performance among the companies covered [12]. Conclusion - The SMID Internet/Media sector in China is undergoing significant changes, with varying growth prospects across different segments. Companies like Damai and 37IE are favored for their growth potential, while challenges remain for the film industry and certain live-streaming platforms.