Core Viewpoint - CITIC Securities has initiated coverage on the social entertainment company, ZhiZi City Technology, with an "Outperform" rating and a target price of HKD 17.50, indicating a 50% upside potential compared to the closing price of HKD 11.66 on October 10 [1] Group 1: Market Position and Growth Potential - ZhiZi City Technology is enhancing its competitiveness in the MENA region, with business scale growth exceeding 60% year-on-year for both 2024 and the first half of 2025 [2] - The MENA region has a population of over 570 million, a median age of 26, and 400 million internet users, with daily social app usage exceeding 210 minutes, significantly higher than the global average of 143 minutes [2] - The company has established a strong competitive moat globally, particularly in the MENA region, by leveraging proven profit models from the Chinese market and a rich talent pool in the internet sector [2] Group 2: Revenue and Profit Forecast - CITIC Securities predicts a compound annual growth rate (CAGR) of 24% for ZhiZi City Technology's revenue over the next three years, reaching RMB 9.8 billion by the end of 2027, up from RMB 5.1 billion in 2024 [3] - The social business segment is expected to generate total revenue of RMB 7.9 billion by the end of 2027, with a CAGR of 28% from RMB 3.8 billion in 2024, driven by strong growth from SUGO and TopTop [3] - The company anticipates its core EBITDA to grow at a CAGR of 27%, reaching RMB 1.5 billion by 2027, doubling from 2024 levels, primarily due to scale expansion and content ecosystem development [4] Group 3: Margin and Return on Equity - The gross margin is projected to improve from 51% in 2024 to 57% in 2027, driven by a shift towards higher-margin UGC products and gaming business [4] - The return on equity (ROE) is expected to remain above 30% over the next three years, indicating strong profitability and efficient capital utilization [4]

Core Insights - The short drama market is shifting towards emerging markets like the Middle East due to saturation in North America and intense competition in Southeast Asia, with local consumption habits and demographic advantages driving this trend [1][10] - DramaBite, launched by the leading social company Chizi City, is the first short drama platform in the Arab region, leveraging local experience and resources to explore this new market [1][4] Market Dynamics - The Middle Eastern youth exhibit a strong demand for entertainment content, but face challenges due to cultural and religious constraints, necessitating precise localization in content adaptation [1][4] - DramaBite has achieved approximately 3.46 million downloads in the past year, with peak daily downloads nearing 47,000 and total revenue exceeding $1.6 million, primarily driven by markets in Saudi Arabia, Israel, and the UAE [2][3] Content Strategy - DramaBite's content includes various genres such as urban romance, fantasy, and suspense, featuring both translated foreign dramas and local productions, enhancing cultural resonance with the audience [4][12] - The platform supports multiple languages, including Arabic and English, and adapts its layout for right-to-left reading to cater to local user preferences [5] Monetization and User Engagement - DramaBite employs a subscription model combined with in-app currency for content unlocking, with a subscription price of approximately 89.99 SAR (around 170 RMB) in Saudi Arabia, which aligns with local purchasing power [8] - The platform encourages user growth through a referral system, rewarding users with in-app currency for inviting friends, thus enhancing engagement and expanding the user base [8][10] Advertising and Market Penetration - Advertising has been a significant user acquisition strategy for DramaBite, with increased ad spending noted in November last year and July this year, targeting primarily males aged 25-34 [10][11] - The platform's advertising efforts extend to regions like the US, Malaysia, and Indonesia, with Indonesia showing a notable increase in downloads following targeted campaigns [11] Future Outlook - As local content continues to diversify and user acceptance of short dramas grows, there is potential for significant market penetration in high-value markets like Saudi Arabia and the UAE, indicating a promising future for DramaBite [12]

Summary of the Conference Call for ZhiZi City Technology Company Overview - ZhiZi City Technology derives 91% of its revenue from social networking for diverse and general populations, with general population social networking being the core business. Products include MICO, YOHO, TopTop, and Sogou. [2][3] - The company has achieved a compound annual growth rate (CAGR) of 67% over the past five years, with an adjusted EBITDA of 50%. [2][3] Financial Performance - Revenue guidance for the year has been raised from 6.5 billion to 6.8-7.1 billion, with a year-on-year growth rate expected to increase from 30% to 35%-40%. [4][12] - In 2024, revenue from the Middle East and North Africa (MENA) is projected to grow approximately 66%, with Sogou's revenue increasing by about 200% and profits exceeding 400%. [2][3] - The company reported a revenue growth of about 54% in 2024, with a net profit margin of 4%. [9] Market Dynamics - The MENA market is a significant growth engine for ZhiZi City Technology, with a projected CAGR of 20.7% over the next five years. [5] - The region has a youthful demographic, with 70% of the population under 35 years old, and high GDP per capita, leading to strong online social networking demand. [5] Product and Innovation Highlights - The innovative business segment includes casual mobile games, traditional traffic monetization, and social e-commerce. The self-developed game Alice Dream has generated over $8 million in monthly revenue as of September 2023. [6][28] - The LGBTQ social networking market is expected to reach 660 million by 2026, characterized by high education and income levels. [7] Strategic Initiatives - The company plans to continue expanding its overseas market presence and explore strategic entry into emerging markets, including potential acquisitions. [4][8] - ZhiZi City aims to replicate the success of Alice Dream to empower new products and create more long-lifecycle hits. [4][8] Competitive Landscape - The competitive landscape for general population social networking remains stable, with flagship products like MICO ranking in the top three in live streaming. [15] - TikTok is a major player in the live streaming space, but ZhiZi City primarily focuses on social networking, with limited overlap. [16] Future Growth Outlook - The company anticipates continued growth in both general and diverse population social networking, with plans to launch two additional casual mobile games in the second half of the year. [28] - The company has a robust pipeline of 5 to 6 products in incubation, with 1 to 2 showing significant potential. [21] Shareholder Returns - ZhiZi City prioritizes investment in its core business while actively seeking acquisition opportunities. The company has repurchased nearly 200 million HKD worth of shares this year and plans to repurchase a total of 400 million HKD over the next two years. [29]