China Literature, which is both China’s leading online bookstore and owner of one of the country’s top TV producers, swung from profits of $55 million a year ago to net losses of $465 million in the six months to June. Revenues were up 10% to $461 million.
The company, which is majority owned by social media and entertainment giant Tencent but is separately listed in Hong Kong, said that its financial performance was undermined by the impact of the coronavirus and by huge provisions at New Classics Media, the film and TV producer it bought in 2018.
Its regulatory filing was a massive mea culpa, cataloging management failures across both business sectors. Earlier this year, China Literature faced a near revolt from authors worried by its planned changes at the online library. That prompted the sidelining of several senior managers and the parachuting in of Edward Cheng Wu, CEO of Tencent’s film business Tencent Pictures, in March.
“The disappointing results made us realize that the lack of resilience of our underlying business model and our structural issues have piled up over the recent years,” said Cheng. “We are prepared to adopt a new culture and creative ideas from a more strategic and multi-dimensional perspective.”
Cheng’s comments on the literature operations were abject. “We failed to take full care of our writer’s feelings and support our writers adequately through our incentive program, and some of our writers expressed concern about previous versions of the writer’s contract,” he said. “Last year, we launched our free reading app Feidu as a supplement to our paid reading products. The free-to-read reading product has strong influence in certain markets and over certain user groups, but Feidu’s overall performance failed to match the leading position the company enjoys in China’s online literature sector.”
Revenues doubled to $281 for the group’s “self-owned platform products… primarily driven by the expansion of distribution channels and users’ growing willingness to pay for our reading content during the first half of 2020.” It claimed a 7.5% year-over-year increase in the number of monthly online users from 217 million to 233 million in the first half of 2020, and a 50% increase in average revenues per user. But the division dropped the ball with distribution of Tencent-owned products.
Worse was to come in the IP division, which spans New Classics Media and sales of physical books. Both sides of its business were hurt by the various coronavirus lockdowns across China.
“Due to the fluid and changing macro-environment and the outbreak of the COVID-19 epidemic, NCM’s production cycle for film and television projects has elongated and becomes less predictable,” China Literature said.
The company booked $622 million of impairment losses relating to the October 2018 acquisition of New Classics Media. These were offset to the tune of $175 million by earn out payments that it will not now have to make. Other long-term investments needed a further $35 million of impairment charges.
Remedies to change the corporate culture are now under way, Cheng says. “First, we will strengthen our core business through enhancing IP incubation capability, strengthening fundamentals, and speeding up cross-sector development to accelerate our IP development. Second, we will improve the social and community features of the platform and establish a stronger connection between China Literature’s products and the Tencent portfolio. Finally, we will introduce enhancements to our IP-centric ecosystem, leveraging our high-quality IP to build business partnerships and networks in content segments including comics, animation, TV series, film, and games,” the company statement said.
The poor performance of China Literature stands in contrast to the trajectory of Tencent, which is one of China’s most admired companies. Tencent saw its shares reach an all-time high a week ago, before being hit by Donald Trump’s executive order against its WeChat product in the U.S.
Tencent is scheduled to report its own second quarter results on Wednesday evening Hong Kong time.
China Literature shares were down 3.2% on Tuesday to HK$50.6 apiece. Tencent Holdings regained some recently lost ground, with a 2.3% gain to HK$513.5, valuing the giant at some $630 billion (HK$4.92 trillion).