Strawbear Slips Into The Red But Seeks Salvation In AI

Key Takeaways:

• Strawbear Entertainment made a net loss of 109 million yuan last year and its revenue dropped 14.3%
• The maker of dramas for film and TV hopes to cut costs by using AI to generate content

By Fai Pui

After the challenges of Covid, China’s entertainment industry was set for a healthy recovery last year. But for one producer of hit dramas, the story did not stick to the expected script.

In a financial plot twist, film and TV company Strawbear Entertainment Group (2125.HK) fell into the red for the first time last year despite pumping out a string of popular dramas.

The company behind blockbusters such as “Hello Beautiful Life” and “The White Castle” reported a net loss of 109 million yuan ($15.1 million) for last year, reversing course from a net profit of 50.93 million yuan in 2022. In its earnings report issued in late March, the company logged a non-GAAP adjusted net loss of 88.1 million yuan after an adjusted net profit of 73.6 million yuan the previous year. Revenue fell 14.3% to 841 million yuan last year and gross profit plunged 71.2% to 63.3 million yuan.

Tighter procurement budgets at broadcast platforms and a decline in the market for direct-to-consumer content were blamed for the reversal of fortune. Breaking down the revenue streams, Strawbear makes most of its money by selling broadcasting rights to its content and producing made-to-order dramas for clients.

A slew of hits including “Never Give Up”, “You Are Desire” and “Never Too Late” boosted broadcast rights revenues by nearly 56% to 749 million yuan last year. The topline figure looks impressive but gross profit from the licensing business fell 64.5% to just 47.75 million yuan, slashing the segment’s gross margin from 28% in 2022 to 6.4% last year and diluting overall earnings.

With competition intensifying, major film and TV platforms have cut their drama spending, explained independent analyst Ivan Chow. The blow was compounded by the company’s overzealous expansion plans after the pandemic. “Every broadcast platform cut budgets last year and many production projects were canceled, causing inventory impairment losses that are included in the total cost of sales, ultimately hurting gross margin,” Chow said.

Indeed, the inventories on Strawbear’s books rose nearly 18% to 1.31 billion yuan last year from 1.11 billion yuan in 2022, bloated by ongoing productions. Some of these productions are expected to be screened this year, but the reception from the cutthroat market has yet to be determined.

The company’s customized drama business also suffered a setback last year, with revenue dropping 83% to 83.6 million yuan. Only two made-to-order series were delivered, one fewer than in 2022, and with sharply reduced budgets, adding to the company’s financial woes.

Established in 2014, Strawbear has links to the famous Taiwanese singer and actor Nicky Wu through his wife Liu Shishi, who owns 10.51% of the company. The business listed on the Hong Kong Stock Exchange in January 2021 at HK$5.88 but has shed more than 90% of its value to trade around HK$0.4 a share, leaving long-term investors with big holes in their pockets.

In fact, the company grew steadily for several years from 2017, hitting peak profitability in 2021. Revenues rose from 543 million yuan in 2017 to 1.7 billion yuan in 2021, generating a profit of 169 million yuan that year, more than eight times the amount in 2020. However, Strawbear’s performance slowed sharply in 2022, with revenue slipping to 981 million yuan and profit coming in at just 50.93 million yuan. Overall gross margin also fell from 30.3% in 2021 to 22.4% in 2022, and even more sharply to 7.5% last year. The worsening profit profile has probably driven the market sell-off.

Cutting production costs

Without doubt, the company has plenty of good intellectual property in its creative portfolio but faces the challenge of improving gross margin. As major platforms trim their drama budgets, Strawbear is being forced to compress its production costs as much as possible. Technology could provide a solution, as the film industry explores using artificial intelligence generated content (AIGC) in its products.

In its earnings statement, the company said it was paying close attention to various AIGC algorithms and technologies that could be applied to the drama business. For example, LED walls were used to create virtual backdrops for some of the scenes in the dramas broadcast last year.

Strawbear had already pledged to unlock the potential of AIGC. Executive director and COO Zhai Fang told a roundtable at this year’s Boao Forum for Asia that more AIGC technologies would be deployed to develop and produce its dramas. The potential uses range from writing scripts to producing high-quality virtual scenes, special effects, soundtracks, subtitles and promotional materials. The AI tools would help the company boost production efficiency and control costs, she said.

Analyst Chow noted that other entertainment companies were applying a similar strategy. He cited Beijing Enlight Media (300251.SH), which used AI on two animations produced last year, and is aiming to better manage and diversify its content. The company’s share price has risen about 30% so far this year, reflecting market optimism about AI-assisted production of film and TV content, Chow said.

Strawbear, however, is one of the underperformers in China’s filmed entertainment sector. The company’s share price has fallen around 60% over the past year, leaving its price-to-sales (P/S) ratio at just 0.34 times, far below the 2.16 to 5.87 times of peers such as Maoyan Entertainment (1896.HK), China Ruyi Holdings (0136.HK) and Linmon Media (9857.HK). Investors will be paying close attention to whether Strawbear can enlist AIGC wizardry to conjure up a more profitable future.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.