Profit warning issued due to goodwill impairment of 1.8 billion; Yuezwen's future remains uncertain

Due to the need for goodwill impairment of 'New Classic Media,' YUEWEN Group recently issued a profit warning, forecasting significant losses in 2025.

Key points:

The company expects a maximum loss of 850 million yuan last year

Goodwill impairment of New Classic Media is estimated to reach 1.8 billion yuan

The author of this article is Liu Zhiheng.

Over the past three months, online reading platforms $CHINA LIT (00772.HK)$have experienced wild swings in share prices, leaving shareholders feeling like they're on a rollercoaster, with investors finding it hard to make sense of the situation.

At the end of October last year, YUEWEN’s share price peaked at HKD 45.5 but failed to sustain the upward momentum, losing a full 20% within less than two months. Entering 2026, the stock began to rebound, only for the “1.24 incident” to not just halt the upward trend but send the price tumbling again. It wasn’t until management announced their 2026 strategy that the stock surged 27% within two days.

Just as the stock was showing bullish momentum, an anti-climax occurred when the company issuedprofit warning, expecting a full-year loss of 750 million to 850 million yuan for last year, and the stock price plummeted by 8% immediately the day after the announcement.

The announcement revealed that the recoverable amount of goodwill from New Classics Media is below its book value, with an estimated goodwill impairment of 1.8 billion yuan. Excluding the impairment from New Classics Media and based on non-IFRS standards, net profit would be approximately 800 million to 900 million yuan, representing a decrease of 21% to 30% compared to 1.142 billion yuan in 2024.

Negative news has gradually passed

Although YUEWEN continues to incur losses, current adverse news has been gradually absorbed. The previous 1.24 incident stemmed from the company's decision last July to replace the decade-long 'Four-Wheel Recommendation PK System' with a 'Traffic Package Intelligent Distribution Model.' On January 24 this year, an author pointed out on the forum that the new mechanism had issues such as unfair traffic distribution and low data transparency, causing a significant drop in income for mid-tier authors. The issue continued to escalate until earlier this month when YUEWEN announced modifications, finally calming the situation and bringing the issue to a close.

As for New Classics Media, YUEWEN acquired it in 2018 for 15.5 billion yuan with the aim of combining its own IP with New Classics Media’s film and TV production capabilities. However, the returns from New Classics Media have not met expectations, particularly as short dramas have gained popularity in recent years, which has been unfavorable for New Classics Media, primarily focused on long dramas and films. Consequently, YUEWEN has had to continuously impair its goodwill, significantly affecting performance over the years.

However, the situation is moving in a positive direction. After multiple impairments, New Classics Media's goodwill has been fully impaired. Although YUEWEN's investment has essentially been written off, the issue that has troubled financial statements for many years has temporarily come to an end, and future results will no longer be affected by New Classics Media's impairments. The company can now move forward without bearing this large impairment burden.

No improvement in performance

The company’s problems are gradually coming to an end, so future performance will likely depend on the development of core business operations. For now, the business does not stand out and even shows signs of decline. Revenue for the first half of 2025 was 3.19 billion yuan, a significant 24% drop from 4.19 billion yuan in 2024, while gross profit also fell 22.6% year-on-year to 1.61 billion yuan.

However, profits unexpectedly rose by 68.5% to 850 million yuan, but this was due to other gains recording a net amount of 583 million yuan. These so-called other gains mainly resulted from YUEWEN’s disposal of invested companies. Additionally, YUEWEN cut sales and marketing expenses by 20.4%, and general administrative expenses were reduced by 11% year-on-year. In other words, the company's profit in the middle of last year came entirely from cost-cutting measures and non-recurring gains, with little relation to core business activities.

Recently, YUEWEN's CEO Hou Xiaonan announced three core strategic directions for 2026 in an internal company communication: 'Evergreen Content,' 'IP+AI,' and 'Globalization.'

Evergreen content supports core writers and key categories, driving the refinement of short dramas and manga. Through derivatives and trendy toys, IPs are deeply integrated into users' lives to cultivate long-lasting IPs. Next is IP + AI, using AI to assist in content incubation, high-quality production, IP development, and industry globalization, thereby enhancing IP development efficiency and value. Thirdly, a global engine is being built to promote overseas expansion in different languages.

Three major strategies remain to be observed

Regarding Hou Xiaonan's new strategy, it appears somewhat superficial. What he mentioned seems to be universal principles applicable anywhere, lacking specific and detailed implementation plans. As investors, it is difficult to foresee the company's future success based solely on a few statements.

On the contrary, what we see are challenges from short dramas. Yueba seems temporarily overwhelmed. Although the company understands that significant efforts must be made in the short drama market, in the 2026 CNPP Top Ten Brands in the production industry, Yueba ranks only eighth, showing how challenging it is for the company to catch up in the short drama sector.

As for going global, the company currently relies mainly on artificial intelligence to translate works into various languages to enter different markets. However, relying solely on AI cannot capture and appropriately convey the essence of the works, failing to reflect regional language styles.

In fact, Yueba is still incurring losses, with no current price-to-earnings ratio available, but its forward-looking PE ratio is estimated to be as high as 274 times, indicating a rather high valuation. Additionally, it is difficult to discern the details of future development success or failure, and the stock price is highly volatile. Investors should adopt a wait-and-see attitude.

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