HONG KONG (Nikkei Markets) -- Online publisher China Literature, a subsidiary of internet services major Tencent Holdings, unveiled plans to boost advertising revenue with a free reading application after suffering a decline in users for its paid reading app last year.
The Shanghai-based company, which connects more than 200 million readers with writers and other partners who adapt original content for TV or web shows, films and games in an online ecosystem, plans to roll out the new app in the second quarter. The move is an attempt to blunt competition from other free reading and pirate platforms, which operate without intellectual property rights, according to company executives.
"We believe there is a great amount of room for growth for us," Co-Chief Executive Officer Xiaodong Liang said at a post-earnings media briefing in Hong Kong on Monday.
China Literature had a library featuring 7.7 million writers and 11.2 million works of literature as of Dec. 31. It distributes content on platforms that are owned by the company, operated by controlling shareholder Tencent or by third-parties including Baidu and JD.com via licensing agreements. China Literature's flagship platform is QQ Reading, which unifies content aggregation and distribution functions.
Earlier on Monday, China Literature reported a 63.7% increase in its 2018 net profit to 910.64 million yuan ($135.67 million), outpacing a 23% growth in its revenue to 5.04 billion yuan. Both figures beat estimates compiled by Refinitiv.
Operating margins improved to 22.1% in 2018 from 15.0% year ago, thanks to gains from the deemed disposal of a subsidiary and valuation gains on acquisitions and other financial assets.
During the course of the year, it sub-licensed more than 130 online literary works to business partners for adaptation into other entertainment formats. Revenue from online reading increased by 9.7%, benefitting from growth in both the number of paying users and the average revenue per paying user in "self-owned platform products."
But while the company's average monthly active users grew more than 11% last year to 213.5 million, the number of average monthly paying users, or MPUs, fell to 10.8 million from 11.1 million in 2017, a year when it saw a 34% surge.
"It takes time for the new monthly active users to become monthly paying users. Therefore, there is hope for growth in monthly paying users later on," Liang said.
The decline in MPUs came amid a fall in the number of users for some partners, Liang said, adding that China Literature has started cooperating with WeRead and Tencent Video in the second half of 2018 in an attempt to boost monthly active users.
Its shares, which listed in Hong Kong in November 2017 following a sought-after $1.1 billion initial public offering, got off to a solid start on debut before reversing course last year. The stock losses steepened after the company in August announced the acquisition of New Classic Media, a producer of TV and web series as well as films, for 15.5 billion yuan in a cash-and-stock-deal that was linked to certain profits guaranteed by the target company.
On Monday, the stock gained 2.3% to HK$35.50 before the results were released, while the Hang Seng Index gained 1.4%. The stock is still some 35% lower than its IPO price of HK$55.
In its earnings statement on Monday, China Literature said the acquisition price of New Classics Media has been reduced by 850 million yuan as the latter could not meet the profit guarantee due to project delays and revenue deferrals, even as he signaled optimism about the future.
"I'm confident New Classics will have guaranteed profit contribution to our 2020 and 2021 profits," Liang said.
New Classics Media, which recorded 67.9 million yuan in profit last year compared with a profit benchmark set at 500 million yuan, is working on selecting its certain literary works for adaptation in-house, the company said.
-- Amy Lam & Benny Kung