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Edited Transcript of 0772.HK earnings conference call or presentation 12-Aug-19 12:00pm GMT

Half Year 2019 China Literature Ltd Earnings Call

Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of China Literature Ltd earnings conference call or presentation Monday, August 12, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maggie Zhou

China Literature Limited - Head of Capital Markets & IR

* Wenhui Wu

China Literature Limited - Co-CEO & Executive Director

* Xiaodong Liang

China Literature Limited - Co-CEO & Executive Director

* Xuesong Shang

China Literature Limited - President

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Conference Call Participants

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* Binbin Ding

JP Morgan Chase & Co, Research Division - Analyst

* Brian Gong

Citigroup Inc, Research Division - Equity Research Associate

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Wei Meng

China International Capital Corporation Limited, Research Division - Analyst

* Yanyan Xiao

Citic Securities Co., Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to China Literature Limited 2019 First Half Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would like to hand the conference over to our first speaker today, Ms. Maggie Zhou. Thank you. Please go ahead.

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Maggie Zhou, China Literature Limited - Head of Capital Markets & IR [2]

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Thank you, operator. Ladies and gentlemen, welcome to our 2019 interim results conference call. Joining us today on the call are Mr. Wenhui Wu and Mr. Xiaodong Liang, our Co-Chief Executive Officers; Mr. Huayi Cao, Founder and Chief Executive Officer of New Classics Media; and [Ms. Lilian Moore], our Vice President of Finance.

For today's call, Mr. Wu will begin with strategic highlights of the first half of 2019, Mr. Liang will review the company's business and discuss its strategies and [Ms. Moore] will go through the financials. We will then open the call for questions. And specifically, Mr. Cao will answer questions related to New Classics Media and our drama and movie production business.

Before we begin, I'd also like to remind you that management's comments during the call will include forward-looking statements that are based on our current expectations. All statements other than statements of historical facts during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. So please do take a minute to read the risk factors and non-GAAP measures discussion in China Literature's 2019 interim results earnings release.

I will now turn the call over to our Co-Chief Executive Officer, Mr. Wenhui Wu.

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Wenhui Wu, China Literature Limited - Co-CEO & Executive Director [3]

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Thank you, Maggie. Hello, everyone. Thank you for joining us today. I'm pleased to share with you the major business progress we achieved during the first half of 2019. We stretched our leadership into online literature space by launching our free-to-read models of certain Tencent products and by releasing our own free reading app, Feidu.

Our MAUs continued to increase to 217 million. In the first half of 2019, we also integrated New Classics Media's exceptional genre development capabilities with our massive IP production platform. We believe the integration will create a synergy across our business by strengthening our in-house drama production capabilities and by allowing us to adapt our IP to other formats.

Our IP-centric monetization model has now successfully included online reading, drama investment and production and with animation coproduction and the online gaming operations. We believe this initiative will significantly strengthen the foundation of our ecosystem, enhance our IP development and support our long-term sustainable growth.

I will now turn the call to Xiaodong to discuss our key achievements and strategy.

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [4]

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Thank you, Wenhui. I'll now go over a few highlights for the first 6 months of 2019.

During the period, we continued to expand the number of writers and literary works on our platform. At June 30, 2019, our library has expanded to over 11.7 million literature works, written by 7.8 million writers. This includes 11.1 million original titles created by our writers on our platform, 380,000 works sourced from third-party platforms and 230,000 e-books. In total, about 20 billion Chinese characters were added to our platform during the first half of this year, while growing our market share by supporting and bringing on board new titles to diversify our content category.

New genres such as comic fiction, competitive sports and science fiction are enriching our content portfolio. We have also been promoting short-form content, which is typically 1/4 to 1/3 of the length of our common long-form content and have witnessed rapid growth in user traffic.

Furthermore, we continue to develop content based on realistic and contemporary urban themes, which are increasing in demand. This strategy has worked out very well for us with many of our works receiving awards and honors from respected industry institutions and government bodies.

Our content continues to stand out in the market. According to Baidu's search ranking, in the first half of this year, 7 out the top 20 most searched online literary works were created on our platform.

As we continued to improve the operational efficiency of our platform, user engagement reached a new record high. For example, total fans for 1 popular novel have exceeded 10 million. The number of works with over 1 million user comments exceeded 13 during the first half of this year, a significant increase from just 2 in last year.

As Wenhui has mentioned, we are particularly pleased to have launch of free-to-read model in the first half. This should help to diversify our revenue streams. We started distributing free content through Tencent's Mobile QQ and QQ Browser in the first quarter and launching our independent free-to-read app, Feidu during the second quarter of this year.

The free-to-read model attracts users who are price-sensitive, which we can monetize through advertising. We believe we can enjoy several competitive advantage in the free reading market. For example, most of our competitors rely on sourcing content from third parties, which limited the skill on quality of that content. We on the other hand source free-to-read content both from our in-house library and from our external partners' libraries. We believe the high-quality and wide selection combined with our sophisticated recommendation algorithm deliver a better experience for users on our platform.

The launch of the free-to-read model will also enhance the total return on investment of our content library and generate higher lifetime value for our users. Under the subscription model, viewership for these titles in our library is evenly distributed; many titles are not able to generate meaningful revenue shortly after their debut. Putting these titles back on the shelf under our free-to-read channel gives them another opportunity for exposure and to collect revenue from advertisers. This is why we believe the free-to-read model is an important initiative and will improve the overall monetization of our existing IP.

In short, the rollout of our free-to-read model alongside our existing paid model allows us to offer a greater breadth of content and serve a broader user base. As free users increasingly becoming engaged with our content, we may also convert some of them into paying users over the longer term.

Turning to our IP business. Our integration of New Classics Media, or NCM, has allowed us to gain extensive expertise in this in-house production and the adaptation of the original content into other popular formats. In addition to producing top-tier dramas and films for us, NCM will also help assess and identify content ideally suited to be adapting into TV and film and allow them to select downstream partners.

NCM continued to prove its ability to develop top-tier content during the first half of this year. Zhima Hutong was aired and ranked first in terms of the viewership during this specific broadcasting time slot on Beijing TV. Two dramas that we have in the pipeline Jingying lushi and Liú jin suìyuè were included in the 2018 to 2022 Top 100 Key TV series, a recommendation list published by the State Administration of Press, Publication, Radio, Film and Television. Additionally, a TV drama series called Jingzhé was selected to the recommendation list to celebrate the 19th (sic) [70th] anniversary of the founding of the People's Republic of China.

While the video industry in China is currently experiencing adjustment, that has impacted the NCM's TV station and online video partners, and thus, NCM's own ability to release content. We believe this adjustment will eventually benefit the high-quality content providers. We also believe the contribution of NCM will amplify the franchising value for China Literature platform and create significant benefits for our entire content ecosystem.

We continue to expand our content library to create additional monetization opportunities. Over the last 6 months, around 70 of our works of literature have been licensed to third-party partners for adaptation. We have seen success in our IP franchising model that turns novels into animation series and TV dramas as it has produced hit after hit. One clear example is our popular IP Quánzhí gaoshou, which was adapted into animated series in 2017 and gained widespread popularity, promoting (sic) [prompting] us to add more episode in 2018. The success solidified the existing fans base for the novel and further accumulated a vast fans base for this animation series.

Recently, our adapted living action web series was launched and received over 300 million video views within 3 days. In this August soon, we will release our animated movie based on this IP. We believe this debut will help to evaluate the IP inflows and make it even more popular. In addition, we have licensed game adaptation right of this IP to Tencent, which is currently developing a mobile game. This will further prolong the life cycle of Quánzhí gaoshou and allow us to operate and monetize this IP for a long time.

Turning to our international business. We're expanding our global reach through our variety of new channels. WebNovel, our foreign language website and mobile app, attracted over 18 million visitors in the first half of this year and now offer over 400 original works translated from Chinese and almost 50,000 original works in local languages.

We also have our sights set on Africa and Southeast Asia. By forming a strategic partnership with Transsion, a mobile device manufacturer, we plan to tap into Africa's huge online literature market. This is clearly the early stage of development.

We have also entered into a strategic partner with Singapore Telecom, a leading communication technology group in Asia, to jointly develop online literary services and content platforms for the Southeast Asia region.

Looking forward, we will continue to develop a healthy ecosystem by building a platform for users and writers in China that is highly engaged and which can be replicated in new overseas market. We believe our innovative monetization models and our partners across the value chain will unlock more IP opportunities and generate long-term growth for our business.

Now I will turn the call over to [Lilian] to discuss our financial performance. Thank you.

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Unidentified Company Representative, [5]

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Thanks, Xiaodong. In the first half of 2019, we generated RMB 3 billion revenue, up 30.1% year-on-year. This increase was mainly driven by the continuous growth of our IP operation business.

Our online business revenues were RMB 1.7 billion in the first half of 2019, down 11.5% year-on-year, accounting for 56% of our total revenue compared to 82.3% during the latter corresponding period. The downward slide was mainly a result of decrease in paying users and the decline of revenue from our Tencent products.

In the first half of 2019, we saw a 9.3% year-on-year decrease in total MPU and a 7.8% decrease in total ARPU, which was mainly due to our strengthened review of paying content and the continued drop on our Tencent products. Despite this, we were able to consistently grow our user base.

During the first half of 2019, our average MAU was 217.1 million, increased by 1.7% year-on-year, mainly driven by efficient optimization of distribution channel for existing paying reading business and introduction of new free-to-read model.

We witnessed the growth in IP operations business post our acquisition of New Classics Media. Revenues of IP operation and others were RMB 1.3 billion, accounting for 44% of our total revenue, up 2.2x year-on-year. This was mainly driven by the increasing revenue from IP licensing, distribution of TV series, web series and films as well as successful ramp-up of our self-operated games. In addition, we were able to realize sizeable gains from co-investments on TV and web series.

Turning now to the cost and expenses outlook. In the first half of 2019, our total cost amounted to RMB 1.3 billion, most of which are content costs, production costs of TV series and film rights as well as platform distribution costs.

Content costs were RMB 556.1 million, down 25.3% year-on-year, in line with the decrease in the underlying revenue to be shared. Production costs of TV series and film rights were RMB 359.7 million, up 14x year-on-year as the impact from acquisition of New Classics Media.

The platform distribution costs were RMB 197.1 million, up 83.5% year-on-year, which includes the revenue share to Tencent product and the game distribution costs. Other cost items as percentage of revenue has declined due to our economy of scale and the ongoing optimization of business structure.

In term of operation expenses, our selling and marketing expenses were RMB 976.7 million in the first half of 2019, up 85.2% year-on-year, mainly due to more marketing dollars spent on our free-to-read app, self-operated game as well as more TV series, web series and films released. So our selling and marketing expenses as a percentage of revenue grew from 23.1% in the first half of 2018 to 32.9% in the first half of 2019.

Our G&A expenses reached RMB 473.5 (sic) [RMB 473.4] million, up 41.8% year-on-year, mainly due to the increased employee benefit expenses from activation of New Classics Media and increased game development expenses. Our G&A expenses as a percentage of revenue grew from 14.6% in the first half of 2018 to 15.9% in the first half of 2019.

To summarize, in the first half of 2019, gross profit increased by 35.5% year-on-year to RMB 1.6 billion and our gross margin went up from 52.4% in the first half of 2018 to 54.6% in the first half of 2019. Our operating profit decreased by 12.6% year-on-year to RMB 527.7 million and our operating margin was 17.8%, down 8.7 percentage points compared with the first half of 2018.

Our net profit decreased by 22% year-on-year to RMB 393.2 million and thereby, net profit margin was 13.2%, down 8.9 percentage points year-on-year.

Our non-GAAP net profit was RMB 390.5 million, a decrease of 19% year-on-year.

During the first half of year, we have invested more resources to enrich our product mix and incubate a wider target user base, which led pressure on the bottom line, but we believe this will pave the way for quality business growth in the longer term.

That concludes the financial-related part. Let's move on to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [2]

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May I have 2 questions. The first one is about New Classics. Just wondering if management can share some of the thought on the earn-out target of New Classics for this year since we already passed more than half of the year?

And then secondly, I remember [Lilian] mentioning that you guys have been interested in building user engagement and we have seen sales and marketing expenses going up in first half of the year. Just wondering after our launch of Feidu, how should we think about your sales and marketing expense trend?

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Unidentified Company Representative, [3]

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Okay. Xiaodong will answer the first question about New Classics media, I will answer the second question. So the second question about the user growing and also the expenses. Actually, the expense -- marketing dollars increasing in first half this year is not only just due to the user acquisition. Only part of the expense is using for the user acquisitions exactly for Feidu. Another increase is due to the increase of marketing dollars for our game business because we're launching a new game in the first half of this year and this game garnered very good performance. And due to the operation, this game was with our partner together. So we needed to do marketing dollars for this game. And also another increase is due to we added New Classics Media in the first half this year. So we also added some of the sales and marketing dollars, especially for the -- sales and marketing dollars for the TV series and films. So this is why the marketing dollars are increasing so much compared to last year.

And also for the free reading and also for our reading user strategy, we think that we still can grow in our user base by both the online paying reading business and also the free reading business. For the free reading business, Feidu, actually, I think that they got a very good user growing in the first half this year and also, we're not only just targeting for the user growing for Feidu, we're also targeting for the revenues growing for these products. So we're already beginning to testing -- and has models in Feidu in June this year, and also, the revenue from the advertising that is still in the very good trend of growing. So we think that we will very focus on the investment return of the product, not only just focus on the user base growing, but we will focus on the (foreign language) costs and revenues growing for these products.

And also at the same time for free reading, we're also not just using 1 Feidu product, we're also working very closely with Mobile QQ and QQ Browser to do the free reading models in that platform. And also, the users growing trend is good. And also their revenue from advertisement also growing very well and that profitability is also good.

So basically, we want to be using Feidu and also working with Mobile QQ and QQ Browser to be good app products in online, to be -- get much more users in and get much more revenues in. And also in the long term, we're targeting free reading business as our profitable business and can be a very good trend of profitability in the long run.

And also for the paying reading business, we also did a lot of work in the first half of this year. And also, I think that we will still continually to improving the community of the products, and also, we are expanding our much more paying approach for these products to make the growing of the paying reading business. So this is for the second question.

For the first question, I think that Xiaodong will answer it.

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [4]

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(foreign language)

We expect to see -- report revenues for more positive in the second half of year. There are 5 to 6 TV and web series for the second half of the year, including (foreign language) and another 1 or 2 dramas produced for video platforms. Although the current film and drama industry is fatigued and we are working through challenges, we will still try our best to meet the financial target we previously set up.

In reference, last year, NCM net profit was largely generated during the second half of the year. Specifically, during the first half of 2018, NCM reported revenue of RMB 190 million and net profit of RMB 71 million. During the second half of last year, its net profit grew to RMB 275 million, much larger than the first half.

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Operator [5]

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Your next question comes from the line of Brian Gong from Citigroup.

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Brian Gong, Citigroup Inc, Research Division - Equity Research Associate [6]

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This is Brian Gong from Citi. I have 2 questions. First question is about free reading business models. Can you give more details about the MAU trends for -- of the free reading models in the past history market? Because we want to see how the MAU grossing recently. And I also hope if you can disclose the -- how much you spent on the promotion in the first half and how much you expect for the second half?

And my second question is about gaming business. I know Douluo Dalu was doing quite well in the first half and I wonder how much revenue management expects it to generate in the second half? And is there any other self-development games under your pipeline?

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Unidentified Company Representative, [7]

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(foreign language)

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [8]

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I will answer the whole question. For the first one, our free-to-reading business model is not only driven by Feidu [onetime apps], it's driven by Feidu and also I mentioned the products we're working with Mobile QQ and QQ Browser. So we want to have product metrics to adding much more users. And actually, in the first half year, the users growing is very well. For Feidu users is also growing well and the growing of the Mobile QQ and QQ Browser, I think, is also good. So we want to -- we are targeting though in the second half, the target we can be becoming one of the top tier of the free-reading products in this industry. And I think that this will be -- this is where we -- much closer for us to get this target is due to all the free-reading apps that you find in the market.

From May of this year, most of the product beginning to decline from the user base. And also, as we are checking much more of our competitors’ products, they don't have any worry clearly this kind of cost recovering back in period or testing. That means not any of our competitors they can get the -- cost of user acquisitions can be back in within 2 or 1 years. At least, we found not any company can do that. But for us, I think that we are much easier to achieving this kind of target and also, we are increasing our users, at the same time, we are increasing our revenues contribution. We are not only just focused on the user base, but also focused on the investment and return reach for these products. So this is our target.

So basically in the second half, when we do the marketing dollars investment, we will be much more related to the revenues growing of this product, including Feidu. If we don't have a very good trend of our revenue, we will not increase much more marketing dollars for these products. So this is our target and also approach for this -- for reading business.

The second one is about our trend of the Douluo Dalu. I think that so far, the trend of the Douluo Dalu is very good due to this achieving a very good fast pace in China and also, the animation is very, very success in the market and also our team are doing a lot of copromotion with this animation series and also got a very good result. I think that for this kind of quality schemes, the last cycle of the scheme, I think, will be much longer, mainly due to we're operating this scheme based on the fans and based on the animations and other related products we have. And also, the TV series of this Douluo Dalu is also producing by New Classics Media in their pipeline and also maybe launching next year with Tencent. So basically, I think that all this will be better for the operation of the game.

And also, we not only just have Douluo in our pipeline, we also have another 2 this kind of game in our pipeline in the period of development. And aside for this kind of game pipeline, we also have some of the [hot IP publishers] with third parties. For example, we still have Quánzhí gaoshou that is developed by Tencent, already in the development period for more than 1 year and also we have Weixin also developed by Tencent and also have Quánzhí gaoshou developed by (foreign language). So we also have some of the products in the pipeline developed by other top tier of the game companies. We will -- also can get some of the revenue shares from them.

So in the first half of this year, we not only just get Douluo Dalu's revenue from our own operation Douluo Dalu game, we also get some of the revenue shares from franchised Douluo Dalu issuer game. So basically, I think that we can have much more capability to working closely with our partners to generate much more revenues and profit from King's in the long run.

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Operator [9]

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Your next question comes from the line of Yanyan Xiao from Citic Securities.

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Yanyan Xiao, Citic Securities Co., Ltd., Research Division - Research Analyst [10]

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I have 3 questions. First is about online reading, the paying online reading business. Can you share more details about like the MAU, the MPU and the ARPU trend in the future for the online paying reading business? And my second question is about the -- your content costs. And I saw your content cost decrease 25% and your online reading revenue only decreased like 11%. So can you help us to understand more about the gap between the decrease of content cost and your decrease of online reading revenue?

And my third question is about the -- can you help expand the fair value consideration abilities related to the acquisition of NCM, RMB 194.1 million, if you can help us understand this item?

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Unidentified Company Representative, [11]

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(foreign language)

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [12]

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I'll answer the first question and [Lilian] will answer the second and third question. For the MAU, MPU and ARPU trend for our online reading business, I think that you have found that in the first half actually our MAUs are still going and driven by -- mainly driven by the growing from our own products. It's mainly driven by our own paying products and also our free reading products. And also, the MAU's from Tencent platform has declined about 5%, merely due to the reading users still declined from Mobile QQ and QQ Browser, but we got some of the users back by free readings in these 2 products. And also, the users from Weixin (foreign language) is also growing in a very good trend.

So basically, I think that the total MAU trend, we will want to keeping the growing trend of the MAUs. Because we think that due to the business model changing in the future, we generate not only just revenue from MPUs, but also from the whole user base because we can generate revenue from paying users and also from advertisement, due to mainly of the revenue from advertisement still at the beginning in the first half, but I believe in the future, the revenue from online advertisement will be much better in the future. So this is trend for MAU.

On the MPU, I think that you can see the MPU indeed has declined in the first half this year. I think that both Tencent platform and also our own product had some of the decline for this MPUs. Mainly that we are doing much stress controlling of the paying content in the first half this year. We think that content is the key of our business. We don't allow any content problem happen, especially for our paying content. So in the first half this year, we do much more controlling of the paying content released in our platform. And I think this can have some of the impact for our paying users. And also, for some of the long term of content, we also get much longer free reading period to attract more users to coming in. So this strategy also impacts the short term of the growing of MPU, but we believe will benefit in the long term.

Overall, I think that MPU actually from China Literature own products will still have the confidence to increase. From the part of the Tencent platform, we will much more focus on the total revenues from that platform. That means not only just see MPUs from Tencent platform, but also see the whole revenues from paying reading and also the free models. So this is what will be the focus for the future.

And also for the ARPU, in the first half, the decline of the ARPU mainly is due to the decline in Tencent's platform. For our own platform, the ARPU is still stable because most of our users have much higher stickiness than Tencent platform. So basically, I think that in the future, the ARPU in our platform can be still stable, but it may lead to using the MAUs growing -- or users growing to generate more revenues for our platform. So this is trend for our online reading business.

Lilian will answer the next 2 questions.

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Unidentified Company Representative, [13]

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Let me translate [Lilian] for this second question relating to content costs first. The fluctuation in content costs are mainly due to the following reasons. We have had higher IP costs during the first half year and, in general, is due to greater production costs of TV, web and animated series and films, which increased from RMB 23.3 -- RMB 23.3 million in the first half of 2018 to RMB 359.7 million in the first half of 2019, along with a rapid increase in revenues as well as an increase in distribution costs related to self-operated online games as revenue increased. And also, these increases were partially offset by a decrease in content costs in accordance with the decline in revenues generated by literary titles with revenue-sharing arrangements. So in general, you can see some of the content cost increased due to the IP purchase, but in general, it's in line with our revenue decrease.

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Unidentified Company Representative, [14]

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For the third question, the change in fair value consideration on NCM mainly due to 2 reasons. The first reason is the increase of market fluctuation and risk. The second one is market valuation of NCM. We have based our adjustment on the third-party evaluation.

That concludes the answer to these 3 questions.

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Operator [15]

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Your next question comes from the line of Binbin Ding from JPMorgan.

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Binbin Ding, JP Morgan Chase & Co, Research Division - Analyst [16]

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My first question is regarding the revenue recognition of New Classics Media. So when do you usually book the revenue from licensing of the dramas and films through the distributing platform? Is it when you sold the broadcasting rights to these platforms? Or when the dramas or movies are finally broadcasted?

My second question is about the [digital content] regulation environment in the second half, especially on video side. Do you think it's realistic to assume the content scrutiny will be loosened in the second half of this year, especially post the anniversary of founding of the People's Republic of China?

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Unidentified Company Representative, [17]

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(foreign language)

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [18]

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Okay. [Lilian] will answer the first question, and I will answer the second question.

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Unidentified Company Representative, [19]

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Okay. Let me translate for the first question. So for TV and web series, we have 3 conditions to recognize the revenue. The first one is, it has been broadcasted and the work has been -- the rights have been transferred to the broadcasting channels, including the video platforms and the TV stations. The second condition is obtaining of the license, the permits. And the third one is the factors of -- the uncertainty factors have already been excluded. And for movies, it's -- the revenue will be recognized based on box office.

Now we're moving on to the second question.

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [20]

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Okay. For the second question, I will answer the part regarding online reading business and also Xuesong will answer for the online video industry. Actually, I think this year, the whole industry requirement for reading business is much higher than before. And also, each of the content company, they will be having some of the much higher requirement for their own content operation process. I think that, overall, this will be -- benefit the high-quality content company and also will be impact for some of the companies, they are not so good content controlling systems. So basically, you can see that for China Literature, we already do a much high requirement for our content release in the -- from this -- beginning of this year. So I believe that -- and also on the other hand, we -- our content quality is much higher than our peers. So this is why you can see that, actually, some of our peers there get a very high punishment from the government, but for us, we are still okay till now. So basically, I think that, on the one hand, we needed to do much better content controlling for our own platform, at the same time, we are keeping this kind of movement to get much better positions in the industry. So this is for the online reading business.

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Xuesong Shang, China Literature Limited - President [21]

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(foreign language)

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Unidentified Company Representative, [22]

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First of all, the regulators did have a guidance that during the -- from August to October, there is some certain guidance over the content -- the genre of the content. We assume -- we expect releasing our content back to normal starting from November.

Currently, the content review is becoming more stringent, and we think this is because there are too many low-quality video companies in the market in the past few years, which undermine the order of the whole industry. And the regulators want to promote the healthy growth of our industry, and we believe that in advance of NCM and China Literature. Under the enhanced content supervision, quality will remain the key differentiator and the utmost important factor. We believe this will eventually benefit those production houses with ability to produce high-quality content, such as NCM and China Literature.

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Operator [23]

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Your next question comes from the line of Wei Meng from CICC.

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Wei Meng, China International Capital Corporation Limited, Research Division - Analyst [24]

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I noticed that some top titles have been put on the Feidu app, such as Douluo Dalu, Quánzhí gaoshou. I can understand that might be an effective way to attract the new users, but do you think this strategy could negatively affect the online reading subscription? And for -- my second question is about the advertisement business. As we know, the overall advertisement -- advertising industry has been tough this year and does it affect the demand from advertisers in your free-to-read business? And could you share more details about the advertisers on your platform? For example, which industries do they mainly come from?

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Unidentified Company Representative, [25]

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(foreign language)

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [26]

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Okay. I'll answer the second question, also Wenhui will answer the first question. So for the advertising business, indeed the market of whole online channels are a bit challenging this year, but due to online reading is very new segment for the advertising business. So currently, we found that the ARPU for our own free reading apps and also from Mobile QQ and QQ Browser still increasing in a very good trend. Mainly, I think it is due to -- this is very fresh segment. And also, we are working very closely with Tencent (foreign language) and also some of the third parties this kind of advertisement agency platform. So we are not directly to communication with any advertiser directly, but we are working with this kind of agency. So in this way, we can -- we know that the revenues and ARPUs trend of our free reading business. So we can -- controlling the cost to make this business -- can be make positive profit in the long run. So this is why we mentioned that our free reading business is focused on the investment and return, not focused on the users growing. We want to -- this business can be -- becoming a positive business. So this is what we are targeting and what we are doing. Now I believe that we still have room to growing both from the ARPU and also on the user base of our free reading business.

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Wenhui Wu, China Literature Limited - Co-CEO & Executive Director [27]

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(foreign language)

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Unidentified Company Representative, [28]

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So our recommendations are based on [algorithm] and recommendation system. For new users, we will promote blockbuster IPs like Douluo Dalu, Quánzhí gaoshou, but for our old users, we would recommend new content and new titles. So that's the newest. The new titles and new authors for recent years contribute more compared to the older titles.

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Operator [29]

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Thank you. Ladies and gentlemen, unfortunately, we have run out of time for any further questions. I would now like to hand the conference back to the presenters. Please continue.

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Maggie Zhou, China Literature Limited - Head of Capital Markets & IR [30]

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Hi, everyone. Due to time constraints, we will now have to conclude today's call. On behalf of the entire China Literature management team, I would like to thank you for your participation on today's conference call. If you have any further questions about the company, please feel free to contact us. Thank you, and goodbye.

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Xiaodong Liang, China Literature Limited - Co-CEO & Executive Director [31]

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Thank you.

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Operator [32]

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Ladies and gentlemen, this concludes the conference for today. Thank you for participating. You may now disconnect.