China Literature Ltd

Good evening, ladies and gentlemen. Welcome to China Literature's 2026 Interim Results Conference Call. A copy of the Interim Results Announcement can be found and downloaded from its Investor Relations website, ir.yuen.com. At this time, all lines have been placed on listen-only mode, and the floor will be open for questions following today's presentation. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to your host today, Ms. Maggie Zhou, Head of Capital Markets and Investor Relations at China Literature. Maggie, please go ahead.

Thank you, operator. Ladies and gentlemen, welcome to our 2026 Interim Results Conference Call. Joining us today on the call are Mr. Xiaonan Hou, our CEO, and Mr. Jackie Xu, or VP of Finance. For today's call, Ms. Ho will discuss the company's strategies and business highlights, and Ms. Xu will go through the financials. We will then open the call for questions. Before we begin, I would also like to remind you that management 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 a conference call are forward-looking statements which are subject to a number of risks and 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-IFRS financial measures that should be considered in addition to but not as a substitute for the measures of the company's financial performance prepared in accordance with IFRS. So please take a minute to read the risk factors and non-IFRS financial discussions in China Literature's 2026 Income Results Earnings Release. I will now turn the call over to our Chief Executive Officer, Mr. Xiaonan Hou.

Thank you for joining us on today's earnings conference call. Before we go over our financial results, let me share a few thoughts on the industry landscape and our strategic priorities. content industry is headed. In particular, two structural shifts stand out. One is the continued rise of fragmented content consumption. The other is the revolutionary reshifting of the entire content ecosystem by AI. In response to these trends, we turned our insights into action and made decisive strategic moves We started with live action short dramas, kept up with the technology wave, and finally incubated a brand new content format, the AI animated drama, by integrating AI deeply into the creative process. In the first half of this year, our short drama and AI animated drama businesses delivered exceptional growth. with combined revenues exceeding RMB $430 million, over three times that of the same period last year, accounting for 27% of our IP operation revenues and serving as a key contributor to the 42% year-on-year increase in IP operation revenues. More specifically, full-time market average while maintaining a balance of male and female-oriented branches across our content portfolio. We also built a scalable approach to developing blockbuster IP into serialized short dramas, validating the potential of serialized IP operations in the short drama sector. Meanwhile, leveraging the AI technology we adapted over 1,000 online literature titles into AI animated dramas, among which 46 titles surpassed 100 million views each, 367 titles exceeded 10 million views each, and the proportion of titles reaching 1 million views was five times the industry average. In our view, this high hit rate reflects not only our ability to anticipate industry trends, but also the strength of our premium IP library and the deep creative ecosystem we have built across the IP value chain over the years. AI tools are undoubtedly ushering content supply into a new era defined by greater scale and speed. but this doesn't diminish the value of content. On the contrary, it really enforces the scarcity and value of premium IP. Visual content has become easier to produce, but only stories with cross-generational appeal that truly touch people's hearts will remain the foundation for sustainable monetization. Powered by our IP plus AI engine, we harness the synergy between technology and creativity to accelerate the high-quality transformation of stories from text to visuals, opening up the next decade of IP value creation. That mission guides us as we look into the future. With that, let me now walk you through our operating highlights for the first half of 2026. First, in IP incubation, our online reading ecosystem continues to serve as a super reservoir of premium content. In the first half of 2026, our platform attracted 240,000 new writers generated over 460,000 online literature works and added more than 30 billion characters, securing a strong source of content supply. Emerging generation writers are gaining momentum. Among newly signed writers who generated more than RMB 1 million in revenue during the first half those under 30 accounted for 57%, representing a 49% increase year-over-year. Promising works continue to emerge. On CDN, the number of titles receiving user collections rose 37% year-over-year, while the number of titles receiving monthly tickets grew 26% year-over-year. two new titles attracted more than 200,000 readers each on their first day of launch, setting new records for debut performance on the platform. Meanwhile, we accelerated the transformation from text to visuals. In the first half of 2026, while solidifying our traditional strengths in film, drama series, and animation, we also stepped up our efforts in emerging segments such as short dramas and AI animated dramas, resulting in exceptional growth. In the premium drama series and film segments, several drama series adapted from China Literature's IPs premiered this year, including top tier titles such as Blossoms of Power by Hua Sha, The Heir, Jia Ye, and Ashes to Crawl . They all ranked among the top titles on platform popularity charts during their respective broadcasting periods. Meanwhile, we also released our self-produced drama series No Ping No Gain , The Devil Between Us and Lady Liberty . These titles broke new ground across genres such as urban and crime dramas, winning both critical acclaim and strong audience traction. In the animation segment, we released sequels of classic animated titles including Battle Through the Heavens, Dou Po Tang Qiong, The Outcast, Yi Ren Zhi Xia. All these titles ranked among the top titles on platform popularity charts during their respective broadcasting periods. Among them, the outcast Yiren Zhixia achieved a popularity index of over 21,800 on Tencent Video, making it the most popular 2D animated series on the platform in the past three years. According to Enlighten, of the top 10 animation series by cumulative use across all platforms were adapted from China Literature's IPs, further demonstrating our market influence in animation content. In the short drama and AI animated drama segment, as mentioned earlier, we achieved major breakthroughs. In the first half of 2026, we launched over 90 short dramas with many breakout hits. In male-oriented genres, The Invisible Bodyguard in Shen Shi Wei was a blockbuster with a popularity index exceeding 100 million and total views across all platforms surpassing 5 billion. In female-oriented genres, sequels of our original In the AI-animated drama segment, our top tier title, 3,000 Shearters, San Tian Bi Hu, surpassed 3 billion views across all platforms, driving the original novel into the top 10 of the best seller ranking on Xidian. We also explored opportunities to develop premium AI-animated drama platforms, launching Xidian Theater, and tools grow in China and overseas respectively. All these achievements were driven by China literature's extensive IP library, strong creator ecosystem, and robust capabilities in IP development across the industry chain. Next, let me turn to IP commercialization. In the first half of 2026, Our IT merchandise business continued to maintain rapid growth with GMV reaching RMB 780 million, representing a year-over-year growth of more than 60%. This growth was driven by our continued enhancement across four core areas, product, channel, operation, and ecosystem. On the product front, merchandise category characterized by high frequency purchases and strong repeat purchase rates, while expanding into new categories such as plush toys, lifestyle products, and precious metals. Our design excellence and supply chain efficiency enabled us to deliver a steady stream of high-quality products, positioning human goods as one of the leading brands in China's enemy merchandise market. On the channel prep, we strengthen our self-operated online sales network, including mini programs, live streaming rooms, and flagship e-commerce stores. We also optimize our offline store network and deepen collaboration with our channel partners. These efforts led to improvements in both channel profitability and brand control. We also continued to strengthen our sales velocity and supply chain management, improving inventory turnover efficiency and turning sales growth into solid profit contribution. On the operational front, we launched campaigns around iconic IP characters, driving deeper fan engagement and stronger consumer conversion. During the first half, we organized the Glory Pilgrimage pop-up event in four cities to celebrate the birthday of Yeshu, the leading character of the King's Avatar. We also launched the OPCOT boy group, Bringing the IP to a broader audience through emotional connection between the IP and users. On the ecosystem front, we accelerated the expansion of our overseas channels. Together with our partners, we opened our first global collectible toy concept store in Singapore, while selected products on the overseas online store for Lord of the Mysteries, Great Meat Jujube, sold out shortly after launch. The popularity of our heat merchandise further amplified the appeal of our IPs, driving users back to our content ecosystem, spanning online reading, animation, and drama series. Now, let me share an update on our progress in AI. At China Literature, AI is not confined to a single application. of the content creation journey, from the spark of inspiration to user reach around the world. Recently, we launched the Buddy series of AI agents purposely built for the creative content industry and upgraded three core products. Normal Buddy, 作家助手, Drama Buddy, 漫曲助手, and IP Buddy, 版權助手. AI-powered tours. NovaBody is designed for online literature creators. In addition to AI-assisted writing support, it also provides copyright protection and anti-plagiarism services, helping safeguard creators' rights. DramaBody focuses on AI-animated drama production, covering the entire process, including creative ideation, content production, and project management, enabling the scalable production of premium AI animated dramas. IPBuddy serves as the all-seeing eye of our in-house copyright team, enabling the value assessment of a title within minutes and greatly improving the efficiency of selecting IP for adaptation and commercialization. Meanwhile, AI has also accelerated our global expansion. As of the first half of 2026, more than 30,000 AI-translated works were available on the WebNoble platform, contributing 40% of the platform's Noble revenue during the first half of the year and enabling Chinese stories to reach global multilingual audiences more efficiently. We remain firmly convinced of the transformative power of IT and AI. Over the past two decades, the Internet lowered the barriers to literary creation and paved the way for China Literature's growth into the company it is today. We believe that over the next two decades, AI will raise the ceiling for creators and drive a substantial value enhancement of the entire content ecosystem. Deeply integrating AI into the creative process to drive growth is a key strategic priority for our future. We see AI as an amplifier of IP values with the power to make great stories reach their true true potential. We also recognize that the more capable AI becomes, the scarcer and more valuable original human creativity will be. That is why China literature will continue to strengthen its support for original creators, ensuring that technology empowers creativity and that great stories thrive for generations to come. This concludes my remarks. Now I'd like to invite Mr. Xu to present our financial performance. Thank you.

Thank you, Mr. Hou. Hello, everyone. In the first half of 2026, our total revenues increased by 10.7% year-over-year to 3.53 billion RMB. Let's start with our online business. Online business revenues were 1.84 billion RMB compared with 1.99 billion RMB. in the first half of 2025. Many due to competitive pressure which led to increased proportion of lower monetizing free-to-read content and the shifted content distribution for online reading, social dramas, and AI-animated dramas on our self-operated products within the Weixin ecosystem. In terms of operating metrics, our total average MUs were 134.1 million compared with 141.3 million in the first half of 2025. The decline was mainly due to our ongoing shift of our core content distribution to our own platform products, leading to a continued drop in MMOs on tens of channels as user activity fell. Average MPOs were 8.2 million compared with 9.2 million in the first half of 2025. mainly because we distributed more free content on our self-owned platform products. Monthly R pool increased 4.5% to 32.7 RMB, reflecting a mixed effect as lower R pool users shifting to free content during the first half of 2026. Now turning to IPO patients and other businesses. In the first half of 2026, Revenues from IT operations and others increased by 40.3% year-over-year to 1.69 billion RMB. In this segment, revenues from IT operations increased by 41.9% year-over-year to 1.61 billion RMB. Primarily driven by rapid growth across multiple business lines, including short dramas, AI-limited dramas, TV and web series, and IP merchandise products. In particular, revenues from short dramas and AI-animated dramas exceeded 430 million RMB, up 2.3 times year-over-year. This accounted for approximately 27% of IT operations revenues and has become a new growth engine of IP businesses. Of IP merchandise business, also making strong growth momentum with GMV increasing over 60% year-over-year to 718 million RMB. Revenues from the others category mainly generated by sales of fifth books increased by 14.4% year-over-year to 77 million RMB. Now let's look at costs and expenses. In the first half of 2026, of cost of revenues increased by 10.2% year-over-year to 1.74 billion RMB, primarily driven by higher production costs for subgenres, AI-emitted genres, and TV and web series, which rose in nine-week revenue growth as more content was released during the period. As a result of the foregoing, our gross profit increased by 11.1% year-over-year to 1.79 billion RMB. Gross margin was up from 50.5% to 50.7% year-over-year. Our selling and marketing expenses increased by 9.6% year-over-year to 1.01 billion RMB. Many Germans buy higher marketing and promotional spending to support the expansion of our IP businesses. As a percentage of our revenues, our selling and marketing expenses decreased from 28.9% to 28.6% year-over-year. Our G&A expenses increased by 15.5% year-over-year to 560 million RMB, reflecting higher personal and administrative expenses related to scaling of IP businesses. As a percentage of revenues, our GIA expenses increased from 15.2% to 15.9% year-over-year. Our net other losses were 25 million RMB compared with net other gains of 503 million RMB in the prior period. The change was mainly due to 134 million RMB in late payment tax surcharges incurred by a subsidiary of the company during the first half of 2026, compared with 598 million RMB of late gains on the deemed disposal of an NST in the first half of 2025. As a result of the bar factors, our operating profit was 271 million RMB, compared with 827 million RMB in the first half of 2025. On a non-IFAS basis, operating profit was 367.2 million RMB, compared with 449 million RMB in the first half of 2025. Our income tax expense increased from 115 million RMB to 225 million RMB, mainly due to 166 million RMB in supplementary income tax payments by a subsidiary of the company, together with related late payment tax surcharges of 134 million RMB, which was recorded in our losses. These tax-related items reduced our profit by 300 million RMB. Our net profit to shareholders was 135 million RMB, compared with 850 million RMB in the first half of 2025. On a non-IFI basis, our net profit for shareholders was 259 million RMB, compared with 508 million RMB in the first half of 2025, not to do to the 300 million RMB tax-related impact discussed above. That concludes our financial review part. Let's move on to Q&A session.

Thank you for answering my question.

I have a question about短剧和AI漫剧我们看到这一块在国内的市场正在快速增长想请教管理层是否有对短剧和AI漫剧行业最新发展的趋势的解读以及阅文在短剧和AI漫剧相关的收入有多少的空间此外随着阅文平台上AI漫剧规模逐步扩大管理层预计AI漫剧对于传统的阅读内容的消费 We have witnessed the rapid growth of short drama and AI-powered animated drama in China, so wondering what is management's latest view on the industry's long-term growth trend and your outlook for China literature's own revenue opportunity in the segment. Additionally, as the AI-generated content scales on China literature's platform, How do management expect the substitution effect on the traditional rating consumption to persist? Thank you.

Thank you for your question. Let me answer this question. We have talked about short-term and long-term. We can see that the short-term and long-term models are accelerating in the production and flow of large quantities. If you look at the trend, it is in the process of turning from quantity to quality. So the performance logic of the industry is also turned to who can really tell the story well and be able to continue to produce money. So this is a structural advantage of having a large amount of IT resources and the ability to make products. China has the largest original library of literature in the world. From the beginning, it solved the most critical pain in the industry, which is the lack of good stories. Our method of repayment has also been popularized. In the first half of the year, the repayment rate of short dramas has reached four times the market value. The million play rate of anime dramas is five times the market value. We have 46 pieces of broken works. . . . . . . . . . .

This is the CEO of China Literature. So thanks for your question. I will take your question regarding the short dramas and AI animated dramas. So we believe that mass production and traffic-driven growth model for short dramas and AI animated dramas is rapidly fading, and the trend is shifting from quantity to quality. And the competition now focuses on Storytelling quality and hit-making consistency represents a structural advantage for top tier players like China Literature with rich IT reserves and premium content production capabilities. China Literature has the largest original literature IT library in China, addressing the industry core problem at a source, which is the shortage of comparing stories. Our proven methodology for hit making is already delivering results. In the first half of the year, the hit rate of our short drama was four times the market average, and for AI animated dramas, the rate of titles exceeding one million views was five times the industry average, and 46 titles each exceeded 100 million views. On the ecosystem front, we launched Project Spotcroft, especially for AI-animated drama business. The project plans to invest over 100 million RMB in building up the industry ecosystem across four dimensions, IT cooperation, platform support, systematic training, and funding. Our in-house developed AI-agent drama body, Manji Tu Shou, has also served over 200 studios providing technical support for ecosystem development.

The strategy in this trend is also very clear. Simply put, it is to embrace IP and embrace ecology. We actively strengthen the development of scripts and IPs, as well as the two big links of headwind and commercialization. The production of this visualized production link is more about using the ability of the external studio. AIM-NG is an IP from a text-to-visual form of natural extension and static reading will form a complementary relationship. U.S.

In response to this trend, China Literature's strategy is very clear. That is, we leverage our rich IP reserves to embrace the entire ecosystem. We are proactively strengthening our capabilities in two critical procedures, including the development of script and IP, as well as user acquisition and commercialization. while outsourcing the visual production to external studios. This asset-like model of controlling both upstream and downstream while outsourcing the midstream allows us to rapidly scale production capacity by leveraging the industry ecosystem, an approach that is most suitable to China literature at this stage. We believe that AI-animated dramas represent a natural extension of IP from text to visual formats, complementing our premium literature business. Since the beginning of this year, various hit adaptations have been continuously feeding back positively into literature works. The adaptations of short dramas and AI-animated dramas in particular have demonstrated strong momentum For example, one of our blockbuster AI animated dramas, 3000 Shelters, 三千壁虎, has surpassed 3 billion views across all platforms, directly driving the original novel back into the top 10 of the bestseller rankings on Qidian. Following the release of our short drama, I Really Didn't Want to Be Reborn, 我真没想重生啊, The original novel exceeded 100,000 average subscribers per chapter, validating that high-quality visual content can channel incremental users to our online reading business.

尽管存在非核心的阅读用户向漫剧用户迁移的情况,但是我们觉得漫剧的核心价值还是在于破圈。 I think this is the biggest opportunity for Vietnamese. From the perspective of the entire Vietnamese IP warehouse, the current IP ratio of development is less than one thousandth. So as the AI tools continue to reduce the threshold of production, the development speed and coverage of the future IP have a huge room for improvement.

While some non-core readers may migrate to AI-animated dramas, the core value of AI-animated dramas lies in reaching more audience in addition to the original users and breaking through the boundaries of IT formats, unlocking the value of visualizing China literature's best IT library and creative ecosystem. And this is our greatest opportunity. If we look at the entire IT library of China literature, the proportion of IT that has been developed so far is less than 0.1%. As AI tools continue to lower the barriers to content production, there remains enormous room for growth in both the speed and scope of IT development going forward. Thank you.

Your next question comes from with . Please go ahead.

Thank you for answering my question. I still want to ask about the situation in the distribution of short films and short films. Because you may see that the competition of the overall channel may have some potential pressure. I don't know if we can share the situation of the distribution of short films and short films on the distribution channel. For example, like Hongbo, or we are now doing some free apps, a comparison of WeChat small programs. And I will translate the question myself I want to ask about the competitive dynamic and mutual displacement between manga dramas and short dramas in terms of distribution channels How are the distribution channels for the two formats distributed overall? For example, the share between Homeworld and the self-developed apps and mini programs. What are the overseas strategies for your manga, dramas, and short dramas going forward? Thank you.

Thank you for your question. Our current short and long series are all-channel. So, including Red果, Douyin, Kuaishou, Shipinghao, Bilibili, these mainstream platforms, and we also have our own small programs and apps. In addition, we are now collaborating with long-term video platforms. In the first half of the year, we put more than half of the slow-mo and short-mo in Red果. Channel Literature's CEO, Mr. Hall, will take these questions.

So our short dramas and the AI animated dramas are distributed on a full set of industry channels, including leading platforms such as Hongguo, Douyin, Kaishou, Tencent Video Accounts, and Bilibili, as well as our self-owned mini programs and apps. In addition, we are currently in discussions with long-form video platforms as well regarding potential partnerships In the first half of the year, over half of our short-form dramas and AI-animated dramas were launched on Hongguo. We do not rely on any single channel decisions on which platform a specific title is to be distributed on and whether to adopt a paid or free model made by our operations team based on each title's content features and the marketing timing. As the landscape of the distribution channels, the video platform continues to evolve, we will remain agile in adjusting our channel strategy accordingly.

Yes, in terms of overseas, we launched our overseas product management platform TOSCROBE this year. We plan to launch more than 1,000 works within the year. At the same time, we are also exploring the development of original IP for overseas local companies. The logic behind it is also very clear, because the space of the global short-format and short-format market is huge. China's industrial experience in the form of short content is very leading, and it has the advantage of paying for it. In addition, the theme of short-format is based on the two-dimensional, one-world, magical energy behavior. These types of products have strong intercultural commonality, and the acceptance threshold of overseas customers is low. Third, AI has greatly reduced and compressed the cost of content production, making it possible for globalization to take off in the economy. In general, our overseas slow-moving and short-moving businesses are in the early exploration stage. Later, we will also update the relevant data to the market when we achieve real-time progress.

This year we launched our overseas premium AI-animated drama platform Toons Grow and plan to release over 1,000 titles within the year. They're also exploring the development of AI-animated dramas based on overseas original IP. The rationale behind this strategy is clear. First, as the global market for short dramas and AI-animated dramas is vast, and China has build up proven expertise in short-form content production that is readily exportable. Second, AI animated dramas are predominantly centered around genres such as anime, isekai, fantasy, and these categories inherently carry stronger cross-cultural appeal and face lower barriers to be accepted by international audience. Third, AI has significantly reduced content production costs making large-scale overseas expansion economically viable. In general, our overseas short drama and AI-animated drama business remains in its early stage of exploration. We will provide timely updates to the market as we make meaningful progress going forward.

And AI has gone through the whole process of video production. From the support topics in the previous project, the production of the script, the design of the scene, to the virtual shooting in the mid-shot, including the virtual scene, and the intelligent editing and special effects synthesis in the later production. So all the videos are being redefined by AI. We also predict that the future of real people and AI will continue to blur. The AI-animated drama industry is growing very rapidly and the market potential is enormous. AI-animated drama represents one of the

for AI-generated video technology. And AI empowers the entire workflow of video production, including video production, where it assists in topic analysis, script generation, and scene design, where it enables virtual production and virtual set rendering, and post-production, where it delivers intelligent editing and automated visual effects composition. Every stage is being redefined by AI. We expect the boundary between human-created and AI-generated short dramas to become increasingly blurred over time, which will fundamentally reshape content creation. The future forms of short dramas and AI-animated dramas may probably extend far beyond what we can imagine today.

Thank you.

Thank you. Your next question comes from Rebecca Su with Morgan Stanley. Please go ahead.

Hi, thank you. I'm Rebecca from Morgan Stanley. My first question is about online reading services. When you were answering the question, you mentioned online reading. um um um I'll translate myself. My question is regarding the online reading business. Could management help us break down the key drivers behind the weakness in the first half? Which factors are the temporary and which may reflect more strangle changes? And also, could management share the media or long-term outlook for the online reading business and what are the key drivers for that? Thank you.

Okay, thank you. Let's have Mr. Huang answer this question. Thank you for your question.

First of all, I would like to say that online reading business has been stable for a long time in Japan, but the position has not changed. As you mentioned, the decline in income in the first half of the year, we see mainly a reduction in the number of users. Second, The form of distribution content is actually shifting from pure text to visual forms such as short films, comics, etc. In fact, we see that this is also a natural ecological redistribution. The attention of users is shifting to visualized content, and the important thing is that the visualized content is also digested by our own IP. And as I just mentioned, there are a lot of cases of protection of 3,000. And in the end, it can counteract the reading environment. Thank you for the question. Mr. Huang, Senior VP of China Literature, will take this question.

First of all, from our view, the poor online reading business will remain stable with its strategic positioning keeping unchanged. The revenue decline in the first half you mentioned was mainly due to the adjustments made for channels with lower user stickiness, while the core P2W product and ecosystem remained steady. First of all, for our users, the proportion of P2W content with relatively lower monetization efficiency increased on our self-owned channels within Weixin ecosystem. Secondly, the content distribution is shifting from text to visuals such as short dramas and AI-animated dramas. This is the natural reallocation of content and traffic in the ecosystem in our view. Specifically, user attention is shifting toward visual content while the visual content is adapted from our own IT and can ultimately feed incremental value back into the reading ecosystem as we previously mentioned AI-animated dramas such as 3000shelves and other project cases actually channeled incremental users back to the reading ecosystem. In this sense, user value is shifting, is flowing from text to visual formats within our ecosystem, and both formats are owned by China Homeward Future.

当然我们讲日本的在线业务的根基没有动摇, 今天上半年呢, China China China China Taiwan Taiwan Taiwan Taiwan We believe the foundation of our online business remains solid. In the first half of this year, the ecosystem of our premium content creators stayed vibrant, and the top tier writers continued to hold steady.

In recent years, the contract renewal rate for our Platinum and Phenomenal writers reached 100%. At the same time, the emerging generation writers have been rising rapidly, with new writers and their debut works accounting for 54% of all titles that exceeded 10,000 average subscribers per chapter over the past 12 months. We have also continued to attract external writers. with the submission volume we received growing 14% year-over-year in the first half of this year, including submissions from a number of quality writers previously active on other platforms. Behind all of this is a robust and stable creator ecosystem, along with consistently leading IT incubation capabilities. These are the core assets that lay the foundation for downstream business such as short dramas, AI-animated dramas, TV series, films, and merchandise. And we believe they also constitute the moat of China literature that is difficult to be replicated.

In the long-term, the reading space and indexing strategy are mainly focused on three aspects. The first is to continue to expand on the content of the gold. We also want to embrace the acceleration of words to vision China China Looking into the media's long term, the growth potential and the strategic focus for our online reading business are centered on three key directions.

We will continue to solidify our premium content ecosystem, embrace and accelerate the content format upgrade from text to visuals to amplify IT value while also feeding value back into the reading business. Second, we will expand the content supply and maintain a healthy and vibrant creator ecosystem. Third, we will firmly advance our overseas expansion strategy to unlock monetization opportunities in overseas markets These three measures will form powerful synergies, steadily incubate quality content, and transform text-based content into richer multimedia formats driven by the joint integration of IT and AI to propel channel literature into its next phase of growth.

Thank you. Your next question comes from Suqing Zhang with CICC. Please go ahead.

Thank you, Director Chen. I have two questions. The first is about the overall IP operation. Because I pay attention to the company's IP business in the first half of the year, many points of development, eye products, GMV growth eyes, and then the short drama and slow drama that everyone mentioned just now have reverted to new growth points. Then I would like to ask how the management level looks at the growth trend in the second half of the year. What will be the increases? Especially regarding game authorization, we also noticed that the IP game masterpiece authorized by the moon has more online in the second half of the year. Are there any expected increases in this area? Thanks management for taking my question. I have a couple of questions. My first one is about O&R activities. IP Operations delivered broad-based growth in the first half, with particularly strong growth in merchandise as DMV, wild-shot dramas, and AI-animated dramas emerged as new growth drivers. So how does management view the growth outlook for the second half? and we do expect the key incremental contributions to come from. In particular, on game licensing, we have noticed that several major games based on IP licenses by China literature will will launch in the second half, so do expect these titles to make a meaningful incremental contribution. My second question about new classic media is the long-form video industry is undergoing a period of adjustment. As a leading television production company, how is NCM responding to the industry challenge? And with the rapid development of AI video generation models, how does management view the company's strategy and opportunities going forward?

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Our CEO, Mr. Ho, will take your question regarding IP development. And later, Mr. Tao from New Classics Media will take a question on media production.

uh uh uh We will ensure that on the basis of the repayment rate, we will continue to integrate production capacity. The content of domestic and overseas double-line layout of this premiumization, in short, we plan to produce more than 200 pieces this year, which is 70% higher than last year. In the long term, the monthly production of premium products has exceeded 100 pieces, and the methodology of repayment has also been continuously verified. AI has lowered the supply threshold of visual content. This actually makes high-quality IPs more and more scarce. In the first half of the year, our short-term and slow-term exposure rate was several times higher than the industry's average. Behind this is the creative soil of our long-term accumulation of IP reserves and the entire industrial chain. Yes, as you mentioned, our IT business in the first half delivered very good results in various aspects with

AI animated dramas and short dramas becoming our new growth drivers and our merchandise business continues to achieve very good GME performance and growth. So looking into the second half of the year, our IT business will continue to gain momentum, especially for the new business segment. Specifically, for short-form drama and AI animated dramas, we are expanding production capacity while maintaining a high hit rate. and pursuing a premium content strategy both domestically and internationally. Specifically, for short dramas, we plan to produce no fewer than 200 titles this year, representing an increase of approximately 70% year-over-year. In terms of AI-animated dramas, our capacity of premium production has already shown exceeded 100 titles and our proven methodology for creating hits continues to deliver results. While AI has lowered the barrier through visual content production, it has intensified the scarcity of high quality IT. In the first half of the year, both our short dramas and AI animated dramas consistently outperformed the industry block author rate averaged by several multiple a testament to our deep IP reserve, a creative ecosystem spanning the full value chain and the story core that deliver cross-generational emotional resonance. At the same time, we have also rolled out premium AI-animated drama platforms both domestically and internationally to further strengthen our premium content strategy.

In the first half of the year of 2026, we continued to work together on IP influence, product development, channel expansion, brand authorization, and so on. The overall market capacity has increased significantly. In terms of head IP influence, we focus on high-end IP to do both. In the expansion of the brand, activity operation, experience creation, three levels of synchronization, system release, and IP visibility, through the birthday party of Ye Xiu, and the debut of artists and men's group, and other immersive activities, pull the distance between the user and the user, not only activated the resumption of the core fans, but also deepened the connection between IP roles and users on the emotional level. In terms of product development, China's leading domestic brand, HaoWuShang, has quickly become China's leading international brand. It has launched a variety of high-quality products, including sachets, clothes, fur, and other new popular products, which meet the needs of users for different colors. The products we have launched have been on the market for almost a second. China China China China China China So it also proves the construction efficiency of our self-sufficiency channel. It also reflects the continuous improvement in the recognition of users' recognition of Vietnamese good products. In terms of brand authorization, we have continued to cooperate with Gouzi Chao Wan, 3C digital, food and beverage, clothing, chain restaurants, and hundreds of other industries. Okay, in the first half of 2026, our merchandise business continues to gain momentum across four key dimensions, IP influence, product development,

channel expansion and grant licensing resulting in apparently stronger overreaction. Regarding top-tier IP influence, we are deepening our operations of flagship IPs and reinforcing them across three fronts, which are category expansion, event-driven activation, and user experience to systematically unlock their full potential. For example, our immersive events like the Glory, So Sugar Merch pop-up for Ye Qiu's birthday and the debut of the outcast boy group brought the IT closer to users, driving the team's purchases among core fans by deepening emotional connections between our IT characters and their audience. On product development grounds, Ye Ren each found Gucci, the sub-brand of Ye Ren Group. has rapidly grown into one of China's leading domestic anime merchandise brands, with multiple premium Ichiban Kuji-style product series covering new and popular categories such as bags and luggage, apparel, and plush toys, addressing diverse stand demands for merchandise. Virtually every product we have launched today has sold out within moments of release. Regarding channel expansion, our omnichannel network continues to improve. online minute programs like Sheen Room and e-commerce flagship stores are growing rapidly. While our offline store network is also expanding steadily and currently we operate a total of 17 stores across the country. Notably, in the first half of this year, GME from our online self-operated channels was three times that of the same period last year, underscoring both the effectiveness of our self-operated channel network and the User Scoring Brand Recognition for Yellow Goods. Regarding brand licensing, since the beginning of this year, we have entered into licensing partnerships with hundreds of brands from a variety of industries, including Goods and Session Toys, Grizzly Digital Products, Food and Beverage, Apparel, Restaurant Chains, and others. So looking into the So looking into the second half of this year in terms of merchandise business, we will continue to focus on product iteration, channel expansion, and operational efficiency improvement. A key objective is to improve profit conversion efficiency and to achieve higher quality and more sustainable growth.

The route is also very clear. In terms of online reading, as the background content of the sea, it is very stable. Then the translation of AIA continues to drive the growth of this small language species At the same time, we also continue to accelerate the development of original IP There are already many original works created by overseas local authors and are being published offline There is also the development of multi-format development such as voice alteration In the second half of the year, we also plan to open new collaborations with multiple works In terms of visualization and real-world images, our new toy platform TOSCROBE

Regarding our overseas business, it is still in a growth phase with a clear strategic roadmap. The domestic online reading business currently supplies the content foundation for our international expansion. and AI-powered translation is accelerating global reach, including those languages less commonly spoken. So the AI-powered translation is a key driver for the global reach. At the same time, incubation of original local IP is underway and is steadily expanding. Multiple original literature works created by local writers in overseas markets have already entered the adaptation stages into various formats, including offline publications and audio books, and we plan to initiate collaborations on a series of additional titles in the second half of the year in terms of visualization and commercialization in the overseas markets. Our premium AI animated drama platform True Scrum plans to launch over 1,000 titles within the year, and we have opened our first global collectible toy concept store in Singapore, both of which will contribute to good future business growth.

In terms of the game industry, we have acquired copyrights and tax deductions through the game industry. This is a kind of high-performance, low-risk, common income for the month. It will also be recorded in our IP operations business. In the second half of the year, there will be a lot of games that are authorized to be released. The representative projects include the MMO that was released by 3G-HuYu, Doudi's Road, has already carried out a public survey on July 29, 2026. In terms of games, we licensed our premium IT to game studios, earning both up from licensing fees and a global share

Growth and Sharing, which is a high-margin, low-risk revenue stream for China literature that contributes to our IP operations business on a recurring basis. Looking into the second half of this year, a number of key game titles are selected for launch. Notably, projects include, first of all, an MMO game adapted from Battle Through the Heavens , published by Sanji Interactive Entertainment, which started open data testing on July the 29th, 2026. And secondly, a management simulation mobile game adapted from my heroic husband's spaceship set to launch its open data testing across all platforms tomorrow, August the 12th, 2026. And third, a flagship UE5 animal game adapted from Lord of the Mysteries. We need to do. developed by Kuaishou scheduled for open beta testing on August 23, 2026, for which pre-registration is now fully open.

These are some of the related cases of IP operation in the second half of the year. Mr. Hao, please answer the question about the new IP.

Okay, I will answer it. Regarding the issue of low-measurability in the industry, we think The essence of the current industry theory is the collection of budget for video platform purchases and the short-term flow of the user market. However, the user's desire to pay for good content has not disappeared. This time, the adjustment is clear. It is the content of the middle class. The head of the long-term collection of products will be more scarce. The price of its scarcity will also increase further.

So the above are my comments on our IT business outlook. And next, Mr. Tao from NCM will answer your question regarding media production. We believe the current industry downturn reflects two underlying dynamics, platforms tightening content budgets and short dramas increasingly capturing users' attention. However, Consumers' willingness to pay for high-quality content remains intact. This adjustment cycle will accelerate the market's curation, weeding out mediocre offerings. Premium long-form dramas will become scarcer, and their scarcity premium will grow.

In the current long-form drama market, consumer expectations for content are higher than ever.

We believe that drama studios should refocus on the fundamentals of content creation with a dedicated emphasis on producing premium series of superior quality and depth. The IP value and emotional connection built up by a premium drama form the bedrock of our content ecosystem and the ability to consistently produce such premium content is exactly New Classics Media's core competitive advantage.

As for the AI technology part, our view is that the AI video model will change the production process, cost structure, and production speed of film and television projects, but it cannot replace the core value of good story, good performance, and good aesthetics. Currently, we are trying to apply the latest AI video technology to the production part, redevelopment, and upgrade workflow. For example, in script evaluation and structure disassembly, Regarding AI technology,

We believe that while AI video models will fundamentally reshape the production workflows, cost structure, and the delivery speed of film and television projects, they cannot substitute for core value of compelling storytelling, outstanding performance, and the refined aesthetics. Currently, we are exploring the application of the latest AI video technologies into our production process to reconstruct and upgrade our workflows, spanning script assessment and structural deconstruction, concept art, and digital asset design, virtual scene design and cinematography, and visual special effects, among others. That said, all of these efforts are anchored by the aesthetic judgment and the creative instincts of our professional talent. Whether a story carries emotional depth and whether a script meets the highest standards ultimately rests with our creators. Ultimately, professional creative talent is what makes a project succeed.

In July, the Yuewen Group and the Shanghai Pudong New Area cooperated to build an artificial intelligence and creative industrial base, which led to the inclusion of cultural creators and a series of AI industrialized facilities.

In July, China Literature entered into a partnership with Shanghai Pudong New Area to co-establish the AI Cultural and Creative Industry Base, which has already attracted cultural creators and rolled out a series of AI industrial facilities The initiative aims to establish an industrialized framework for high-quality, AI-powered cultural and creative content with AI-powered film and television production serving as an important part and new classic media will also be deeply involved.

In the face of the future, Xinli will adhere to the positioning of the head content creators in the preparation of the script, the preparation of the early stage, the shooting, and the production of each part in the later stage, and strive for the audience to bring more high-quality works. At the same time, we will also grasp the popularity of technology innovation, use AI to speed up productivity, including control costs, increase efficiency, and expand productivity, etc.

Looking into the future, New Classics Media will stay true to its identity as a top-tier content creator with a relentless focus on excellence across the entire production process, from script incubation and pre-production planning to filming and post-production. In order to bring more high-quality work to our audience, At the same time, we are capitalized on the dividends of technological innovation, deploying AI to reshape our productivity, including cost control, efficiency improvement, and the capacity expansion, thereby further strengthening our market leadership in the premium drama segment.

Thank you. There are no further phone questions at this time. I'll now hand back to Maggie Zhou for closing remarks.

Thank you, operator. I will now 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. If you have further questions about the company, please feel free to contact us. Thank you and goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.