China's 'Amazon' Gets More Animated With Purchase From Tencent

Key Takeaways:

• China Literature’s acquisition of Tencent’s comics and animation unit brings all of the latter’s long-form print and filmed entertainment assets under one roof
• Tencent has been unloading loss-making businesses amid an ongoing crackdown on anti-competitive practices in China’s tech sector

By Edith Terry

Is China Literature Ltd. (0772.HK) on track to become the Disney of China, at least when it comes to animation? It took a step in that direction earlier this month when it announced its purchase of the comics and animation unit of its parent, Tencent (0700.HK) for 600 million yuan ($84.6 million). In combination with its own AI-based large language model (LLM) tools for writers and translation, the acquisition could be a game changer for China Lit.  

Or maybe not. The Tencent Animation and Comics unit China Literature is buying lost 190 million yuan ($26.7 million) in 2021 and 110 million yuan last year, though its revenue for the two years wasn’t disclosed. From Tencent’s perspective, the sale could be part of its effort to dispose of some of its underperforming assets in niche markets.

China’s strict content restrictions have limited the growth of e-books and comics since their heyday a decade ago. The e-books market has remained static relative to formats like short-form video dramas, which took off with the likes of Douyin, the Chinese version of TikTok, as well as the Youtube-like Bilibili BILI. Tencent founder Pony Ma has been saying for the last year that he sees big potential in short-form dramas offered over the company’s WeChat Channels app.

China’s overall short-form drama market is expected to reach 37.4 billion yuan by the end of this year, a 268% increase compared to 2022, according to a report by iMedia Research. That’s roughly triple the $1.79 billion in revenue for e-books in China this year, and it’s also ahead of the $3.3 billion in 3D animation revenues in 2022, according to Statista.

Tencent has been shedding assets over the last few years as Chinese regulators slowed their approval of new titles for the company’s core domestic game business. In 2022, Mainland regulators froze new gaming licenses for nine months, and only resumed in April 2023. Earlier, new restrictions announced in 2021 limiting game users under the age of 18 to just three to four hours of play per week in an effort to tackle gaming addiction by Chinese youth.

In addition to Tencent Animation and Comics, China Lit’s acquisition includes other related assets such as Tencent Animation and Comics’ app platform, its content IP, and its animation, film and TV series projects. The purchase also represents a sort of a homecoming for Tencent Animation and Comics, since about half of its 30 best-selling titles originate from China Lit, according to China Lit CEO Hou Xiaonan.

“This acquisition will enrich China Literature’s reservoir of blockbuster IPs, bolster our pipeline of comic adaptations, and further expand our production capacity for animation,” Hou said, adding that the new acquisition would become a key driver of China Lit’s future growth.

China Literature said that Tencent Animation and Comics generated 484.5 million yuan in revenue for the 12 months through September, with a book value of 442 million yuan.

Industry Veteran

China Literature is one of the nation’s oldest online literature companies, formed through the merger of two of China’s largest e-book publishers, Shanda Cloudary and Tencent Literature in 2015. The new company, initially called Yuewen Group, was heralded as the “Amazon of China” at the time of its formation.

By the time Yuewen raised more than $1 billion by listing in Hong Kong as China Literature in 2017, it commanded a quarter of China’s online readers. But things have changed as the company was overtaken by newer hotshots like Douyin, and its current share price of around HK$28 is about a quarter of the all-time highs it reached shortly after its IPO. Still, the company trades at a relatively high price-to-sales (P/S) ratio of 3.9, more than double the 1.5 for Bilibili and 1 for iQiyi IQ.

Tencent Comics was set up in 2012 with its own comics and animation website to capture a slice of the domestic market for Japanese-style manga, or comics, and to compete with Bilibili. But China’s strict oversight of such content, combined with the rise of short-form videos, dampened the development of both comics and novels.

As approvals for its core gaming business have resumed, Tencent is using a playbook similar to, though less extreme than, that of Alibaba by shedding non-core assets. A year ago it divested its $20.3 billion stake in food delivery giant Meituan (3690.HK) through a dividend distribution to its shareholders. Earlier this week, reports emerged that it had shut down its U.S.-based Team Kaiju video games studios, once considered key to its global expansion.

Tencent’s current direction came into focus a year ago when Chairman Ma scolded staff for losing their urgency in cost cutting. He added that short video was key to the company’s future, even at the expense of long videos and gaming. WeChat Channels, Tencent’s short-from video business, was set up in 2020 and had 813 million active users by June 2022, ahead of Douyin’s 680 million and Kuaishou’s (1024.HK) 390 million, according to Questmobile.

In that context, Tencent’s latest sale to China Lit looks like a way of offloading its mediocre unit making longer-form e-books, videos and animations. Or will the deal end up being a winner for China Lit after all?

A determining factor may lie in generative AI tools. China Lit announced in July that it would soon roll out a new artificial intelligence-generated content (AIGC) tool for writers that it likened to the transition from manual to automatic transmission in cars. Smart Pen, China Lit’s LLM, and its Writer’s Assistant Smart Pen will use prompts to generate story characters, their physical appearance, personalities and other characteristics, according to CEO Hou, who said China Lit was already using AI to create comic reproductions of novels.

“Previously, coloring a single panel took around two hours, but now it can be completed in one hour,” Hou said. Smart Pen was still under testing, he added, but said at the time it would begin to roll out features later this year and in 2024.

AI may also provide a boost to WebNovel, China Lit’s overseas website for content creators. According to a recent report by the company, global sales of China’s online fiction content grew 40% in 2022 to 4.06 billion yuan. China Lit said that AI had improved translation efficiency by more than 100 times and cut costs by 90%. WebNovel has released more than 3,600 works, though that’s still a tiny fraction of the 34 million e-books sold in the domestic market.

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