China Literature Limited reported a 10.7% year-over-year increase in total revenues to RMB3,531.4 million (USD518.5 million) for the six months ended June 30, 2026, driven by robust growth in its intellectual property (IP) operations segment. While top-line growth accelerated, profit attributable to equity holders declined significantly to RMB135.4 million (USD19.9 million) from RMB849.8 million in the first half of 2025. The drop in profitability was primarily attributed to RMB300 million (USD44.0 million) in tax-related payments incurred by a subsidiary and the high base effect of a RMB512 million after-tax gain on the deemed disposal of an investee during the prior year period.

The company’s strategic pivot toward visual content and merchandise is reshaping its revenue mix. Revenues from IP operations and others surged by 40.3% year-over-year to RMB1,691.4 million (USD248.3 million), offsetting a 7.3% decline in online business revenues to RMB1,840.0 million (USD270.2 million). This divergence highlights a structural shift as China Literature leverages its extensive IP library for short dramas, AI-animated dramas, and merchandise, while traditional online reading faces competitive pressures and monetization challenges.

Financial Performance

Total revenues increased by 10.7% year-over-year to RMB3,531.4 million. Cost of revenues rose by 10.2% to RMB1,739.3 million (USD255.4 million), primarily due to higher production costs for short dramas and AI-animated dramas. Gross profit increased by 11.1% to RMB1,792.1 million (USD263.1 million), with gross margin improving slightly from 50.5% to 50.7% year-over-year.

Operating profit stood at RMB270.8 million (USD39.8 million), compared to RMB875.8 million in the first half of 2025. On a non-IFRS basis, operating profit was RMB367.2 million (USD53.9 million), down from RMB448.7 million in the prior year period. Selling and marketing expenses increased by 9.6% to RMB1,011.4 million (USD148.5 million), representing 28.6% of revenues, while general and administrative expenses rose by 15.5% to RMB560.0 million (USD82.2 million).

Segment Analysis

The IP operations segment emerged as the primary growth engine, with revenues rising 41.9% to RMB1,613.9 million (USD237.0 million). Key drivers included:

• Short Dramas and AI-Animated Dramas: Revenues exceeded RMB430 million (USD63.1 million), representing a 2.3-fold year-over-year increase. This business now accounts for approximately 27% of IP operations revenues. Notably, 46 AI-animated drama titles surpassed 100 million views each.
• IP Merchandise: Gross merchandise value (GMV) reached RMB780 million (USD114.5 million), up more than 60% year-over-year, driven by enhanced product categories and channel expansion.

Conversely, online business revenues declined due to competitive pressure leading to a higher proportion of lower-monetizing free-to-read content. Self-owned platform product revenues fell to RMB1,623.4 million (USD238.4 million) from RMB1,746.0 million in the prior year period.

Strategic Context and Market Position

Nine years after its high-profile listing, China Literature is attempting to redefine its value proposition through an AI-plus-IP business model. The company’s shares have traded near post-IPO lows, hovering around HK$20, roughly one-fifth of their peak valuation shortly after the IPO when they surpassed HK$100. Despite the 84.1% profit plunge in H1 2026, shares leaped 10% following the results release, suggesting investor optimism regarding the new strategic direction.

The company’s historical reliance on online paid-reading, which accounted for 70% to 80% of revenue in early years, has shifted. In H1 2026, the online business contributed 52.1% of total revenue, while IP operations gained significant traction. Management is leveraging proprietary AI tools, such as DramaBuddy for generating comic-style shorts and IPBuddy for evaluating literary works, to streamline content adaptation and commercialization.

What the Numbers Show

A critical observation from the results is the widening gap between IFRS and non-IFRS profitability metrics, signaling significant one-time headwinds rather than operational deterioration. While IFRS net profit plummeted 84.1% year-over-year, non-IFRS net profit declined by a more moderate 49.0%, largely attributable to the RMB300 million tax-related impact. Furthermore, the 2.3-fold surge in short drama and AI-animated drama revenues demonstrates successful monetization of new content formats, validating management’s strategy to diversify beyond traditional text-based subscriptions. However, the decline in monthly active users (MAUs) on self-operated Tencent channels by 20.5% suggests ongoing challenges in user retention across third-party platforms.

Operational Metrics

Average MAUs on self-owned platform products and self-operated channels on Tencent products totaled 134.1 million, down from 141.3 million in the first half of 2025. MAUs on self-owned platform products remained broadly stable, increasing by 0.8% to 103.5 million. In contrast, MAUs on Tencent’s channels decreased by 20.5% to 30.6 million, reflecting a strategic shift of core content distribution to China Literature’s own platforms. Average monthly paying users (MPUs) declined to 8.2 million from 9.2 million, primarily due to an increased proportion of free-to-read content. Monthly average revenue per paying user (ARPU) increased by 4.5% to RMB32.7.