China Literature's shares experienced a significant boost on Tuesday following the announcement of a share buyback and plans to acquire Tencent's animation and comics unit. The company foresees this deal as an opportunity to generate more animated adaptations of the literary works it publishes online.
By midday break on Tuesday, shares of the Shanghai-based company had risen by 13% to 30.30 Hong Kong dollars (US$3.88), marking its largest single-day increase since January.
As part of the deal, China Literature will allocate 600 million Chinese yuan (US$83.6 million) to acquire Tencent Animation and Comics. Additionally, they will obtain a 90% stake in Michengzi, an animation and comics company primarily owned by Tencent.
China Literature believes that these acquisitions will be advantageous for its premium content portfolio. Notably, they mentioned that five of Tencent's highest-grossing comics, out of their top 10, were adaptations of novels published by China Literature. With this acquisition, China Literature aims to transform literary works into animated forms.
Citi analysts, led by Brian Gong, expressed optimism about the deal, emphasizing that "the synergies behind the acquisition are clear." However, they anticipate that China Literature may require some time to fully capitalize on these advantages.
The Citi analysts also expressed positivity regarding China Literature's plans to expand its mini-drama projects, pointing out that this format offers better returns compared to traditional dramas due to their swift production cycle, among other reasons. They added that mini-dramas "could become a new growth driver ahead."
Citi has maintained a buy rating on China Literature and set a target price of HK$40.
Jefferies analysts Thomas Chong and Zoey Zong also share a buy rating on China Literature. They anticipate profitability from the acquired assets to be realized in 2024, following a small loss this year. Their target price for the company's stock is HK$48.
In a separate development, China Literature announced its plans to repurchase shares worth up to CNY1 billion, citing an undervaluation of the stock at its current level.
The previous share buyback program conducted by China Literature amounted to CNY700 million and was announced in August 2022.
