After nine lost years, China Literature opens new chapter with AI-IP combo

Once embraced by investors, the Tencent-backed online literature company’s shares now trade at just one-fifth of their peak

Key Takeaways:

• China Literature reported its revenue rose 11% in the first half of this year, but tax-related expenses dragged down its profit by more than 80%
• The company’s intellectual property business grew by over 40% during the six-month period, as seeks to better cultivate the area with help from AI

By Cheng Shui Tong

Nine years after listing with high hopes that never quite materialized, China Literature Ltd. (0772.HK) is hoping to open a new chapter for its long-suffering shareholders.

The country’s leading online literature provider’s bottom line certainly didn’t look too impressive when it released its results for the first half of 2026 earlier this month. Yet despite an 84.1% profit plunge, its shares leaped 10% the following day.

In fact, China Literature’s top line revenue looked much healthier over the six-month period, up 10.7% year-over-year to 3.53 billion yuan ($524 million). The massive profit drop was mostly due to tax-related expenses, including about 300 million yuan in back taxes and late payment penalties the company made.

China Literature’s online business, historically its main breadwinner, actually retreated in the first half of the year. Instead, its intellectual property (IP) operation was the star of its new chapter, with revenue up 41.9% year-over-year to 1.61 billion yuan. Gross merchandise volume (GMV) from the IP derivative businesses was also strong, leaping 60% to 780 million yuan.

Also notably, revenue from the company’s short dramas and AI-animated dramas, mostly comic-style shorts generated using AI, surged 2.3 times to over 430 million yuan. Solid performance metrics aside, the warm investor reception for the latest report probably also owed at least partly to China Literature’s current stock levels, now hovering near record lows.

China Literature enjoyed its moment in the sun when it launched its Hong Kong IPO nine years ago. The company was formed after parent Tencent acquired rival Cloudary in 2015 and combined the two, before listing the company two years later.

Basking in Tencent’s halo during the IPO, the company attracted a massive HK$520 billion ($32 billion) in interest from retail investors, the second-highest amount ever for new listings in Hong Kong at the time. The stock doubled from its HK$55 listing price on its debut, pushing its market capitalization close to HK$100 billion with a meteoric price-to-earnings (P/E) ratio well over 100 times on big hopes.

But that stellar stock performance proved to be a flash in the pan. The shares quickly surpassed HK$100 after the IPO – a level that to this date remains their all-time high. More recently, the shares have moved steadily downward to hover near a post-IPO low of about HK$20. The protracted slump boils down to years of lackluster profitability and an absence of compelling new narratives to get investors excited.

Fleeting glory

In its early days as a public company, China Literature leaned heavily on its online paid-reading business, which accounted for 70% to 80% of its revenue. The IP operation later emerged as a second growth engine, and was roughly neck-and-neck with the online reading business by 2024. Yet the IP operation failed to mount the kind of explosive growth that gets investors truly excited, even as China’s IP economy has boomed in recent years. As a result, the online business remains its primary top-line contributor, accounting for 52.1% of total revenue in the first half of 2026.

The intellectual property market generates money from the creation, licensing, adaptation and merchandising of IP rights. One of the best recent examples of milking such rights for massive profits comes from Pop Mart (9992.HK), which rode the popularity of its characters, led by the wildly popular Labubu, to a dizzying peak market value of more than HK$400 billion last year. That raises the question of why Pop Mart could achieve such phenomenal success, while China Literature, which boasts an equally massive trove of IP and a deep-pocketed parent in Tencent, could lag so far behind.

Commercialization race

Pop Mart’s strategy is built around trendy, visually based art IPs. By leveraging a formidable pop-retail formula and its own supply chain infrastructure, along with trendy marketing gimmicks like its “blind box” format, Pop Mart can create overnight sensations for its IPs. But because its visually oriented IPs trade on aesthetic appeal and creating community among collectors, rather than narrative depth, they remain highly vulnerable to shifting tastes.

By contrast, China Literature’s IPs are content-driven. Backed by an extensive library of web novels, its characters possess richer backstories and have deeper emotional bonds with audiences. That said, the company is far less effective than Pop Mart in the trend-making and merchandising arenas. That commercialization gap has led investors to heavily penalize its stock, shrinking its market capitalization to HK$23 billion today — just 20% of its historic peak.

In all fairness, China Literature has produced some smash hits recently, such as the critically acclaimed “Joy of Life” drama series and the chart-topping 2024 domestic blockbuster film “Yolo.” Yet, such stellar performers have failed to move the needle for the company’s overall financial performance, largely due to fragmented copyright ownership and opaque profit-sharing mechanisms. Blockbuster box office returns and sky-high viewership don’t automatically translate into lucrative merchandising either, explaining why the stock has remained in a perennial funk.

While China Literature’s paid online reading business boasts a deep economic moat, growth for that segment has also hit a bottleneck. During the first half of this year, the division’s revenue actually retreated by 7.3% to 1.81 billion yuan, while its active users slipped 5.1% to 134 million. The company’s ability to engineer a meaningful turnaround will ultimately hinge on its ability to successfully pivot to an AI-plus-IP business model.

AI as IP amplifier

Management has made it clear that a key future focus will revolve around finding synergies between IPs and AI. Armed with its huge text library, China Literature has been accelerating efforts to turn those text properties into visual formats, notably by rolling out smash-hit short dramas and AI-animated series. The company developed DramaBuddy, a proprietary AI tool for generating comic-style shorts, to streamline the process. Meanwhile, it has also launched IPBuddy, a system allowing its copyright team to evaluate individual literary works within minutes, greatly boosting the efficiency of IP adaptations and commercialization.

AI is bringing China Literature the ability to both visually adapt text-based works while also singling out IPs with the best commercial potential. Put differently, the company is turning to AI as a crucial amplifier to maximizing the value of its IPs.

Both AI and IP have been hot investor themes lately. A successful transformation from a traditional online reading platform into an IP-driven play could provide some major upside for China Literature’s business. But the company will need to show some stronger growth first, and also detail specific cases that demonstrate how it’s successfully using AI to squeeze more revenue and profits from its rich IP library.

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