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Annual Report Our Mission Is to Create Value for Writers and to Bring Literature to People Contents

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Annual Report Our Mission Is to Create Value for Writers and to Bring Literature to People Contents (Incorporated in the Cayman Islands with limited liability) Stock Code: 772 2019 ANNUAL REPORT OUR MISSION IS TO CREATE VALUE FOR WRITERS AND TO BRING LITERATURE TO PEOPLE CONTENTS 2 Corporate Information 4 Financial Summary and Operational Highlights 6 Chairman's Statement 10 Management Discussion and Analysis 22 Directors and Senior Management 27 Report of Directors 60 Corporate Governance Report 81 Environmental, Social and Governance Report 97 Independent Auditor's Report 107 Consolidated Statement of Comprehensive Income 108 Consolidated Statement of Financial Position 110 Consolidated Statement of Changes in Equity 112 Consolidated Statement of Cash Flows 114 Notes to the Consolidated Financial Statements 231 Definitions CORPORATE INFORMATION Board of Directors Strategy and Investment Committee Mr. Wu Wenhui (Chairman) Annual Report 2019 Executive Directors Mr. Liang Xiaodong • Mr. Wu Wenhui (Co-Chief Executive Officer) Mr. James Gordon Mitchell Mr. Liang Xiaodong (Co-Chief Executive Officer) Mr. Lin Haifeng (resigned on November 22, 2019) Ms. Chen Fei (appointed on May 17, 2019) Non-executive Directors Ms. Li Ming (retired on May 17, 2019) Mr. James Gordon Mitchell (Chairman) Mr. Cao Huayi (appointed on May 17, 2019) China Literature Limited Authorized Representatives Ms. Chen Fei (appointed on May 17, 2019) Mr. Liang Xiaodong Mr. Cheng Yun Ming Matthew Ms. Lai Siu Kuen (appointed on November 22, 2019) Ms. Li Ming (retired on May 17, 2019) Joint Company Secretaries Mr. Yang Xiang Dong (retired on May 17, 2019) Mr. Zhao Jincheng Mr. Lin Haifeng (resigned on November 22, 2019) Ms. Lai Siu Kuen Independent Non-executive Directors Legal Advisors Ms. Yu Chor Woon Carol As to Hong Kong laws: Ms. Leung Sau Ting Miranda Clifford Chance Mr. Liu Junmin 27/F, Jardine House One Connaught Place Audit Committee Hong Kong Ms. Yu Chor Woon Carol (Chairman) Mr. Lin Haifeng (appointed on May 17, 2019 and As to Cayman Islands laws: resigned on November 22, 2019) Maples and Calder (Hong Kong) LLP Mr. Yang Xiang Dong (retired on May 17, 2019) 53rd Floor, The Center Ms. Leung Sau Ting Miranda 99 Queen’s Road Central Mr. Cheng Yun Ming Matthew Hong Kong (appointed on November 22, 2019) Auditor Remuneration Committee PricewaterhouseCoopers Ms. Leung Sau Ting Miranda (Chairman) Certified Public Accountants Mr. Wu Wenhui 22/F, Prince’s Building Ms. Yu Chor Woon Carol Central Hong Kong Nomination Committee Mr. James Gordon Mitchell (Chairman) Registered Office Ms. Yu Chor Woon Carol The offices of Maples Corporate Services Limited Mr. Liu Junmin PO Box 309, Ugland House Grand Cayman KY1-1104 Cayman Islands CORPORATE INFORMATION Head Office and Principal Place of Business in China Annual Report 2019 Block 6, No. 690 Bi Bo Road • Pudong XinQu Shanghai PRC Principal Place of Business in Hong Kong Room 1503-04 China Literature Limited ICBC Tower 3 Garden Road, Central Hong Kong Principal Share Registrar and Transfer Office Maples Fund Services (Cayman) Limited PO Box 1093, Boundary Hall Cricket Square Grand Cayman KY1-1102 Cayman Islands Hong Kong Share Registrar Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Center 183 Queen’s Road East Wanchai Hong Kong Principal Banker Shanghai Huangpu Sub-branch of Bank of Communications No. 99 Huaihai East Road Shanghai PRC Company’s Website http://ir.yuewen.com/ Stock Code 772 FINANCIAL SUMMARY AND OPERATIONAL HIGHLIGHTS CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Annual Report 2019 • Year ended December 31, 2019 2018 2017 2016 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Revenues 8,347,767 5,038,250 4,095,066 2,556,866 1,606,640 Gross profit 3,692,023 2,557,979 2,075,440 1,054,847 580,534 China Literature Limited Operating profit/(loss) 1,193,907 1,114,951 614,563 33,323 (307,760) Profit/(loss) before income tax 1,179,797 1,077,801 645,730 38,318 (317,142) Profit/(loss) for the year 1,112,134 912,398 562,692 30,360 (354,159) Profit/(loss) attributable to equity holders of the Company 1,095,953 910,636 556,129 36,683 (347,584) Total comprehensive income/(loss) for the year 1,167,355 1,342,293 412,562 57,589 (363,730) Total comprehensive income/(loss) attributable to equity holders of the Company 1,151,165 1,340,538 405,999 63,912 (357,155) Non-GAAP profit/(loss) attributable to equity holders of the Company 1,194,618 900,490 721,817 85,255 (91,959) CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2019 2018 2017 2016 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Assets Non-current assets 14,059,479 13,556,968 5,703,237 5,016,493 5,025,715 Current assets 12,190,525 14,277,638 9,434,131 2,115,212 1,355,375 Total assets 26,250,004 27,834,606 15,137,368 7,131,705 6,381,090 Equity and liabilities Equity attributable to equity holders of the Company 19,396,567 18,403,478 12,621,196 5,166,225 4,375,468 Non-controlling interests 14,244 11,567 41,514 42,057 82,491 Total equity 19,410,811 18,415,045 12,662,710 5,208,282 4,457,959 Non-current liabilities 925,546 2,823,250 710,492 264,957 362,831 Current liabilities 5,913,647 6,596,311 1,764,166 1,658,466 1,560,300 Total liabilities 6,839,193 9,419,561 2,474,658 1,923,423 1,923,131 Total equity and liabilities 26,250,004 27,834,606 15,137,368 7,131,705 6,381,090 FINANCIAL SUMMARY AND OPERATIONAL HIGHLIGHTS Year ended December 31, 2019 Annual Report 2019 • Profit attributable to Revenues equity holders of the Company Average MAUs China Literature Limited 8,347.8 1,096.0 219.7 RMB in Million RMB in Million Million Non-GAAP profit attributable to Gross profit equity holders of the Company Average MPUs 3,692.0 1,194.6 9.8 RMB in Million RMB in Million Million CHAIRMAN’S STATEMENT I hereby present our annual report for the year ended of individual releases. Consequently, successfully December 31, 2019 to our shareholders. investing in content-centric companies requires a Annual Report 2019 degree of fortitude and willingness to endure short term • A TUMULTUOUS YEAR A VOLATILE volatility for long term returns. This need is particularly STOCK PRICE apparent in stock markets such as Hong Kong’s, where a scarcity of content-centric businesses means that As our shareholder, you are likely aware that 2019 was investor attitude toward such companies fluctuates more a tumultuous year for our business and our stock price, sharply than toward companies operating in industries the latter declining sharply in the middle of the year, and with more violent but better understood cycles, such as China Literature Limited then recovering toward the year-end. While market-wide financial services and real estate. factors played a part, company-level factors likely contributed too, specifically concern surrounding: OUR STRATEGIC EVOLUTION CHANGE • Free-to-read literature apps amassing millions of Given the challenges above, and the fact that we users in short periods of time, and thus challenging operate in a fast-changing industry, we have sought and not only our own literature apps but more broadly are seeking to enhance our capabilities and elevate our our pay-to-read model. strategy in certain areas, while adhering to long-held principles and directions in others. • The negative effect of reduced traffic from some of our traditional distribution channels, notably Areas where market changes have prompted us to Tencent’s Mobile QQ and QQ Browser apps, evolve our strategy include: temporarily outweighing the positive effect of increased traffic from newer distribution channels, • Adding our own free-to-read (advertising-funded) notably the Weixin Reading app, impacting our services, initially in Tencent’s Mobile QQ and QQ user base growth. Browser apps, and then in our stand-alone Feidu app. • The unusually slow broadcast approval process for drama series on TV and internet video • Deepening our integration into the Weixin Reading platforms suppressing revenue and earnings for app, and nurturing users’ payment habits inside our recently-acquired New Classics Media (“NCM”) Weixin Reading. production studio business, and thus provoking debate around our rationale for that acquisition. • Licensing our IP not only into live action costume drama series, where the entire genre has been More broadly, while it is easy to recite that “content is subject to a period of delay in being broadcast, king” when content-centric businesses are financially but also into modern-day live action drama series outperforming expectations, such businesses do and animated drama series, which have not been periodically underperform expectations due to factors subject to such a period. such as content release dates not following a regular annual pattern, delays from expected to actual content release dates, and variability in the popularity CHAIRMAN’S STATEMENT These changes generally brought more costs than • Developing NCM’s position as a leading drama revenue in 2019 (for example, marketing cost for our series and film production studio. Both in the West Feidu app), but we believe that from 2020 onward they and in China, only a handful of production studios Annual Report 2019 • will generate platform benefits and, in some cases (such are capable of generating consistently high-quality as the modern-day live action drama series, animated drama series; we are proud that NCM is one such series or Weixin Reading), financial benefits. studio, and intend to utilize China Literature’s privileged position as a content library and creator OUR STRATEGIC EVOLUTION to entrench and enhance NCM’s position.
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