Good evening, ladies and gentlemen. Welcome to China Literature's 2020 Annual Results conference call. A copy of the annual results announcement can be found and downloaded from its investor relations website at ir.yuewen.com. At this time, all lines have been placed on listen-only mode, and the floor will be open for questions following today's presentation. I would now like to hand the conference over to your host today, Ms. Maggie Zhou, Head of Capital Markets and Investor Relations at China Literature. Maggie, please go ahead, ma'am.
Thank you, operator. Ladies and gentlemen, welcome to our 2020 Annual Results conference call. Joining us today on the call are Mr. Edward Cheng, CEO, Mr. Monkey Hou, our President, and Mr. William Sun, our Vice President of Finance. For today's call, Edward will discuss the company's strategies, Monkey will review the company's business, and William will go through the financials. We will then open the call for questions. Before we begin, I would also like to remind you that management's comments during the call will include forward-looking statements that are based on our current expectations. All statements other than statements of historical facts during the conference call are forward-looking statements, which have a substantial number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company.
This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures for the company's financial performance prepared in accordance with the IFRS. Please do take a minute to read the risk factors and non-IFRS measures discussion in China Literature's 2020 Annual Results earnings release. I will now turn the call over to our Chief Executive Officer, Edward.
Thank you, Maggie. Hello, everyone. Thank you for joining our earning call today. This is the second time I have shared our earnings result with you since the release of China Literature's interim report in August 2020. In our last investor call, we offered a very frank review of the challenges faced by China Literature, including external factors such as the COVID-19 pandemic and market competition, as well as internal issues. The latter include both systematic issues and weak integration across our business segments. We proposed three major solutions for this, namely upgrades in content, platform, and ecosystem. Looking back now, I would say our perceptions were accurate.
If we did not choose to face the challenges head-on and do the hard but the right things, and if we instead tried to escape and cover things up so as to complete the so-called smooth transition, our subsequent strategy and execution would have been very seriously compromised, and there might even be significant deviations in the direction of our development. I could never imagine that in just a little bit more than a half- year's time, China Literature's team could face up to the historic problems, overcome the difficulties, and go all out to promote strategic upgrades and have accomplished positive progress in business layouts, and in turn, have achieved a turnaround in performance. Based on this experience, we intend to stick to communicating our thoughts very openly and very honestly to our investors in the future, and in a very direct and effective way.
Turning now in the second half of last year and for the results we have achieved, the management team and I would like to thank all the employees of the company for their dedication and thank all our partners for their support. Now, let's have a look at the figures. First, our content upgrade. We saw an increase in both the number and the quality of our writers and the literary works. As of the end of 2020, we have more than 9 million writers on our platform, with a total of 13.9 million literary works. During the year, we added approximately 46 billion words to our platform. According to the leading China search engine, Baidu Search Ranking, for novel in February 2021, 26 out of the top 30 online literary works originated on our platform.
At the same time, our writer ecosystem and IP incubation capabilities have been consistently improved, receiving positive comments from more and more writers, with some of the platinum writers who had left China Literature previously due to various reasons, already deciding to return as well. This has strengthened our reputation as the best partner to writers in China among our peers. Second, our platform upgrade. We have expanded our relationship with the Tencent channels, such as QQ Browser and Mobile QQ, by distributing free-to-read content to a very wider range of readers. In addition, we established a free reading content decision committee to provide dedicated coordination and management of free content, and also to incubate high-quality free literary works and writers. In December 2020, average DAUs for our free reading channels reached approximately 10 million users.
We will continue to explore this field of free reading, so as to make more progress in 2021. Third, our ecosystem upgrade. As part of this, we're enhancing the quality and the visibility of our IPs across diverse media formats, including comics, animation, film, TV, and web series. This approach has already landed us a number of blockbusters. For example, following Joy of Life in 2019, the drama series, My Heroic Husband, which was jointly produced by New Classics Media, Tencent Pictures, and the China Literature Pictures, was another successful adaptation from our IP. The drama series ranked number one on Enlightent's web series playlist during its launch period, enjoying overwhelming market popularity and winning praise from various media, including People's Daily. Its success reflects the blockbusters power of the three-way New Classics Media, Tencent Pictures, and the China Literature Pictures partnership.
I look forward to seeing more quality works from this cooperation model in the future. Another example is the drama series, Soul Land, which was also adapted from China Literature's top IP and produced by New Classics Media. It was ranked number one on Tencent Video's hot search list and the drama series list with over 4 billion video views, and created a good synergy between the Soul Land animation series and the online game. In addition to the serialized adaptation of our top IPs, New Classics Media has continued to launch high-quality products with modern themes. It is a specialist in this genre with titles such as My Best Friend's Story, the sequel to The First Half of My Life, which was ranked number one on playlists of Enlightent's TV series during its launch period.
New Classics Media was also participating in the production of the recent hit movie, Hi, Mom, with box office of over CNY 5 billion. Actually, today, its box office CNY 5.3 billion, t he second-ranking box office sales in the history of China film industry ever. This success has testified our value judgment on New Classics Media and validated our decision to extend its earn-out mechanism. We believe that New Classics Media will have much more room to grow as part of our ecosystem. Based on this strategy, China Literature has been able to maintain its leading position in the online reading market and enhance its IP operating capacity. Our financial performance picked up significantly in the second half of the year 2020. For the whole year, China Literature has total revenues of CNY 8.5 billion.
Out of the total, the second half saw revenues of CNY 5.3 billion, up 62% from the very first half of the year. Net profit attribute to equity holders of the company and non-IFRS measures for the whole year was CNY 917 million. Of this, the second half saw CNY 895 million in net profit, around 40% fold increase over the first half. The numbers give you a flat and a one-dimensional picture of our operational activities. To me, what really matters is the organization and the decision-making behind the data. China Literature is now evolving from a digital reading-focused company into a broad-based entertainment company with unparalleled capacity to cultivate and develop IP through a wide variety of digital offerings, including literature, comics, animation, film, TV series, and games.
Our organizational strategy and the decision making are not just targeting half-year or one-year performance, but at a sustainable growth for the next three to five years, or even 10 years, as creating quality IP content is a long-term task. As you may have seen, our core management team is now stronger and more diverse, as we introduce new leaders in the areas of IP operations, online business, investment, legal, and finance. All these new members of our management team have extensive industry experience and outstanding entrepreneurial spirit in their respective fields and are injecting new dynamism into the company. At the same time, we have upgraded our hiring criteria in order to build a team that is passionate about content and dedicated to improve the organizational efficiency of the company overall. In addition, our organizational structure has become more flexible and inclusive.
We have established the joint committee between China Literature's comic and animation department and Tencent Comics. The joint committee between China Literature Pictures, New Classics Media, and Tencent Pictures, which have developed synergies with Tencent Pictures, Tencent Comics, and New Classics Media, with common beliefs to start deeper and closer cooperation. Furthermore, our high-level decision-making has become more focused on long-term strategy-oriented than short-term business. We have never valued the overall life cycle value of our IP as much as we do today. Historically, each IP licensing agreement was simply a deal and a sales figure. Today, each IP licensing agreement is with the objective of the beginning of long-term IP life cycle. China Literature will do everything it can to realize the lifetime value of its IPs together with the industry partners, build its ecosystem, and create long-term value.
The key to strengthening our management team and redesigning our organization structure is to ensure this core concept is put into practice. To support this decision-making mechanism, we have established an IP-focused intermediate business platform, and this has three functional segments, including writer service, IP screening and planning, and ecosystem partnerships. Firstly, for upstream writers, this intermediate platform will offer better IP planning and promotional services, help them build up their reputation in the field of IP adaptation, and in turn, benefit the writer ecosystem. Secondly, as part of our IP operational procedures, we have established a more in-depth IP screening and planning mechanism. While screening and selecting suitable IPs for adaptation through data and content analysis, we're also providing value-added content planning services. Examples of this including IP classification and grading for different partners and project planning for IP adaptations.
We're also actively developing new themes and genres to be able to lead market demand. Thirdly, we are engaging more closely with our external partners. Through integrated IP planning and development, we aim to raise IP visibility to create blockbuster IPs across different entertainment formats. The establishment of this IP intermediate platform has standardized our IP licensing procedure and paved the way for industry-scale IP development system. Based on this capacity built into the intermediate IP platform, w e can strengthen ecosystem partnerships, expand production capacity, achieve improvements in quality and quantity, and finally, increase the value of IPs. Predictably, this is another hard but right thing to do. The road to success is a winding one, and few people are brave enough to take it. The team here are ready to take on this challenge of doing the hard but right thing in order to build our business to last.
Looking ahead, we are confident in our long-term IP development and unshaken in our determination to reap long-term rewards. The progress we achieved during the second half year of 2020 was just the beginning. We are long-term rather than short-term oriented, and is committed to building an ecosystem that produces nutritious quality content. We look for life-enriching, heartwarming stories, and content with deep humanity. Finally, I would like to share my personal expectations with you for the future development of China Literature. In the days to come, we will center growth on content, platform, and ecosystem, creating a sustainable growth trajectory and laying a solid foundation to explore new business.
We hope that more and more users will be enjoying China Literature's IP across a very wide range of entertainment media formats, from text, comics, animation, film, and TV series to games, as we produce consistent IP winners as time goes by. We will also promote partnerships with various industry players to expand our boundaries. We see enormous growth potential for our IP business across segments, leveraging our online reading business to create an innovative IP-centric production cycle. IP incubation will become our next growth accelerator. We believe this will lead the company to a very much wider market with more exciting prospects ahead. That concludes my session. Now, let's welcome Monkey to brief us on the business development of the company. Thank you all.
Thanks, Edward. Just now, Edward has discussed our strategy and some key business updates. Let me add more detail about our business development during the year. First, let's look at our online reading business. In 2020, total MAU on our self-owned platform products and the self-operated channel on Tencent products increased 4.2% year-over-year to 228.9 million. MPU increased 4.1% year-over-year to 10.2 million. Our paid reading business performed well as we expanded into new channels, strengthened content management and the community, and made improvements to our recommendation system. In addition, our free reading business started to show results with further expansion of content reserve and user base. Average DAU for our free reading channels reached 10 million in December 2020. We will continue to expand our online reading business through both pay and free business models.
During the year, we improved our writer ecosystem and offered writers service and experience that better reflect their needs. New Generation Z writers have also become a major group of new writer supply, bringing fresh ideas and emerging trends during the year. While adding contents and enhancing the quality of writing on our platform, we introduced functions to improve engagement and stickiness of our reader community, such as instant comments and replies, user-generated audio reading of text, and user-generated chapters. We improved our recommendation system, allowing users to find their preferred books more quickly. In addition, big data analysis tools help our editors to screen and nurture content. Let's move to our IP operation business. In 2020, we licensed around 200 IP rights for adaptation to third-party partners.
Besides the release of top-ranking film and drama series, as Edward just mentioned, we released a number of adapted animated series during the year. These include new season of Stellar Transformations, Xing Chen Bian, Martial Universe, Wu Dong Qian Kun, The King's Avatar, Quan Zhi Gao Shou, Fighter of the Destiny, Ze Tian Ji, and Full-Time Magister , Quan Zhi Fa Shi. All these animated series received more positive feedback from users. That concludes my session. Now I'll hand over to William for financial performance update. Thank you.
Thanks, Monkey . Hello, everyone. It's my honor to attend the first earnings call since I joined China Literature. In 2020, our total revenues increased by 2.1% year-over-year to CNY 8.5 billion. Our online business revenues were CNY 4.9 billion, up 32.9% year-over-year, accounting for 57.9% of total revenues, compared with 44.5% in 2019. The revenue increase was contributed by the growth of our self-owned platform products, primarily driven by the expansion of distribution channels, as well as user growing willingness to pay for our reading contents. On the other hand, we continue to see decline in revenue from Tencent products as we further expanded our free-to-read services and were not aggressive in monetizing our free users through advertisements. Revenues from third-party platforms were also impacted by drop in revenues from certain distribution partners. In 2020, we continued to expand our total user base and increase user spending.
Our average MAU grew by 4.2% year-over-year to around 229 million, driven by the user growth from both our self-owned platform products and our self-operated channels on Tencent products. Our average MPUs increased by 4.1% year-over-year to 10.2 million, mainly driven by the growing number of paying users on our self-owned platform products, p artially offset by the decrease in paying users from certain Tencent products, as more users were attracted to free-to-read content. Monthly ARPU reached CNY 34.7, up 37.2% year-over-year, mainly because we improved our content operations, optimized our recommendation system, and expanded our content distribution channels during the year. Turning to the IP operations and other business.
In 2020, our IP operations and other revenues decreased by 22.5% year-over-year to CNY 3.6 billion, primarily due to the delayed production and release dates for the films, TV series, and web drama series during the first half of the year, as impacted by the COVID-19 pandemic, but recovered gradually during the second half of the year. Now let's look at the costs and expenses. In 2020, our total cost of goods sold amounted to CNY 4.3 billion, down 7.8% year-over-year, mainly impacted by lower production costs and partially offset by higher platform distribution costs. Production costs of TV, web, and animated series and films decreased by 47.9% year-over-year to CNY 1.1 billion, mainly due to the delayed release of certain products caused by the COVID-19 pandemic.
Platform distribution costs increased by 109.7% year-over-year to CNY 1.2 billion, mainly due to the expansion of our online reading channels and the improved operation of our online games in 2020. In 2020, our gross profit increased by 14.7% to CNY 4.2 billion, representing a gross margin of 49.7%, up from 44.2% in 2019. We recorded net other losses of CNY 5.3 billion for 2020, compared with net other gains of CNY 453 million in 2019. The other losses for 2020 were mainly consisted of, one, the impairment of provision of goodwill and trademark rights related to the acquisition of New Classics Media of CNY 4.4 billion. Two, a net fair value loss of CNY 605 million due to the modification of New Classics Media's earn-out mechanism in 2020. Three, the impairment provision of the company's long-term investment related to certain investee companies of CNY 252 million.
In terms of our operating expenses, our selling and marketing expenses were CNY 2.5 billion in 2020, up 20.5% year-over-year. As we invested more marketing dollars to promote our online reading content, selling and marketing expenses as a percentage of revenue increased to 29.3% in 2020 from 24.8% in 2019. Our G&A expenses decreased by 13.5% year-over-year to CNY 874 million in 2020, mainly due to a net reversal of compensation costs related to the service expense of certain employees and former owners of New Classics Media as we modified its earn-out mechanism. As a percentage of revenues, our G&A expenses decreased to 10.2% in 2020 from 12.1% in 2019. As a result of factors mentioned above, our operating loss was CNY 4.5 billion.
Non-IFRS operating profit, which excludes share-based compensation, M&A-related impacts such as net gains or losses from investee companies, amortization of intangible assets, and the impairment provision, was CNY 935 million, with a non-IFRS operating margin of 11%. Our net loss was CNY 4.5 billion, which was largely attributable to net other losses in relation to the New Classics Media acquisition. Our non-IFRS net profit was CNY 901 million, with a non-IFRS net margin of 10.6%. Although 2020 began with a variety of challenges, our businesses yielded strong performance in the second half of 2020, benefiting from the effective execution and our growth strategy. That concludes the financially related part. Let's move on to the Q&A session.
Ladies and gentlemen, we will now begin the question- and- answer session. If you wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. Kindly note, please ask your questions first in Chinese and then translate it to English. Once again, it is star followed by one to ask a question. We have the first question coming from the line of Ryan Fung from Citigroup. Please go ahead.
[Non-English content] So I will translate myself. Thanks management for taking my question. Congratulations on the solid results. I have two questions. First is regarding the free reading. I noticed we have recorded DAU of 10 million for freemium reading as of December 2020. Can management share what was the revenue from free reading in 2020? What could be the DAU target in 2021 and over long run? How does management see monetization potentials? The second question is about the pipeline of New Classics Media for 2021, and how does recently very successful film, Hi, Mom, and the drama, My Heroic Husband, how does those two contribute to the top line and bottom line in 2021? Thank you very much.
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Yeah, I will translate. Total ad revenue was higher than 2019. At the same time, ad revenue in the second half year was greater than the first half. Even with the fact we focused on developing user base, improving retention, and incubating and selecting quality content other than commercialize broadly. Our revenue from free reading are mostly attributable from Tencent products like QQ Browser and Mobile QQ. In this year, we will remain focused on developing user base, improving retention, and introducing quality content. In 2021, we will continue to cultivate and select quality free content and improve recommendation system in order to attract users to spend more time with us.
Thank you.
Thank you.
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In 2021, we expect to release six to eight TV series, such as The Golden Hairpin, Demi-Gods and Semi-Devils, and The Rival. [Non-English content] Regarding the question for [Non-English content] NCM is one of the three original producers of Hi, Mom. In the competitive Chinese New Year holiday season, in order to gain better distribution and film scheduling resources, we chose a guaranteed box office publishing model with a fixed box office number set up by the film publisher. The fixed box office revenue is fixed but still much lower than the actual box office revenue, which is CNY 5 billion . Because of this, the revenue and the profit we generated is not much, it's not very high, but ROI will be even. Thank you.
Thank you. We have our next question from the line of Eddie Leung from Bank of America. Please go ahead.
[Non-English content] So just two quick questions. One is about the competitive landscape. We have seen some traffic platforms, especially some short video companies, investing in online literature in the past one to two years. Just wondering how China Literature plans to defend its leadership position in the industry. Secondly, perhaps more technical question. We know that in 2021, as Mr. Cao also mentioned that there should be more IP projects completion. Wondering how that could affect the gross margin on an accounting basis. Thank you. [Non-English content]
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We have conducted in-depth operations in content innovation and genre diversification and will continue to incubate young writers. We will further enhance community features by launching more community functions and increase user activity and stickiness. We will increase ROI through the continuous improvement of our recommendation system. This will help to drive users' willingness to pay. In addition, we are also expanding the new distribution channels, such as [inaudible] public accounts to obtain user traffic in the reading system. While solidifying our paid reading business, we will actively explore opportunities in free reading business, as free reading model could bring us more new users, which we believe is also very important. Regarding the competition for free reading. In the past, when we faced the competition from free reading business, we adopt a conservative strategy, and didn't put considerable resources to promote our free-to-read apps.
As we were worrying that this would dilute our brand reputation for high-quality content. From another perspective, we will think that free-to-read apps have already attracted a large number of users, which proves there is a need that exists. We realized that only by gaining the market share, we will be able to help more users to enjoy more quality content, and we can leverage our reach and our high-quality library to make this happen. One of our competitive edges is our high-quality content that drives user stickiness. We have established a free reading content decision committee to provide dedicated coordination and management of free content and to incubate high-quality free literary works and writers. Meanwhile, we collaborate with the Tencent channels to reach more users in efficient ways as there is no upfront user acquisition cost. We will only share revenues with Tencent when we actually monetize.
The average DAU of our free-to-read content reached 10 million in December 2020. Internet industry is naturally and intensely competitive. We keep an open mind towards monetization model selection. We believe we should focus on cultivating good writers and quality content to set a solid foundation for later IP operations, which is also one of our competitive edges. In the future, while solidifying our paid reading business, we will actively explore the opportunities in free reading business, combining China Literature's advantage in high-quality content and Tencent's advantage in user traffic. Thank you.
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For the profit margin question, I would say the price or profit margin of our drama series projects or films are driven by both the quality of the product and the policy and market environment at the time of release. IP adaptation alone will not be a guarantee for higher price or higher profit margin.
Okay. Thank you.
Thank you. [inaudible].
Pardon me. We have the next question from Xueqing Zhang from CICC. Please go ahead.
[Non-English content] I will translate myself. My first question is about online reading businesses. We saw revenues from self-operated channels on certain Tencent products as we continue to expand free reading businesses decline. Just wondering, what's the strategy for different channels on online reading business, and could we share more color on the revenue in 2020? My second question is about IP operation. We saw great achievements in TV dramas and films for IP operation businesses. In terms of games, could we share more color on the progress on cooperation with Tencent Games and other game companies recently? Will it be a driver for our IP operation revenues? Thank you.
[Non-English content]
For self-operated products, we intend to incubate more IP from our library. For the Tencent channels, we will leverage its high- volume traffic to further expand our users for free-to-read content. Also, we will collaborate with more third parties to seek more opportunities. Our main focus for 2021 is to grow user base, especially the users of free-to-read services, so we can expand the reader base for our stories and serve our IP operation business in the long run.
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Hi, this is Edward. I would like to take your second question. As mentioned in my prepared remarks, in the second half of last year, we have gone through a turnover in our business. We converted our business from a pure online reading business into a comprehensive IP adaptation and operation business on the basis of online reading. We are devoted to converting more of our IPs into more adapted formats like drama series, films, games, animations, and comics, and others. We will also continue to strengthen our collaboration with external business partners, to produce and present more content products for our users. At the same time, that will bring us more commercial value, to us and to our business partners. We believe, internally, we will continue to strengthen our capability for the content creation, and we will be able to produce more synergies among different IP-adapted formats.
As Monkey mentioned, we continue to strengthen our capability in the aspect of free reading and paid reading. On the basis of that, we will be able to lay a very solid foundation for our IP adaptation business. First of all, let me talk about our comics and animations business. China Literature and Tencent Comics have established a joint project team and set up an efficient communication and collaboration mechanism to execute a systematic IP planning. The joint project team has set a strategic target, which is to produce 300 comics in three years, and it is expected that over 100 comics will be launched in 2021. Also, China Literature, Tencent Pictures, and New Classics Media, we three parties, will continue to work together to adapt more China Literature IPs into high-quality premium drama series.
We believe that by releasing more and more synergies between the animations in comics and the drama series, the IP value will be further maximized, and that would lay a very solid foundation for the game business. We will be able to attract more business partners in the gaming industry and attract them to help them strengthen their research and development. In terms of the game business, first of all, Tencent Games is very interested in our IP, and we will have more opportunities to collaborate with Tencent Games in IP licensing. In addition, we will continue to introduce more key game players outside the Tencent ecosystem into the China Literature ecosystem for more collaboration in more dimensions. We will be able to have more formats, more categories of games, including MMORPG, SLG, and other genres of games.
We, together with various game industry players, will explore the library of China Literature's treasure house of IPs and present more adaptations. For instance, as you know, The Joy of Life, the drama series, was a big hit co-produced by New Classics Media, Tencent Pictures, and China Literature. On the basis of that, the adapted game, Joy of Life, is expected to be released in 2021. We believe this game will also be able to benefit from the success of the drama series. In 2021, we are devoted to the diversification of adapted genres and the quality of IP adaptation, and enhance our financial return along with the IP life cycle. We will always continue to strengthen our capabilities. I would like to share one more example with you, which is the Soul Land, which is the high-quality drama series produced by New Classics Media.
This also drives the operation of the same IP-adapted game, Soul Land. That is the synergy among these different adapted formats I am talking about. Thank you for your question.
Ladies and gentlemen, due to time constraint, I would like to hand the conference back to our host for any ending remarks. Please take over, ma'am.
Thank you, operator. Due to time constraints, we will now conclude today's call. On behalf of the entire China Literature management team, I would like to thank you for your participation in today's conference call. If you have further questions about China Literature, please feel free to contact us. Thank you and goodbye.
Thank you.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now.