China Online, "Burning Money" Continues

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(Source: NetEase Tech)

Is it content-driven or marketing-driven? The answer was openly revealed in the prospectus Chinese Online submitted to the Hong Kong Stock Exchange—relying on spending money on marketing.

Although this has long been an open secret in the digital entertainment industry, the divergence between the company’s sales expenses and revenue growth directly exposes its business shortcomings.

ByteDance relies on Tomato Novel + Red Fruit Short Dramas to rebuild a cultural factory; Tencent leverages China Literature + Video Accounts to build a cultural empire. Both are transforming within their own ecosystems, but Chinese Online lacks its own ecosystem, especially in overseas short drama business, which can only rely on third-party platforms.

This situation is temporarily hard to change. The company is trying to seek a breakthrough through super content inventories, IP resources, and AI empowerment. This time, rushing into Hong Kong stocks has become a key to raising funds.

Continuous Losses

Chinese Online (300364.SZ) is undoubtedly a veteran in China’s digital entertainment industry.

Founded by Tong Zhilei in Beijing in 2000, and eight years later, founded Reading Technology; in 2015, Tencent Literature merged with Shengda Literature to form China Literature.

At its founding, China’s internet industry was still in its infancy, and digital content consumption was a niche market. The production and business model of pure literary content were still exploratory, and Chinese Online could only quietly accumulate strength.

Unexpectedly, Qidian Chinese Network launched a paid reading model in 2003, becoming a watershed for commercializing online pure literature content; in 2004, Qidian was acquired by Shengda Network, which helped build an IP copyright operation system. Its hit IP “Ghost Blows Out the Light” later shined in film, television, and gaming, maintaining high activity to this day.

By 2006, Chinese Online began to take action. That year, it established 17K Novel Website, gathering quality online literature and attracting top authors from the source, gradually forming the basic framework of online literature, IP, and other digital entertainment businesses.

As the business expanded, Chinese Online’s business model became clearer: adopting a first-creator buyout system for quality authors to secure high-quality content resources; pioneering a paid model linking e-books and physical books; its business and products covering the entire IP industry chain. It incubated hit IPs like “Silent Love” and “Empresses in the Palace,” covering multiple subfields such as film and television, forming a matrix of popular IPs.

During the era dominated by portal websites, the online literature industry entered its first resource scramble, with major platforms competing fiercely for top authors and content. After completing the foundational layout of 17K Novel Website, Chinese Online chose to leap into the capital market first. In 2015, the company successfully listed on the Shenzhen Stock Exchange’s Growth Enterprise Market, becoming China’s first digital entertainment industry listed company.

Despite leading in capitalization, Chinese Online has not fully translated this advantage into business performance. For example, in 2024, the company’s revenue was 1.159 billion yuan, far below China Literature’s 8.021 billion yuan and Reading Technology’s 2.583 billion yuan.

Notably, the company’s profitability has been weakening year by year. From 2022 to 2025, net profit after non-recurring gains and losses has been continuously negative, with total losses exceeding 1.3 billion yuan.

Business Structural Flaws

Over the past 26 years, Chinese Online has diligently cultivated in the digital entertainment track, owning 5.6 million digital content items and over 4 million registered authors, establishing a vast IP resource library.

According to the prospectus, in 2023-2024 and the first three quarters of 2025, operating revenues were approximately 1.409 billion yuan, 1.159 billion yuan, and 1.011 billion yuan, respectively. During the same period, net profit attributable to the parent was about 90 million yuan, -243 million yuan, and -517 million yuan.

Based on 2024 revenue, the company ranks third in the domestic online literature copyright-driven content platform market, with a market share of 1.6%. In overseas short drama platforms, as of September 2025, it ranked eighth by revenue. Under the pressure from leading companies like China Literature and Reading Technology, the company’s industry voice is relatively weak.

Why has Chinese Online been continuously losing money? Perhaps a glimpse can be gained from its business structure.

The company’s business mainly divides into two segments: online literature and related businesses, and short dramas and IP derivative products. According to the prospectus, in 2023-2024 and the first nine months of 2025, revenues from online literature and related businesses were approximately 670 million yuan, 686 million yuan, and 480 million yuan, accounting for 47.5%, 59.2%, and 47.5% of total revenue; meanwhile, short dramas and IP derivative products generated about 622 million yuan, 398 million yuan, and 474 million yuan, accounting for 44.2%, 34.4%, and 46.9%.

The core business—online literature and related content—is facing “problems.” On one hand, revenue growth is slowing: in 2024 and the first three quarters of 2025, year-on-year increases were 2.24% and -1.23%. On the other hand, profitability is rapidly declining, with gross margin dropping from 40.6% in 2023 to 24.4% in 2024.

Under the impact of short videos, Chinese Online’s traditional profit model has visibly declined. Despite its large pool of authors and content resources, its commercial monetization ability has been weakened.

In response, the company is attempting to compensate by developing short drama business, but this may be wishful thinking. In the first three quarters of 2025, revenue from short dramas and IP derivatives was 474 million yuan, with a gross margin of only 34.4%, down 12.5 percentage points from 2024. In 2023 and 2024, gross margins for this segment were 44.6% and 47.4%, respectively.

In 2023, the company launched the Sereal platform to explore overseas short drama markets, but its positioning and content did not meet overseas user demands, and operations fell short of expectations. In 2025, it launched the overseas short drama platform FlareFlow, replacing Sereal.

The replacement of old and new platforms has achieved a stage growth in user base but also led to higher production, content, and sales costs. Coupled with cultural aesthetic differences between domestic “powerful CEO” and “sweet” short dramas and overseas audiences, content monetization remains inefficient.

Against the backdrop of core business setbacks, Chinese Online is pinning hopes on AI technology empowerment.

In this Hong Kong IPO attempt, the company highlights its self-developed AI creation platform “Xiaoyao,” mentioning AI technology at least 314 times in the prospectus and listing it as a core development focus.

As of the latest feasible date, Xiaoyao AI has served over 50,000 content creators across more than 90 countries and regions, helping produce over 2 billion words of content.

Meanwhile, the company has used AI to create over 50,000 literary works, more than 250 AI-produced dramas, and over 200,000 hours of audio content.

Unfortunately, the company has not disclosed the monetization path or commercialization level of this tool, which weakens the practical performance support for its heavily promoted AI advantages.

Whether the weakening of online literature monetization or the rising costs of short dramas, fundamentally, it stems from the company’s failure to build its own traffic ecosystem. Content distribution relies on third-party platforms, losing channel pricing power, and squeezing profit margins.

Continuing to “burn money”

Chinese Online’s move from domestic competition to overseas markets, betting on short dramas, aligns with current industry trends.

According to a report by Frost & Sullivan, the overseas short drama market is still in its early stages, with the market size expected to grow from 14 billion yuan in 2024 to 120.8 billion yuan in 2029, with a compound annual growth rate of 53.9%.

However, the core challenge in this sector lies in the high costs of production and customer acquisition. Industry estimates suggest that producing one overseas short drama costs about $150,000, and customer acquisition costs range from $15 to $20 per user. Conservatively, a return on investment ratio of at least 1:10 is needed to recover costs. As a latecomer in the short drama market, Chinese Online has yet to achieve scale effects and heavily depends on third-party platforms, further increasing customer acquisition costs.

In 2025, the company expects a net loss attributable to the parent of 580 million to 700 million yuan; net loss after non-recurring gains and losses is projected at 579 million to 699 million yuan. The increased losses are due to expanding overseas business and increased promotional investments, essentially “burning money” to gain market share.

In the first nine months of 2025, Chinese Online’s revenue grew 25.12% year-on-year, driven by overseas short drama platform revenue, but losses exceeded 500 million yuan. During the same period, sales and marketing expenses reached 660 million yuan, accounting for 65.28% of total revenue, a 93.55% increase year-on-year, reflecting low efficiency in “burning money” for growth.

Ongoing losses have also challenged the company’s cash flow. As of September 2025, cash and cash equivalents were about 294 million yuan, with a net operating cash flow of -164 million yuan. By the end of January this year, cash and equivalents further shrank to 239 million yuan, with bank and other borrowings at 403 million yuan.

This may be one of the key reasons Chinese Online is seeking a secondary listing in Hong Kong. The prospectus discloses five main uses of the raised funds: developing and improving AI technology, building an overseas short drama ecosystem, expanding digital content library, repaying bank and other borrowings, and supplementing working capital and general corporate purposes.

Even if the company successfully lists in Hong Kong to raise funds, if it cannot break free from the model of “burning money” to gain market share and address its ecosystem shortcomings, a secondary listing could merely turn into a new round of money-burning.