Summary of Key Points
As a traditional leading film and television company, Huace Film and Television has faced weak growth in its live-action drama business (with a decline in core film and television gross margins and a significant drop in net profit after deducting non-recurring items). As a result, it has decided to take a bold gamble on the AI sector: spending 3.3 billion yuan on purchasing computing power servers to enter the computing power business, investing 400 million yuan to establish an AI fund to build up the industry chain, and collaborating with technology companies on AI-driven dramas, in an attempt to create a closed-loop of "computing power + technology + content." However, this path is fraught with high risks—tense cash flow (the expenditure of 3.3 billion yuan far exceeds annual revenue), competition from larger companies in the computing power market, a short-term duration of the AI fund making it difficult to exit, and inherent technical flaws in AI content, as well as market uncertainties, making it a risky gamble with little room for error.
Detailed Analysis
1. Huace's AI Closed-Loop: From Hardware to Content, Aiming to Dominate the Entire AI Video Chain
Huace's AI strategy is not a single attempt but a comprehensive approach:
- First, purchasing computing power (3.3 billion yuan for servers): This addresses the "hardware foundation" required for AI operations—computing power is like the "engine" of AI; more power means better performance and the ability to handle complex videos. By acquiring 29,000 PUs of computing power, Huace can reduce the cost of producing its own AI dramas and also rent out the servers to other companies for rental income (with revenue from server rentals amounting to 126 million yuan in 2025 and a gross margin of 36%).
- Then investing in a fund (400 million yuan): By setting up an AI fund, Huace takes stakes in upstream technology companies, such as those developing video models and virtual human technologies, effectively becoming a "channel distributor" of AI technologies.
- Finally, creating content (AI-driven dramas): In collaboration with Utopai, Huace is producing the long animation "Journey to the West: The Lost 500 Years," utilizing AI to turn its computing power and technology into actual products. This closed-loop seems perfect, covering all aspects from hardware to technology to content, but each step poses its own challenges.
2. The 3.3 Billion Yuan Computing Power Business: Expenditure Exceeds Annual Revenue, Straining Cash Flow
Huace's total revenue for 2025 was only 2.828 billion yuan, yet it spent 3.3 billion yuan on servers, which means using more than a year's worth of revenue just on hardware. The immediate consequences include:
- Cash flow crisis: In the first quarter of 2026, the operating cash flow was -3.302 billion yuan (spending 330 million yuan more than it earned), a three-fold increase in losses compared to the same period last year. This is mainly due to the need to pay in cash for servers, while revenue from selling computing power and dramas is slow to come in.
- Competition from giants: Giants like Alibaba Cloud and Tencent Cloud offer cheaper computing power services due to their larger scale and lower costs. Huace can only take on small orders from smaller companies, leaving it with little room for price increases and likely leading to a decline in gross margins.
- Annual depreciation: Servers become obsolete after one year, resulting in annual losses—equivalent to investing in assets that gradually depreciate, imposing high long-term costs.
3. The 400 Million Yuan AI Fund: A Tight Five-Year Timeline, with Limited Possibilities for Recovery
The AI fund established by Huace has a lifespan of only five years, which is relatively short for AI investments (typical projects take at least six to ten years from development to profitability). This means:
- Limited investment period: The 500 million yuan must be invested within three years, leaving little time to carefully select projects and increasing the risk of investing in poorly performing companies.
- Short exit period: Projects must be monetized within two years (either by selling to other companies or going public), but many AI companies are not yet profitable at this stage, forcing Huace to sell them at lower prices and significantly reducing potential returns. In essence, this fund acts as a time limit, forcing Huace to make quick decisions with little room for mistakes.
4. AI Content: Technical Issues and Uncertainty in Audience Acceptance
Huace's collaboration with Utopai on the long AI animation, touted as "China's first large-scale fully AI-driven project," faces several challenges:
- Technical flaws: AI-generated videos often have issues such as discontinuous visuals, inconsistent character sizes, and logical inconsistencies, making it costly to produce high-quality content.
- Market risks: The entry barrier for AI short-form dramas is low, and there is an abundance of such content. Huace's investment in long AI dramas may not result in higher prices from platforms, and there is uncertainty about audience acceptance of AI-generated content, prolonging the payback period.
- Technical shortcomings: Although Huace excels in content production, it lacks expertise in large model training and computing power management, and its cost control is inferior to that of technology companies. For example, tech companies may achieve similar results with less investment.
5. Is Huace's Bet on AI a Last Resort or a Wise Move?
Huace's transformation is not voluntary but a result of the industry's changing landscape:
- Deteriorating industry conditions: Once a hub for film and television production, Hengdian now has only a few low-cost projects in production, indicating a shrinking live-action drama market. Huace's core film and television business saw a 8.85% decline in gross margins and an 87.64% drop in net profit after deducting non-recurring items, indicating that its traditional business is no longer sustainable.
- Is AI the only saving grace? While AI offers potential opportunities, Huace's approach is aggressive and capital-intensive (3.3 billion yuan for hardware) with significant risks in case of failure. In contrast, some short-form drama companies use AI as a supplementary tool (e.g., for scriptwriting or video editing), mitigating the risks.
Huace's problem lies in its lack of technical expertise as a film and television company attempting to dominate the entire AI ecosystem, akin to an outsider trying to compete with professionals.
Conclusion
Huace's bold bet on AI represents the dilemma faced by traditional film and television companies in the face of technological change: failing to adopt AI could lead to demise, but doing so might also result in failure. Every step—3.3 billion yuan for servers, 400 million yuan for the fund, and investment in AI dramas—is fraught with risks. The outcome of this gamble depends not only on technological progress but also on Huace's ability to manage cash flow, avoid competitive pitfalls, and attract audience interest in AI content. For the broader industry, this situation highlights a trend where AI is reshaping the film and television industry, but not all companies will be able to seize the opportunity; those that follow blindly may suffer even more.