Investment highlight

Covering Shandong Publishing for the first time (601019) gives the industry a rating of outperforming, with a target price of 8.00 yuan. The company is a comprehensive publishing leader located in Shandong, ranking in the first echelon of the state-owned comprehensive publishing company. we are optimistic about the company's continuous optimization and innovation of traditional publishing and distribution business. as well as the economic and demographic advantages of Shandong Province are the stable foundation of the company. The specific reasons are as follows:

Industry situation: the development of teaching materials and auxiliary teaching has been accelerated, and the growth rate of general books has picked up. 1) Teaching materials and auxiliary industries:

The industry has rigid supply and demand and strong anti-risk ability. from 2012 to 2020, the CAGR of the industry reached 9.1%, maintaining a steady development trend. We believe that due to the release of the "second child dividend" and the transfer of teaching and training demand under the "double reduction" opinion, the development of the teaching materials and auxiliary industry is expected to be accelerated. 2) General book industry: the 2020 epidemic interrupted the continuous growth of the book retail market for more than 20 years, and the rise of new channels such as short videos further aggravated the distribution pressure of the traditional publishing industry. However, we judge that with the effective control of the epidemic and the slowing down of channel differentiation, the traditional general book industry is expected to pick up.

The highlight of the company: the auxiliary kinetic energy of teaching materials is obvious, and general books are expected to grow again. 1) Teaching materials and auxiliary business: under the "two-child policy", the number of births in 2014 in Shandong Province increased by 25% to 43% compared with the same period last year, significantly exceeding the national figure of 3% to 8%. The basic market of the company has been expanded; in 2020, the per capita consumption level of teaching materials and teaching assistance in Shandong Province is 608 yuan, which is only in the middle of the industry. We expect that the company will improve its channels and improve its product capacity or release the market potential of teaching materials and teaching assistance in the province. 2) General book business: the company's theme publishing and children's books are outstanding: in 2021, 6 topics were selected into the key theme publications of the propaganda Department of the Central Committee of the Communist Party of China, ranking fourth in the industry; its tomorrow Society has firmly ranked among the top three in the children's market in recent years. We believe that with the dissipation of the epidemic disturbance and the reduction of channel pressure in the short term, the performance pressure of the company is expected to be reduced; in the long run, the company grasps the trend and actively arranges digital publishing is expected to increase the long-term value.

Operational level: the quality of assets is healthy and high dividends bring stable returns. The company has abundant paper funds, low proportion of interest-bearing liabilities and good cash flow. The absolute amount of annual dividends has continued to increase since the company went public, and the company may maintain a higher amount of dividends in the future.

The biggest difference between us and the market we are optimistic about the potential of Shandong teaching materials and auxiliary market, as well as the company's continuous optimization and innovation of traditional business, we judge that the company's revenue and profits are expected to continue to expand.

Potential catalyst: the primary school enrollment in Shandong Province is rising rapidly, and the domestic book retail market is picking up.

Profit forecast and valuation

We estimate that the company's EPS will be 0.80 in 2023, 0.83 in 2023 and 6.6 in 2021 and 2023, respectively. For the first time, we cover the company's outperform industry rating and target price of 8.0 yuan, corresponding to 10.0 picks in 2023, and current prices correspond to 8.1 picks in 2023, with a potential upside of 22.8 percent.

Risk

The growth rate of the number of primary and secondary school students in Shandong Province is lower than expected, the pricing policy of teaching materials and teaching assistance has changed, the digital transformation is not as expected, and the epidemic has repeatedly affected book distribution.