Event

The company realized operating income and net profit of 5.572 billion yuan and 467 million yuan in the first three quarters of 2017, up 9.84% and 1.95% respectively over the same period last year.

Comment

Revenue and profits keep growing, and the company's fundamentals are stable. The company's revenue grew by 9.84% in the first three quarters, and its publishing, distribution and material sales business all grew steadily. Among them, the material sales business with low gross margin grew faster and the proportion of revenue increased, while the cost of paper continued to rise, so that the growth rate of net profit was 1.95% lower than that of revenue, and the gross profit margin decreased by 0.62 percentage points to 8.44% compared with the same period last year. The rates of sales expenses and management expenses were 10.41% and 10.78% respectively, with a decrease of 0.28 and 0.24 percentage points respectively. Inventory turnover and accounts receivable turnover were 3.69 and 4.53 respectively, with a decrease of 0.07 and 0.29 percentage points. The operating fundamentals of the company remain stable.

The demand for teaching materials and auxiliary teaching is conducive to the long-term growth of the main industry, and digital publishing provides performance flexibility. Henan is a populous province, according to statistics, the birth rate has shown an increasing trend in the past five years, which is expected to continue to rise under the stimulation of the two-child policy, promoting the long-term growth of the number of students in school and the demand for teaching materials and auxiliary teaching materials. The company's teaching materials and auxiliary business is mainly concentrated in Henan, accounting for more than 60% of revenue, and will continue to benefit from downstream demand. At the same time, the company strengthens the layout of digital publishing, actively promotes the ADP5 publishing platform, strengthens the research on the industrial application of ISLI standards, lays the foundation for digital publishing, and provides greater flexibility for the company's long-term performance growth.

The main business continues to grow, highlighting the advantage of undervaluation. In 2017, the company had PE15 times and PB1.5 times, and its PE valuation, excluding cash, was only 11 times, a three-year low and one of the lowest valuations among publishing companies. Taking into account the long-term upward prosperity of the main business and the flexibility of new business, its low valuation advantage is more obvious.

Investment advice: the company's main business benefits from demand growth, with high certainty of marginal performance improvement, highlighting the advantage of current undervaluation. The company is expected to make an 18-year net profit of 7160.80 billion yuan, emphasizing medium-and long-term value, maintaining its target price of 14 yuan and a "buy-A" rating.

Risk hint: the progress of digital upgrading and education business development is not as expected.