Main points of investment:

2018H1 revenue, performance growth is solid, Q2 single-quarter growth back to the right track. In 2018, H1, the company achieved operating income of 4.1 billion yuan, an increase of 7.6% over the same period last year, a net profit of 340 million yuan, an increase of 6.4% over the same period last year, and a net profit of 330 million yuan, an increase of 6.6% over the same period last year. The gross profit margin and net profit rate of the company in the first half of the year were 28.9% and 8.4% respectively, which remained generally stable over the same period last year. Among them, Q2 achieved operating income of 2.51 billion yuan in the single quarter, an increase of 11.5% over the same period last year; net profit of 270 million yuan, an increase of 14.5% over the same period last year; and non-return net profit of 250 million yuan, an increase of 15.0% over the same period last year. In the first quarter, the company was affected by the expiration of the VAT exemption policy of its issuing Group Co., Ltd., and its revenue and performance declined, but according to the notice on the continuation of the preferential Policy of Cultural VAT issued by the Ministry of Finance and the State Administration of Taxation, from January 1, 2018 to December 31, 2020, the company's publications in accordance with the provisions of the document enjoy the preferential policy of levying VAT first and then withdrawing it. As a result, Q2 revenue and net profit are back on track.

Mass publishing has achieved high growth, and "going out" has achieved good results. During the reporting period, the company's publishing business achieved revenue of 750 million yuan, an increase of 14.1% over the same period last year, and the gross profit margin of the publishing business was 32.4%, down 1.63% from the same period last year. In the first half of the year, the company's general book publishing revenue reached 130 million yuan, an increase of 51% over the same period last year, becoming an important engine for driving the high growth of the publishing business. In the first half of the year, a variety of books published by the company were affirmed by the government and the market, including 45 national key publications in the 13th five-year Plan, 36 varieties of animation publication "Conan Series" and more than 240000 copies. In addition, during the reporting period, the company's publication "going out" made another success. The company organized publishers from Sri Lanka, Bangladesh, Pakistan and Mongolia to hold copyright trade negotiations with publishing units, and signed 143 copyright export projects. Classic China International Publishing Project, Silk Road Shuxiang Publishing Project, Chinese Foreign Translation and Publishing Project reported a total of 187 projects, a record high.

Teaching aids and teaching materials distribution to maintain a sound online channel is a bright spot of growth. The revenue of 2018H1's issuance business reached 2.53 billion yuan, an increase of 10.1% over the same period last year, accounting for 61.7% of the total revenue. Among them, the income from the distribution of teaching materials is 2.04 billion yuan, an increase of 11.5% over the same period last year, accounting for 80.7% of the distribution business. Teaching materials and auxiliary sales are still the most important part of the company's distribution business. With the rapid development of digital content, some physical books are obviously impacted by electronic publications, while teaching materials are mainly used by students, and many domestic examinations, including the college entrance examination, are paper papers. Therefore, the sales of teaching materials are less affected by new media, and we expect the company to maintain steady growth in the distribution of teaching materials in the future. In terms of distribution channels, the company's online e-commerce platform developed well. During the reporting period, the company's e-commerce platform Yunshu online and offline achieved sales of 377 million yuan, an increase of 72.9% over the same period last year. We believe that under the background of the slowdown in the growth of physical bookstores, the active expansion of the company's online bookstore channels is expected to become a new growth point of the company's distribution business in the future.

Integration and development is getting better and better. New business type is ready to go. During the reporting period, the company strengthened the layout of digital publishing and education, and made great progress. 1) the aggregation function and application integration capability of ADP5 publishing platform have been further improved. At present, it has the capabilities of unified payment and unified big data analysis. The docking of data and resources between the platform and various subsystems is being intensified. We believe that, as the core of the company's digital publishing layout, the growth of the ADP5 platform will provide a new driving force for the company's publishing business. 2) A breakthrough has been made in the promotion and application of "Elephant examination and Teaching Evaluation Service system V2.0", serving more than 900,000 users; "Elephant Wisdom question Bank" has completed product development. "Elephant e-learning" and other content resource ports to achieve organic docking. The comprehensive education service system has been initially built. We believe that in the context of the slowdown in the growth of traditional publishing and distribution business, the active promotion of the company's education and digital content transformation business is expected to improve the company's performance and valuation flexibility in the future.

Profit forecast and investment advice. We expect the company's EPS to be 0.79,0.86,0.96 yuan per share respectively from 2018 to 2020, and refer to the publishing industry Changjiang Media, Wanxin Media and Xinhua Wenxuan to expect PE to be 10 times, 12 times and 12 times respectively in 2018. We give the company a range of 10-12 times PE in 2018, corresponding to a reasonable value range of 7.90-9.48 yuan per share, giving the company a better rating than the big market.

Risk hint. The risk of decline in the main business of publishing and distribution, and the risk that the distribution of education is not as expected.