Incident: Tianzhou Culture published its report for the third quarter of 2018. The revenue for the first three quarters reached 686 million, an increase of 32.69% over the previous year; the net profit of the mother was 182 million, an increase of 30.87% over the previous year. Among them, the third quarter achieved operating income of 280 million, an increase of 82% over the previous year; net profit of 45.6 million was achieved, an increase of 56% over the previous year. Overall, against the backdrop of adjustments in both the teaching aid publishing and mobile game industries, the company has maintained a relatively rapid growth in comprehensive profit, which is not easy.
Comprehensive education services counter the pressure of traditional teaching aids. In the past, the teaching aid business was an important source of revenue and profit for Tianzhou culture. However, starting in 2017, the entire Hunan Province began to impose very strict regulations and regulations on teaching aids entering schools, which led to a greater or lesser impact on teaching aid publishing and distribution enterprises throughout Hunan Province. Tianzhou Culture, as a leading private publishing enterprise in the province, was also affected to a certain extent. In order to cope with this situation, the company resolutely began a transformation from simple teaching aid publishing to a comprehensive education service industry. Since this year, Tianzhou Maker, a subsidiary of the company, has fully launched digital education services in the province; on the other hand, in the field of study tours, the company has also made many advances, reached cooperation agreements with top international schools, launched a number of quality study tour experience service products, which have been highly recognized by the market. Judging from the current situation, the company has completed the transformation from traditional publishing to comprehensive education services, and the “soft service+digitalization” layout is expected to further expand the education business in the future in the original teaching aid business.
The game business is stable, waiting for management policies to be liberalized. Currently, Tianzhou Culture's game business is relatively stable, and the works operated by the two core subsidiaries have maintained a relatively steady long-tail effect. However, since this year, the country's regulations on the game industry have been further strengthened, and game versions have also begun to be strictly controlled, causing great pressure on the entire game industry. Tianzhou Culture's game business was affected by this, and there have also been some adjustments. However, we believe that the pressure generated by industry regulations is short-term. In the long run, after market regulation and purification, it is beneficial to companies with high-quality R&D capabilities.
Profit forecast: Tianzhou Culture's 2018-2020 EPS is expected to be 0.24 yuan, 0.25 yuan, and 0.28 yuan respectively, and the corresponding PE is 16 times, 15 times, and 14 times. Although the game industry is currently under a lot of pressure under policy supervision, considering Tianzhou Culture's layout in the highly valued education service industry and potential further integration expectations in the future, it maintains an “increase in holdings” rating.
Risk warning: Goodwill risk due to merger and acquisition targets falling short of expectations; risk of further decline in teaching and support business; liquidity risk due to equity pledges; risk of further tightening of regulations in the gaming industry.