Event: Shandong Publishing released its 2018 annual report on the evening of April 13. The company's annual revenue was 9.351 billion yuan, an increase of 5.05% over the same period last year, and its annual net profit was 1.485 billion yuan, an increase of 8.8% over the same period last year, of which Q4 decreased by 9.18% in a single quarter. The company plans to pay 2.9 yuan for every 10 shares.
The expense rate is stable as a whole, and the profit margin is rising steadily. In 2018, the company's overall gross profit margin was 35.87% and net profit margin was 15.88%, slightly higher than in 2017. The three-fee rate is also basically stable compared with 2017.
The book business grew steadily, and the gross profit margin of the publishing business declined due to the influence of paper. In terms of products, the revenue of teaching materials and general books increased by 12.85% and 9.30% respectively, while in terms of business, publishing and distribution increased by 12.01% and 12.10% respectively. The gross profit margin of the distribution business is relatively stable, and the gross profit margin of the publishing business decreased 2.36pct compared with 2017, which we believe is mainly due to the increase in the cost of paper. In 2018, the company's paper material cost was 653 million yuan, an increase of 21.58% over the same period last year.
As a pillar business, the share of revenue and gross profit continues to increase. In 2018, the company's teaching materials and auxiliary income accounted for 73.1%, while gross profit accounted for 74.71%. The contribution of teaching materials and teaching aids to the overall business shows an increasing trend.
The proportion of dividends continues to rise. The company's proposed dividend in 2018 amounts to 605 million yuan, accounting for 40.74% of the net profit returned to the mother. In 2017, the proportion of dividends was 33.63%, which improved 7.11pct.
Good cash position, no goodwill impairment, debt repayment, pledge and other risks. The company has plenty of cash on hand, 5.033 billion yuan in 2018. There is currently no goodwill, interest-bearing debt or pledge, so there is no associated risk.
The improvement of the business performance of teaching materials and teaching aids depends on the increase of population in the long term, the increase of permeability, the increase of profit proportion and the decrease of cost in the medium and short term.
Shandong is the top three populous province in the country, with a strong desire to have children. The new-born population has increased significantly since 2016, and the new-born population has led the country for two consecutive years from 2014 to 2017, which may be good for the company's teaching materials and auxiliary business after 2020.
The correction in paper prices is good for the publishing business. Paper prices began to rise sharply at the end of 2016, and a sharp correction after peaking in April 2018 is expected to gradually increase the company's profits, but because the paper cost accounts for a low proportion of publishing revenue and the publishing business accounts for a low proportion of the company's business, so the impact of paper prices is limited. We estimate that for every 10% reduction in paper price cost, the performance elasticity to Shandong Publishing is close to 4%.
Profit forecast and investment advice: we predict that the revenue of Shandong Publishing from 2019 to 2021 will be 10.128 billion yuan, 10.82 billion yuan and 11.525 billion yuan respectively, an increase of 8.31%, 6.83% and 6.52% over the same period last year, and the net profit will be 1.633 billion yuan, 1.763 billion yuan and 1.895 billion yuan respectively, up 9.96%, 7.95% and 7.49% respectively over the same period last year. The corresponding EPS from 2019 to 2021 is 0.78,0.84,0.91 yuan respectively.
Risk tips: rising paper prices; depression in the publishing industry; transformation and upgrading do not meet expectations; dividends do not meet expectations; market risk preference downside risk.