As the chief distributor of primary and secondary school teaching materials in Shandong Province, the company also has the exclusive publishing rights of several categories of primary and secondary school teaching materials in Shandong Province; it has long been based on the advantages of publishing resources, distribution network, logistics guarantee, professional services and other advantages. always maintain the status of the largest textbook publisher in Shandong Province. In 2018, the company was selected into the "2018 Chinese Culture Enterprise Brand value TOP50" list, ranking 32th with a brand value of 1.169 billion yuan; according to the 2017 Press and Publishing Industry Analysis report, the company's controlling shareholder, Shandong Publishing Group Co., Ltd. ranked seventh in the National Book Publishing Group. In 2018, the operating income was 9.35 billion yuan, and the net profit of YoY+5.05%; was 1.485 billion yuan. The general book publishing business of YoY+8.80%, grew rapidly, with sales code of 1.08 billion yuan, YoY+20.77%, contributed 475 million yuan of operating income, and YoY+22.31%, gross profit margin of 34.37%, increasing 0.47pct.

The publishing industry supports the continuation of policies, teaching materials and auxiliary business stability, general book structural growth. The publishing and distribution industry is a key industry supported by the national policy, which enjoys the preferential policies uniformly formulated by the state in the aspects of finance and taxation. In June 2018, the Ministry of Finance and the State Administration of Taxation issued the Circular on the extension of the preferential policies of value-added tax on Culture, clearly extending the preferential policies of value-added tax in the publishing and distribution links before the end of 2020. In December 2018, the General Office of the State Council issued the Circular on Printing and issuing the two provisions on the Transformation of for-profit Cultural institutions into Enterprises and further support for the Development of Cultural Enterprises in the Reform of the Cultural system, it is clear that cultural enterprises that have completed the transformation will continue to be exempted from enterprise income tax for five years from 2019. According to open-book data, the total size of China's book retail market in 2018 is 89.4 billion yuan, and the growth of children's books in YoY+11.3%, has been stronger than that of the industry for two consecutive years, with an industry growth rate of 21.4% and 13.7% respectively in 17 and 18 years. At present, sales code accounts for 25.19% of the entire book retail market.

The company operates on the basis of Shandong Province, which is a populous province and a major education province, giving full play to the advantages of the whole industrial chain, effectively reducing internal transaction costs and improving business efficiency. By 2017, Shandong Province had more than 12.03 million primary and secondary school students, and the local education expenditure was about 190 billion yuan, accounting for 20.4% of the total local financial expenditure; the company's main business covers the whole industry chain of publishing, distribution, material trade and printing, and its business layout is comparable to that of other domestic head publishing group companies. Its publishing subsidiaries such as tomorrow Society, Education Society, people's Society and Science and Technology Society have advantages and strong competitiveness in the stage of publishing all-age education content, such as preschool education, primary and secondary education, higher education and continuing education, vocational education and so on.

Investment suggestion: the company's industry is growing steadily and its cash flow is good. As a large provincial publishing group operating steadily in the whole industry chain, the core teaching materials business is based on the population base and a large province of education expenditure. At the same time, it has made some achievements in the development of general book business. Since listing, the company has maintained a high dividend level, with a cash dividend ratio of 40.76% in 2018 and a dividend yield of 3.25% based on the stock price on the date of release of the annual report. We expect the company's net profit from 2019 to 2021 to be 1.62 billion yuan, 1.78 billion yuan and 1.89 billion yuan respectively, corresponding to EPS0.77 yuan, 0.85 yuan and 0.91 yuan respectively. With reference to comparable companies in the industry, we give the company a 15x valuation in 2019 and a "buy-A" rating corresponding to the target price of 11.7 yuan in 2019.

Risk hints: the expiration risk of preferential tax policies, the risk of bidding for the distribution of teaching materials, and the expansion of general books is not as expected.