The company released its annual report in 2018, with operating income of 10.363 billion yuan, down 7.74% from the same period last year, and the net profit of shareholders belonging to the parent company was 733 million yuan, an increase of 19.45% over the same period last year. We are optimistic that the company's book publishing and distribution business will maintain a steady growth rate and maintain the company's buy rating.

Support the main points of rating

The main business of publishing and distribution is growing steadily, and it can be expected in 2019. In 2018, the company's publishing business income was 1.943 billion yuan, an increase of 12.53% over the same period last year, and the gross profit margin decreased 0.84 percentage points to 34.02%. The distribution business income was 3.021 billion yuan, an increase of 10.76% over the same period last year, and the gross profit margin rose 1.58% to 31.38%.

Among them, the income from teaching materials and general books increased by 12.37% and 26.71% respectively over the same period last year, both higher than the overall growth rate of books in 2018 released by open-book data (11%). Based on the tightening of the book number and the company's active teaching and marketing, we judge that the market share of the company in Hubei province is expected to continue to increase.

Bookstore upgrading and multi-format innovation to open up new growth points. In 2018, the company actively promoted the upgrading of physical bookstores. The business format of "Book + Coffee + Cultural Life + Cultural Salon + Life elements" was comprehensively distributed in the province, and campus bookstores and community bookstores were promoted rapidly. The company's multi-format innovation has achieved certain results. In 2018, the revenue of cultural, educational and multi-cultural and creative business increased by 62.92% and 26.80% respectively compared with the same period last year, and the revenue of e-commerce business increased by 351.12%. Educational equipment, educational information products and cultural and creative business in 2019 are expected to bring more performance contributions.

Take the initiative to substantially reduce the bulk trade business with low gross profit margin, and the gross profit margin and net profit margin have increased significantly.

In 2018, the company took the initiative to reduce the bulk trading business with low gross profit margin by 2.6 billion yuan, and further focused on the main business of cultural media, so that the gross profit margin increased by 3.07% year-on-year to 18.17%, and the net profit margin increased by 1.64% to 7.28% year-on-year. It also reduces the risk of asset impairment such as inventory decline. The net cash flow generated by the company's operating activities in 2018 was 479 million yuan, up from 176 million yuan in 2017, and the cash flow and asset quality improved significantly.

Valuation

We are optimistic that the company's book publishing and distribution business will maintain a steady growth rate, and the bulk trading business assumes that there will not be a sharp decline. The company is expected to achieve a net profit of 8.68,9.81 and 1.069 billion yuan from 2019 to 2021, with earnings per share of 0.72,0.81 and 0.88 yuan (the original forecast is 0.73 trillion). The price-to-earnings ratio for the current stock price is 10.3,9.1 and 8.3 times respectively. Maintain the company's buy rating.

Main risks faced by rating

Book sales are slowing down.