Matters:

On the evening of November 27, 2020, the company announced that its wholly-owned subsidiary Yunan Information plans to sell 100% of Jiangnan Xinan's shares to the four counterparties of Gongqingcheng Zhongzhi, CLP Information, Qian Information and Mary. Each transferee will pay the price according to the share ratio of the transferred shares. After the transfer is completed, the company will no longer hold shares in Jiangnan Xinan.

Guoxin Social Service's opinion: 1) Traditional business divestment is expected to gradually begin: there have been many acquisitions and transformations in the company's history, resulting in a large amount of goodwill on the report book. Among them, Kangbang Technology's net goodwill amount to 1.3 billion yuan, Study Abroad 360 (announced to be divested on the evening of December 26, 19) is 200 million yuan, and Jiangnan Xinan is 180 million yuan. The previous Wind Exchange Journal shows that in the future, with the exception of “Chinese Future+100 Years of Talents”, other traditional businesses will be divested one after another. Although business divestments can supplement capital, we still need to be wary of the risk of impairment. 2) Dou Xin plans to increase holdings to strengthen market confidence: The company announced that Dou Xin plans to increase his holdings and Chi Yanming plans to reduce his holdings of corresponding shares. If it is successfully implemented, the shareholding ratio gap between the two is expected to narrow to less than 2% in the future, demonstrating Dou Xin's confidence in the development of the language business. 3) Risk warning: termination of divestment plans, reduction of shareholder holdings, failure to gamble, impairment of goodwill, etc.; 4) Investment advice: We expect the company's overall EPS to be -0.08/0.32/0.51 yuan in 20-22. Among them, the education sector “Chinese Future+100 Years of Talents” was 0.21/0.39/0.55 yuan respectively, and the corresponding valuation of the education industry was 59/32/22x (if considering the impact of 10% increase in refinancing and the spread of equity incentives, the 20-22 EPS was 0.17/0.32/, respectively) 0.45 yuan, corresponding to a valuation of 71/38/27x). There was a significant short-term stock price correction due to several changes in the financing environment and increased competition in the K12 industry, but the company's logic did not change, maintained the mid-tier “buy” rating, and closely followed the progress of refinancing and traditional business divestments.

Comments:

It is proposed to divest Jiangnan Xinan at a price of 250 million yuan. The divestment of traditional business subsidiaries is expected to begin gradually. On the evening of November 27, 2020, the company announced that Yunan Information, a wholly-owned subsidiary, plans to sell 100% of Jiangnan Xinan's shares to the four counterparties of Gongqingcheng Zhongzhi, CLP Information, Qian Information and Ma Li. Each transferee will pay the corresponding transaction price according to their own share transfer ratio. After the equity transfer is completed, the company will no longer hold shares in Jiangnan Xinan.

If Jiangnan Xinan is unable to fulfill its performance promises, listed companies are required to pay cash compensation. The specific compensation methods are as follows. According to information disclosed in the announcement, Jiangnan Xinan's 2019-2020 Q1-3 revenue was 3476 and 32.39 million yuan respectively, and net profit was 78 and -4.11 million yuan respectively. Of these, 2020 is expected to be greatly affected by the epidemic. The agreement stipulates that the net profit achieved by Jiangnan Xinan in 2021-2023 shall not be less than 27 million, 31 million and 37 million yuan respectively, and that the cumulative net profit achieved over three years shall not be less than 95 million yuan. If the cumulative net profit achieved by the end of any fiscal year minus the accumulated excess deductible R&D expenses up to the end of that year is less than 80% of the net profit promised by the end of the year (excluding the principal amount), then the transferor and the listed company shall pay 80% compensation to Jiangnan Xinan in cash within 30 working days after the audit report for that year is issued. as follows:

Amount of compensation payable for the current period = (cumulative committed net profit up to the end of the current period* 80% - cumulative net profit realized by the end of the period - excess R&D expenses accrued up to the end of the period) * 100% - the reimbursed amount;

In 2023, when the three-year performance commitment period expires, the amount to be compensated shall be calculated according to the following method and the full amount shall be paid to Jiangnan Xinan in cash within 30 working days after the audit report for the last year of the performance commitment period is issued. The amount of compensation payable is as follows:

Compensation amount = (sum of net profit promised during the performance commitment period - sum of accumulated net profit realized during the performance commitment period - sum of excess R&D expenses during the performance commitment period) * 100% - reimbursed amount;

The traditional business divestment process is expected to begin gradually. The company has carried out many acquisitions and transformations in its history, and its historical goodwill has been extensive. In 2018, Chinese Future officially transformed into the Big Language K12 training circuit through the acquisition of the subsidiary, and the early Wind Exchange Journal shows that in the future, with the exception of Chinese Future+100 Years of Talent, other traditional business subsidiaries will be divested one after another. As of 2020H1, the net book reputation of the education informatization subsidiary Kangbang Technology was 1,283 million yuan, Study Abroad 360 (announced on the evening of December 26, 19) was 220 million yuan, and Jiangnan Xinan was 175 million yuan. In the future, the successive divestitures of traditional business subsidiaries will enable the company to have sufficient capital to develop its main education business, but at the same time, it is still necessary to be wary of the risk of impairment.

Dou Xin plans to increase his holdings in the secondary market or commodity trading to strengthen confidence. The refinancing plan progressed steadily on the evening of November 12. The company's director and CEO Dou Xin plans to increase his holdings by 6—12 million shares from the secondary market or bulk trading method in the next 6 months. During the same period, Chi Yanming, the controlling shareholder and actual controller of the company, plans to reduce his holdings by no more than 8.68 million shares through centralized bidding or bulk trading (of which 6 million were reduced in the form of bulk transactions). As of the latest announcement date, Dou Xin held 7.87 million shares, accounting for 8.39% of the total share capital (two shareholders), Chi Yanming holds 108 million shares The shareholding ratio is 12.43%, and he is still the controlling shareholder.

Considering the implementation of the early equity incentive plan (targeted issuance of 18.75 million additional shares), there will be three situations in the shareholding ratio after this reduction in holdings:

1) Dou Xin increased his holdings by the lower limit+Chi Zong did not reduce Dou Zong's holdings: Dou Xin's holdings increased by 9.82%

Taken together, Dou Xin's shareholding ratio is even closer to Chi Yanming's shareholding ratio, but it is expected that there will be no change in the actual controller, which is quite close to the situation after the implementation of the fixed increase plan in February (the plan was revised) was implemented! CEO Dou Xin's shareholding ratio increased, demonstrating confidence in the future development of the big language business. The company made many early corrections. On the one hand, it is related to the fact that the operating income growth rate under the ownership conditions of the equity incentive plan (2019 is the base, the increase of 100/200/ 350% in 21-23) was slightly lower than optimistic market expectations. On the other hand, according to policy guidelines, Dou Xin's failure to participate in this refinancing plan also had an impact on market sentiment. Mr. Dou's increase in the company's stock holdings this time responded to the concerns of the market in the early stages to a certain extent. Also, on November 25, the company's refinancing plan or exchange was accepted, and the overall refinancing pace is still progressing.

Investment advice: Wait for the refinancing plan to be implemented, and maintain the “buy” rating for the time being. We expect the company's overall EPS for 20-22 to be -0.08/0.32/0.51 yuan. Among them, the education sector's Chinese Future+100 Years of Talent 20-22 EPS was 0.21/0.39/0.55 yuan respectively, and the corresponding valuation of the main education industry was 59/32/22x (if considering the impact of 10% off refinancing and diluted equity incentives, the 20-22 EPS was 0.17/0.32/0.45 yuan respectively, corresponding to a valuation of 71/38/ 27x). Recently, due to several changes in the financing environment and large-scale financing from competitors in the K12 industry, the company's short-term stock price has recovered significantly, but the company's logic has not changed, maintaining the mid-tier “buy” rating, and closely following the progress of refinancing and traditional business divestments.