2Q23 performance meets our expectations
The company announced 1H23 results: revenue of 6.77 billion yuan, same increase of 8.2%; net profit of 971 million yuan, same increase of 16.5%; net profit of 931 million yuan, same increase of 6.1% after deducting non-net profit of 931 million yuan. At the same time, 2Q23 results were announced: revenue of 4.106 billion yuan, an increase of 6.5%; net profit of 623 million yuan, an increase of 10.7%; net profit of 600 million yuan after deducting non-net profit of 600 million yuan, an increase of 5.4%. The company's 2Q23 performance was in line with our expectations.
Development trends
The distribution sector performed well, and the publishing sector was doing well. The company's 1H23/2Q23 revenue increased by 8.2%/6.5% respectively to 6.770/4.106 billion yuan. By business, the revenue of the company's 1H23 distribution division also increased 13.1% to 5.824 billion yuan, which is a good performance. We judge that it is mainly the company: 1) continues to develop the education service market, with sales revenue of the “four-dimensional reading” series products being 242 million yuan; 2) focusing on developing the middle vocational higher education market and building the “Red Classroom” research brand. In the publishing division, the company's 1H23 revenue also increased 9.6% to 1,596 million yuan. We believe that among them, the textbook teaching aid business grew steadily along with the gradual release of the “two-child dividend”; the general book business, benefiting from incremental impetus such as “four-dimensional reading,” the company's 1H23 general book publishing business also increased 17.1% to 279 million yuan, with good business performance. In terms of gross margin, the company's 1H23/2Q23 gross margin fell by 2.4/1.4ppt to 41.4%/41.1%, respectively. We determined that this was mainly due to the adjustment of transportation expenses related to performance obligations under the new revenue standards to operating costs.
Increased promotion fees drive sales rates and operational efficiency; investment income boosts profit growth. In terms of expenses, the company's 1H23/2Q23 sales rates were reduced by 1.6ppt to 14.3%/14.2%. Considering the reimbursement of transportation expenses adjusted by the new revenue guidelines, the sales rate increased slightly during the company period. We determined that the main reason was that the company increased general book promotion expenses; the company's 1H23/2Q23 management rate decreased by 0.4/0.5ppt to 11.7%/11.4%, respectively. We determined that it was mainly due to the continuous optimization of the company's operating capacity. In terms of non-recurring profit and loss, 1H23/2Q23, the company achieved a total net investment income plus fair value change income of 7,442/44.25 million yuan (loss of 35.46/29.68 million yuan in the same period last year). We judge that the market performance of transactional financial assets held by the company is mainly good; considering that the company has disposed of most of the highly volatile stock assets, we believe that future fluctuations in related accounts are expected to decrease. Overall, the company's net profit for 1H23/2Q23 decreased by 16.5%/10.7%, respectively, to 971/623 million yuan.
Restructure the multi-point product layout and continue to promote integrated publishing. In terms of new products, after the “double reduction” policy, the company promoted the transformation of market-based teaching aid products to quality products. Currently, it has developed a “youth reading book series” and a “four-dimensional reading” series of products. Furthermore, in response to demand after school at 3:30, the company has launched and continues to iterate on the “Smart Fun New After-Course” platform. In terms of integrated publishing, the company Tianwen Digital Media, Shell Network, and Zhongnan Xunzhi's multi-product matrix continued to advance. As of 1H23, the number of registered users of the Zhongnan Xunzhi mobile app exceeded 5.6 million, an increase of 350,000. We believe that accelerating the company's business restructuring and transformation will help build its core competitiveness and is also expected to lay the foundation for long-term stable development.
Profit forecasting and valuation
Thanks to improved operating capacity and better financial asset performance, we increased our net profit for 2023/2024 by 5%/6% to $1,604/1,751 million. The current stock price corresponds to 13.6/12.4 times P/E 2023/2024. Maintaining an outperforming industry rating, in order to better compare with industry companies, we switched from the DCF valuation method to the P/E valuation method. Due to profit adjustments, the target price was raised by 9.2% to 14.3 yuan, corresponding to 16.0/14.7 times P/E in 2023/2024, with an upward space of 17.9%.
risks
Policy changes related to the textbook teaching aid business have fallen short of expectations, and digital transformation has fallen short of expectations.