On August 24, Zhongnan Media released its semi-annual report for 2023. In the first half of 2023, the company achieved operating income of 6.77 billion yuan, an increase of 8.23% over the previous year; net profit of 971 million yuan, an increase of 16.53% over the previous year; deducted non-net profit of 931 million yuan, an increase of 6.10% over the previous year. In 2023Q2, the company achieved operating income of 4.106 billion yuan, an increase of 6.52% over the previous year; net profit of 623 million yuan, an increase of 10.70%; and non-net profit of 600 million yuan after deducting non-net profit of 600 million yuan, an increase of 5.42% over the previous year.

The leading publishing position is stable, and the distribution business drives performance growth. According to volume opening monitoring data, in the first half of 2023, the company's share in the national comprehensive book retail market increased by 0.4pct to 3.52% year-on-year, ranking second in the country. Among them, the company ranked first in the comprehensive essay and art section, and ranked second in the psychological self-help, biography, family education, and popular science sections. It has obvious advantages in the publishing business. By business, in the first half of 2023, the company achieved revenue of 5824/1,596 billion yuan in the distribution/publishing sector, with a year-on-year increase of 13.06/ 9.63%, respectively. In terms of distribution, the company continues to boost the education service market. In the first half of 2023, Xinhua Bookstore in Hunan Province achieved revenue of 4.918 billion yuan, a year-on-year increase of 13.01%, a year-on-year increase of 13.01%, and net profit of 652 million yuan, an increase of 12.41% over the previous year.

Under the new revenue standard, gross margin declined slightly, and cost control was continuously optimized. In the first half of 2023, the company's gross sales margin fell slightly by 2.41pct to 41.41%. The main reason was that the company adjusted transportation expenses related to performance obligations to operating costs in accordance with the new revenue guidelines, which led to an increase in operating costs. In the first half of 2023, the company's sales/management/financial expenses ratio was 14.28/11.67/ -0.52%, respectively, compared to -1.57/-0.44/+0.44pct, with good cost control. Considering that the company's performance continues to grow, expenses are well controlled, and cash on hand (total cash and cash equivalents as of the end of 2023H1 were 8.239 billion yuan), future dividends are expected to be stable.

Promoting digital transformation and upgrading, the digital education sector has performed well. Tianwen Digital Media, a subsidiary of the company, relies on the big data system of the ECO Cloud open platform to achieve a smart education ecosystem covering the whole process of teaching, learning, management, evaluation and testing. By the first half of 2023, Tianwen Digital Media's digital education products had entered 25 provinces, 174 prefecture-level cities, 646 districts and counties across the country, and various products served more than 10,000 schools. Shell Network is actively transforming and upgrading, focusing on building a smart cloud platform for Hunan education. Zhongnan Xunzhi is focusing on developing education quality monitoring and examination services, using paper media such as examination papers and teaching aids as traffic entry points, and focusing on building products such as examination paper reading systems and examination evaluation systems. As of the first half of 2023, the number of registered users of the Zhongnan Xunzhi mobile app exceeded 5.6 million, an increase of 350,000 over the previous year.

Maintain a highly recommended investment rating. Maintain a “Highly Recommended” investment rating. Considering the company's stable leading position in the publishing and distribution industry and the impressive performance of the digital education sector, we expect to achieve net profit of 1,69/18.20/1,905 million yuan respectively in 2023/2024/2025, corresponding to 12.6/11.8/11.2 times the valuation, and maintain a “highly recommended” investment rating.

Risk warning: The risk of new media technology impacting traditional publishing businesses, the risk of business transformation falling short of expectations, and the risk of intellectual property infringement.