Performance review
2Q23 performance fell slightly short of our expectations
The company's revenue increased 2% to 446 million yuan in 2Q23; net profit at the same time increased 0.3% to 48.81 million yuan, and after deducting non-net profit, it also fell 10% to 49.9 million yuan. The company's performance was slightly lower than our expectations (revenue of 480 million yuan, net profit of return to parent of 55 million yuan). We believe that: 1) the actual recovery pace on the demand side was slightly slower than expected, so revenue performance was relatively lackluster; 2) there is still some pressure on online channel discounts, affecting gross margin levels.
Development trends
Although income is relatively lackluster, individual performance is superior to that of the market, and market share is gradually increasing. The company's 2Q23 revenue increased by 2%. We believe this is mainly due to: 1) the bookstore business began to be adjusted in the second half of last year, and the first half of the year was still on a relatively high base; 2) readers' reading demand was affected by the macro environment and is still recovering. According to open statistics, the size of the domestic book retail market in 1H23 fell by 2.41%. From the perspective of the company's individual competitiveness, 1H23 achieved a good breakthrough. According to the company's announcement, in terms of market share in Shiyang, the company's overall increase was 0.48ppt to 3.47%, ranking first among publishing organizations. Among them, management, children, psychological self-help, and biographical categories increased by 0.43/4.32/1.01/0.74ppt, respectively, over the same period last year, ranking first in all categories. At the same time, the company is also increasing investment and publishing efforts in the field of art and animation, and is collaborating with IPs such as “China's Qi Tan” to plan a variety of best-selling books. We believe that in the book publishing and distribution business, the company has a stable leading position in mass publishing, continues to improve operational efficiency, and is expected to maintain competitiveness; in the bookstore business (cultural consumption), the company takes fine management of offline bookstores, places emphasis on profit realization when opening new stores, and is hopeful that profit levels will gradually increase in the future.
Expected gross margin is still slightly affected by channel discounts, and cost control is better. The company's 2Q23 gross margin dropped 1.1/0.7ppt to 35.00% at the same time. We think it is still slightly affected by discount pressure from online channels (live e-commerce), etc. The company's 2Q23 sales/management/R&D fee rate was reduced by 2.5/0.7/0.8ppt, and overall control was good.
Key bibliographies have been launched one after another, and AI technology empowerment continues to advance. In terms of key bibliography for the second half of the year, three books in the “30 Thousand Mile to Changan” official series were sold in July: a collection of settings, a selection of poems, and a collection of art paintings driven by film and television content, and sales were good. There are also “The Oppenheimer Chronicles” (a new translated version, released with the movie), “Valuable Life Advice”, etc. In terms of AI technology, the company said it is already exploring how to re-engineer the publishing process to reduce costs and increase efficiency. The company has now set up a “parallel publishing laboratory” and launched the “AIGC Digital Publishing Project”. A product production and promotion system co-built by AI has been basically set up, and the AIGC digital publishing integration tool platform has been opened for trial use by internal editorial teams. Furthermore, the company also stated that it has launched a set of science fiction novels (three volumes in total) supported by AIGC throughout the process. We believe that the company uses AIGC to promote the re-engineering of the entire publishing process, and is expected to further improve industrial efficiency in the future.
Profit forecasting and valuation
The 23/24 return net profit forecast remains unchanged. The current stock price corresponds to 30/25 times 23/24 P/E.
It maintained an outperforming industry rating and target price of $33.3 (35 times P/E in 2023), with 15% upside.
risks
The recovery in demand for books has fallen short of expectations, increased channel competition, the impact of new media, poor intellectual property protection, changes in preferential tax policies, the risk of rising paper prices, and the process of exploring new technologies has been slow.