2Q23 performance meets our expectations

The company announced 1H23 results: revenue of 5.225 billion yuan, same increase of 6.9%, net profit to parent of 884 million yuan, same increase of 3.7%, excluding non-net profit of 833 million yuan, same increase of 7.5%; of these, 2Q23: revenue of 3,053 million yuan, same increase of 7.1%, net profit of 683 million yuan, same increase of 5.2%, net profit of 683 million yuan, same increase of 5.2%, net profit of 660 million yuan, same increase of 11.9%. The company's 2Q23 performance was in line with our expectations.

Development trends

The main business is developing steadily, and all businesses are progressing in an orderly manner. The company's 1H23/2Q23 revenue increased by 6.9%/7.1% respectively to 52.25/3,053 billion yuan. By business, the company's publishing business increased by 12.1% to 1,685 billion yuan. Overall performance was excellent. We judge that the main reason is that the company continues to strengthen its “double product, double effect” strategy:

In terms of books in general, the company has continuously optimized the best-selling book product line and created a best-selling book matrix. According to the opening data, 1H23's ranking in the national book retail market increased by 3 places compared to the same period; in terms of textbooks and teaching aids, the company continued to enrich education publishing products, and 1H23 added 42 related varieties. The distribution business of 1H23 also increased by 5.4% to 3,006 billion yuan. Among them, we determined that the overall distribution of textbooks and teaching aids was stable. Thanks to the strength of the company's short video channel, book distribution may have brought about a certain increase. According to the opening data, 1H23's short video channel has a share of 3.23%, ranking seventh, and the rise in ranking is quite obvious.

Costs and expenses are well controlled, and a high base of non-recurring profit and loss slightly reduces profit growth. In terms of costs and expenses, the company's gross margine/sales rate/management rate 1H23 changed -1.2/-0.2/+0.2ppt, respectively, and 2Q23 changed -0.2/-0.1/+0.0ppt, respectively, year-on-year, respectively, and remained stable. In terms of non-recurring profit and loss, due to related land expropriation, 1H22 recorded $36.99 million in non-current asset disposal revenue, and 1H23 related revenue was 4.81 million yuan. The high base during the same period slightly affected the company's profit growth rate. Overall, the company's net profit from 1H23/2Q23 increased by 3.7%/5.2% to 894/683 million yuan respectively; after deducting non-net profit, the company's 1H23/2Q23 increased 7.5%/11.9% respectively to 833/660 million yuan.

Digital publishing continues to advance, and there is plenty of cash on hand, and steady dividends are expected to continue. In terms of digital publishing, 1H23 is promoting the digital transformation and upgrading of education publishing in an orderly manner, developing and constructing the “Assignment+Academic Information Diagnosis Big Data Feedback” project, which has been piloted in relevant prefecture-level cities. At the same time, the company has built a “Shandong Publishing Digital Textbook Service Platform for Primary and Secondary Schools”, which has entered the stage of integrated testing and performance optimization. We believe that the company continues to accelerate its digital transformation and is expected to shape its medium- to long-term competitiveness in the field of education publishing. In terms of dividends: As of 1H23, the company's monetary cash and transactional financial assets totaled 9.599 billion yuan. Considering the steady operation of the company's main business, we expect the company to pay attention to shareholders' interests, maintain a steady level of dividends, and continue to return to shareholders.

Profit forecasting and valuation

The net profit forecast for 2023/2024 remains unchanged, and the current stock price corresponds to 10.6/10.0 times P/E for 2023/2024. Maintaining the outperforming industry rating, considering the upward shift in the industry valuation center, the target price was raised by 12% to 11.2 yuan, corresponding to 13.0/12.2 times P/E in 2023/2024, with an upward margin of 22.3%.

risks

Changes in textbook teaching aid policies, the risk of rising paper prices, potential goodwill impairment may be calculated or affect profits.