3Q23 performance is lower than we expected.

The company announced 3Q23 results: revenue was 413 million yuan, down 14% from the same period last year; net profit from home was 35.44 million yuan, down 28% from the same period last year, lower than we expected. We believe that this is mainly due to the weaker-than-expected overall recovery on the revenue side and slightly higher-than-expected sales and administrative expenses.

Trend of development

The demand of the book market recovers slowly due to the influence of the external environment, but the company's leading position in the subdivision track is relatively stable. According to the open-book data, the national book retail market fell by 1.04% in the first three quarters of this year compared with the same period last year, and the overall market performance is still relatively weak due to weak consumption. From the perspective of market share, the company's real foreign market share in the first three quarters increased to 3.28% compared with the same period last year, ranking first in economic management, children and other advantageous areas, and there are good bibliographies in related fields within the quarter: among the non-fiction categories, the Legend of Elon Musk (the new book in September) ranked third in the non-fiction retail sales list in September, and "believe" ranked eighth in August / September. Among children, "tantrum Little Monster (all 4 volumes)" ranked 6th / 9th in 7-8-9, while "starting to learn rules at 5" and "Safety at 5" ranked 18th / 19th in August, respectively.

The expenditure is slightly higher than expected, or related to the rhythm of the launch of new books, investment in new technology development, and so on. The company's 3Q23 sales expense rate increased by 0.63/1.65ppt to 18.3% month-on-month, which we think may be related to the company's promotional expenses such as the September book "the Legend of Elon Musk" and the August book "Biography of Oppenheimer."

The rate of 3Q23 R & D expenditure increased by 0.39/0.04ppt to 0.73% month-on-month, which we believe is mainly due to the company's investment in AIGC and other aspects, while continuing to improve the digital level of the company's internal operations.

AIGC has achieved some results, and the publishing efficiency continues to improve. In terms of content publishing, on the one hand, the company uses data-driven and technology applications to improve quality and efficiency, driving 3Q23 gross profit margin to increase by 36.29% compared with the same period last month; on the other hand, the company said that it has assisted the publication of "Blood and Rust" science fiction series with the help of AIGC Mathematical Intelligence Publishing platform. In terms of data asset accumulation, the company said it had partnered with major AIGC model technology companies to speed up the building of an intelligent reading brand. We believe that the company, with the help of AIGC to promote the whole publishing process reengineering, is expected to further improve the efficiency of the industry in the future.

Profit forecast and valuation

Due to the slow recovery of book market demand, the 24-year net profit of homing in 2023 will be reduced by 14% to 156 million yuan / 185 million yuan. The current share price corresponds to the 2023 Universe 24 31 Placement 26 times PUnix E. Maintain the outperform industry rating, due to the profit forecast adjustment but the industry valuation center slightly moved up due to the impact of the AI application, switching to 2024 valuation, lowering the target price by 7% to 31.1 yuan, corresponding to 32 times Phand E in 2024, with an upward space of 21%.

Risk

The recovery of book demand is lower than expected, channel competition intensifies, new media impact, weak intellectual property protection, changes in preferential tax policies, the risk of rising paper prices, and the slow process of new technology exploration.