3Q23 performance is slightly lower than we expected.

The company announced 3Q23 results: revenue of 2.44 billion yuan, an increase of 0.02% over the same period last year, slightly lower than our expectation of 2.66 billion yuan; net profit of 265 million yuan, an increase of 11.34% over the same period last year, lower than our expectation of 300 million yuan; and deducting non-net profit of 263 million yuan, an increase of 1.76% over the same period last year, slightly lower than we expected (280 million yuan).

We believe that it is mainly due to the weaker-than-expected performance on the revenue side due to the change in the recognition rhythm of some reading products and the contraction of material business.

Trend of development

The quarterly revenue performance is stable, or affected by the rhythm change of some reading products and the contraction of material business.

The company's 3Q23 revenue increased by 0.02%. We believe that: 1) the recognition rhythm of some reading products has changed, mainly due to the fluctuation of revenue recognition rhythm of four-dimensional reading products; 2) the performance of general books is stable. According to the company announcement, the sales code of its 3Q23 general book publishing business decreased by 7.6% year-on-year, and its operating revenue decreased by 17.1% year-on-year. 3) the company's material business also contracted to a certain extent in the first half of the year, which we think will also affect the company's revenue in the current quarter.

Under the influence of the adjustment of financial reporting subject confirmation rules, the gross profit margin decreased slightly, and the sales expense rate decreased correspondingly.

Gross margin 3Q23 decreased by 2.2ppt to 44.1% compared with the same period last year, which we believe is mainly due to the adjustment of transportation costs related to compliance obligations under the new revenue criteria to operating costs for recognition, thus affecting the company's gross margin performance in recent quarters. Accordingly, the company's sales expense rate fell year-on-year in the first three quarters of this year, with 3Q23 falling by 2.4ppt to 16.6%. In terms of non-recurrent items, we believe that it is mainly due to the non-recurrent loss of 20.77 million yuan in Q3 last year, and the net basic non-recurrent income of Q3 this year is only 1.66 million yuan, so it is generally flat in terms of deducting non-net profit, which is basically in line with the trend on the income side.

Strengthen the construction of educational multivariate matrix, accelerate the transformation of digital fusion publishing, and pay attention to the value of sound dividends. At the 2023 China International Trade in Services Fair, the company exhibited the innovative achievements of the digital transformation of education, such as "Reading Education", "after-class Intelligence", "Research practice course", "A Best Education" and so on. In addition, part of the Malanshan Park project invested by the company has been capped, and we believe that in the future, the park is expected to promote the company to continue to explore the integration of media and publishing. In terms of the company's cash flow, as of the end of 3Q23, the monetary funds on hand reached 9.5 billion yuan, we think it is expected to better support its follow-up dividends. In terms of dividend yield, we estimate that the current dividend yield is 5.2% (at the closing price on 2023-10-27, corresponding to 2023), which has a good high dividend value.

Profit forecast and valuation

Maintain the forecast of net profit of homing in 2023x24, 16,000,000 yuan, unchanged. The current share price corresponds to 13 times 2023 earnings and 12 times 2024 earnings. Maintain an outperform industry rating and target price of 14.3 yuan, corresponding to 16 times 2023 price-to-earnings ratio and 15 times 2024 price-earnings ratio, with 22% upside space.

Risk

Teaching materials and auxiliary business related policy changes, dividends are lower than expected, digital transformation is lower than expected, and the macro-economy is in the doldrums.