On October 27, New Classic released its report for the third quarter of 2023. The company achieved operating income of 657 million yuan in the first three quarters of 2023, a year-on-year decrease of 6.63%; net profit of 130 million yuan, an increase of 2.32% over the previous year; and non-net profit of 115 million yuan, a year-on-year decrease of 1.40%. In 2023Q3, the company achieved operating income of 217 million yuan, a year-on-year decrease of 15.77%; net profit of 41 million yuan, a year-on-year decrease of 7.00%; and net profit withheld by a whopping 39 million yuan, a year-on-year decrease of 6.51%.
The recovery of the paper book market fell short of expectations, and the popular bestseller category maintained good performance. According to the open volume data, the book retail market fell 1.04% year on year in the first three quarters of 2023. Benefiting from the summer and school season, the year-on-year increase in online store channels was further expanded compared to half a year, but the decline in physical channels was still significant. Judging from the composition of the code ocean, the children category accounted for the largest share of the code ocean at 26.89%, but at the same time, it was also the category with the biggest drop in the share of the code ocean, down 2.04% from the previous year. In the first three quarters of 2023, the company's paper book sales volume decreased by 6.83% year on year, achieving revenue of 602 million yuan, a year-on-year decrease of 6.82%. Specifically, the company's popular books maintained good sales performance, and the popularity of the short video e-commerce platform remained popular. On November 1, 2023, the books “Alive” and “Water of Change” ranked in the top 15 of Dangdang's best-selling books, while children's books may be affected by the overall market decline, and the performance of children's books may be weak due to the overall market decline. The company's digital content sector revenue increased by 30.02% year on year, and continued to maintain a good trend.
Increased profitability of digital content has supported a slight increase in gross margin, and cost control has remained stable. In the first three quarters of 2023, the company's gross margin increased slightly by 1.17pct to 49.29%. Among them, the gross margin of paper books/digital content/copyright operations was -0.06/+2.91/-0.91pct, respectively. The gross margin of the paper book business remained stable, the profitability of the digital operation business increased significantly, the copyright operation business was still in the construction stage, and the cost investment was higher than revenue growth, leading to a slight decline in gross margin. In the first three quarters of 2023, the company's sales/management/R&D expenses were 18/7.71/ 1.03% respectively, with a year-on-year ratio of +1.44/-0.20/-0.17pct, and the cost control was relatively stable.
High-quality content cooperates with long-term operations, and abundant reserves of copyright resources and products. The company always adheres to the idea that high-quality content drives long-term development, and carries out long-term operations for writers and works. According to Douban's reading data, the company produced 32 new books in the third quarter of 2023, including high-quality works that received widespread attention, such as Booker Prize winner Flannagan's latest work “Surging Sea in Dreams”, the famous historian Xu Zhuoyun's “Jingwei Huaxia”, and “On a Rainy Day Like This”, the film master author Zhi Yuhe's creative memo “On Such a Rainy Day.”
In the future, the company will further expand copyright resources, cope with rapid changes in the market with high-quality resource reserves and gradually strengthened operating capabilities, and rebuild competitive advantages in the market.
Maintain a “Highly Recommended” investment rating. Considering that the company's abundant copyright resources are stored in digitally strengthened long-term operation capabilities, we expect to achieve net profit of 1.70/2.02/238 million yuan in 2023/2024/2025, respectively, corresponding to 17.1/14.3/12.2 times the valuation, maintaining a “highly recommended” investment rating.
Risk warning: risk of industry policy adjustments, risk of overseas business and new business development not meeting expectations, risk of intellectual property protection falling short of expectations, etc.