Incident Overview

On October 27, the company released its report for the third quarter of 2023. In the first three quarters, the company achieved revenue of 9.780 billion yuan (yoy +5.92%), net profit of 984 million yuan (yoy +18.32%), net profit of 928 million yuan (yoy +11.05%), net profit of 928 million yuan (yoy +11.05%); 23Q3 achieved revenue of 3.747 billion yuan (yoy +0.53%, qoq +27.63%), net profit of 260 million yuan (yoy +13.30%, qoq -32.76%), net profit of 279 million yuan (yoy +14.32%, qoq -26.67%)), The company's various operating indicators continued to grow steadily.

Analysis and judgment

(1) The company's year-on-year growth rate increased steadily in the first three quarters, mainly due to the continued recovery of the book retail business market, steady development of the company's main business, and continuous improvement in profitability. We expect the company's revenue and profit in 2023 to be better than in 2022. The company continues to upgrade its business model. We expect that the company's performance flexibility in the second half of the year will continue to be unleashed, maintaining a rapid development trend.

Revenue side: The company's main textbook business and general book and audio-visual products business achieved revenue of 1,630 billion yuan and 3.861 billion yuan respectively in the first three quarters, up 3.02% and 36.06% year on year. The high growth rate of the general book business was mainly due to the recovery of the book retail business in the market.

Cost side: The company's 23Q3 sales expense ratio is 9.74% (yoy+5.74pct, q+1.53pct), the management expense rate is 3.12% (yoy-0.34pct, q-1.00pct), and the R&D expense rate is 0.11% (yoy-0.03pct, q-0.23pct). We believe that the company's marketing promotion in developing new business formats is affected by costs. The sales expenses rate has increased, the company continues to improve management capabilities, and management expenses continue to decrease. We expect the steady development of the new business format. By gradually improving management expenses, the company's profitability is expected to further improve.

Profit side: The company's profit increased significantly, mainly due to growth in the company's main business and benefits from changes in fair value. The company's net profit for the first three quarters increased 18.32% year-on-year, up 9.75pct from 8.57% in the same period last year. In terms of gross margin, the company's overall gross profit margin for the first three quarters was 22.22%, up 3.77pct from 18.45% in the same period last year. Among them, the company's main textbook business was 25.11% (yoy+1.48pct) and the general book and audiovisual business was 38.57% (yoy+3.20pct).

(2) The company continues to promote the smart ecosystem in depth to empower the development of the company's main business. Driven by technological integration and innovation, the company promotes the development of three new business formats: new retail, smart education, and smart supply chain. The new cultural business format is expected to lay a solid foundation for the company's future development.

The company's game platform continues to build key game products, increase distribution efforts through various well-known channels, establish strategic cooperation with many well-known companies, and continuously enhance the competitiveness of the cube game platform. By the end of June 2023, the cube gaming platform had launched more than 400 products, with nearly 2 million registered users, launched products such as “Fairy 7 DLC: A Dream” and “The Journey of the Daredevil”, signed contracts to reserve a number of projects, and developed rapidly in the game business.

The company is actively expanding the C-end product line for smart schools and collaborating with Huawei to create an inclusive learning opportunity for education. Education inclusive learning machines can formulate overall solutions for independent learning. Currently, the trial marketing stage is being carried out through the Xinhua Bookstore stores and online channels owned by Anhui New Media, and the overall plan is continuously optimized based on marketing results.

The company continues to deepen the application of smart education, and actively carries out various activities such as online training for smart schools, the “same class heterogeneity” competition for smart classrooms, and fun live streaming classes for the new public welfare classroom in Anhui, and online collaboration and integrated development offline and online. The company's campus reading business launched more than 500 beautiful reading video micro-courses, covering more than 4 million teachers and students. Preschool education launched an AI-enabled extended service plan for kindergartens, and sales increased 87% year-on-year in the first half of the year.

On the basis of its main business, the company continues to build a new cultural retail system to meet the cultural consumption needs of users in the new era through the construction of online and offline integrated e-commerce platforms, social marketing and live streaming platforms. We believe that the continued expansion of the business is expected to maintain the rapid development trend of the company's performance.

Investment advice

The company consolidates the development of its main business, focuses on digital technology empowerment, uses technological integration and innovation as driving force, promotes the development of smart ecosystems, and actively expands new cultural business formats. The company's performance growth rate for the first three quarters exceeded expectations. We raised the net profit from the parent in 2023 to 1.06 billion yuan. We expect the company's net profit from 2023-2025 to be 1.06 billion yuan, 1.17 billion yuan, and 1.3 billion yuan, respectively, increasing by 49.8%, 10.6%, and 10.5% respectively. The corresponding valuations were 13 times, 12 times, and 11 times respectively, maintaining the “buy” rating.

Risk warning

The risk of increased competition in the industry, the risk of comprehensive promotion of cultural digitalization, the risk of impact of new technologies, and the risk of fluctuations in raw material prices.