South China's leading education service provider, Explore Quality Literacy Training Company, is a leading private education service provider in South China. After the “double reduction”, it actively took steps to promote business transformation. In the fall of 2021, it launched non-subject literacy courses for primary and secondary schools, including scientific literacy, love Chinese studies, logical thinking training, and Miaowei international literacy courses, continuing its “Happy Learning” brand; currently, the company's business is mainly based on non-subject literacy training services and a small number of academic education courses, while broadcasting live e-commerce.

The non-subject training business is growing rapidly, and profitability continues to recover

23H1's revenue was 251 million yuan, an increase of 31.3% year over year, mainly due to the increase in the total number of students enrolled and the number of tutoring hours. 23H1's gross profit margin was 41.4%, up 7.7pct; net profit to mother was 43 million yuan, up 234.07% year on year, and profitability quickly recovered.

By business, at present, more than 90% of the company's revenue comes from quality and literacy training courses. 23H1 quality education course revenue was 232 million yuan (accounting for about 92% of the total), an increase of 29.80% over the previous year; the revenue of the academic exam preparation course was 119 million yuan (accounting for about 8% of the total), an increase of 53.3% over the previous year.

Quality education has broad room for growth, with clear supply+strong demand. According to estimates by the Duowhale Education Research Institute, the potential domestic market size for quality education will exceed 478.7 billion yuan in 2023, and the five-year CAGR is expected to be 15.3% during the 2018-2023E period; after the “double reduction”, parents' investment in training courses remained unchanged and increased by 85%, and demand for training was still strong.

The certification standards and supervision of training types are more left to the local authorities. Guangdong Province defines subject/non-subject training using a 50% line. According to the Guangdong Provincial Department of Education, considering mixed subject and non-subject projects, they proposed multiple qualitative and quantitative combination indicators, using the “training content” index as an example, clearly stating that if the training content accounts for less than 50% of the “scope of training content” of the “subject training program,” then it is not considered to have the characteristics of subject category attributes for the time being, and further assessment will be carried out after measuring and comparing other indicators.

We believe that after 3 years of double decline, future enterprise development will have a relatively stable external environment; at the same time, leading enterprises have significant advantages. After experiencing the impact of the epidemic and under current policy supervision, small and medium-sized institutions with slightly poor qualifications may gradually be cleared. With trust endorsements and resource support from leading brands, it is beneficial to gain greater market share.

Actively transform non-subject training and lay out live e-commerce

The company is actively adopting transformation measures, and the business continues to lean towards quality education. Before the “double reduction”, the company's main source of revenue was academic exam preparation courses; after the “double reduction”, the company launched non-subject literacy courses for primary and secondary schools in the fall of '21. 2021-2023H1 quality education courses accounted for 23.56%/91.97%/92.40% respectively. The number of literacy course hours increased from 263,000 in 2021 H1 to 2.675 million in 2023H1, an impressive increase.

After the “double reduction”, the number of study centers was reduced, and after the transformation and maturation of non-subject training gradually matured, the number of outlets may gradually rise. By the end of 2020, the company had a total of 152 learning centers. Since then, in order to improve operational efficiency, reduce costs and increase efficiency, the company has closed some outlets that have failed to meet operating performance standards. Using the campus disclosed on the company's official website as a reference, the company currently operates about 90 study centers, all of which are concentrated in the Shenzhen area. We expect the future to be accompanied by the development of non-subject training business, the company may restart its network expansion, expand learning centers in Guangdong Province or even other provinces, further expand its market share and strategic cooperation with Baijia Xingyao, lay out the live e-commerce field, and make every effort to create a second enhancement curve. In April '23, the company signed a strategic cooperation agreement with Baijia Xingyao to carry out in-depth cooperation in the fields of live e-commerce, agricultural aid and poverty assistance, talent incubation, and knowledge payment to jointly establish an account “Thinking Music Selection” to create a second growth curve; the cooperation was built on a three-year basis, and it is expected to create a GMV of more than 1.5 billion yuan within three years.

First coverage, giving a “buy” rating

As a leader in education services in South China, the company responds positively to policy calls and comprehensively promotes quality education courses. As the business gradually adjusts and matures operations, the network gradually expands, and its market share is expected to continue to increase. We expect the company's revenue for 23-25 to be 6.71/9.51/1,293 billion yuan, net profit to mother of 0.91/135/179 million, and EPS of 0.16/0.24/0.32 yuan/share, respectively. Referring to the comparable average, the company was given a reasonable 15-20xPE for 24 years, corresponding to a target price of HK$4.28-5.71.

Risk warning: policy risk, new business risk, management risk, risk of rising operating costs, risk of small company circulation market value; risk of selecting comparable companies across markets; estimation is subjective risk, etc.