Matters:

Company announcement: 1) On July 31, 2023, the board of directors of Huatu Education, the indirect controlling shareholder of the company, reviewed and approved, recommending that listed companies choose a high-quality development direction in the field of vocational education to expand new businesses, and plan to provide comprehensive resource support for this purpose.

2) On October 10, 2023, the wholly-owned subsidiary and Huatu Hongyang Education signed the “Free Authorized Use Agreement for Intangible Assets” and related transaction announcements.

3) On October 16, 2023, the Shenzhen Stock Exchange issued a letter of concern regarding the “Agreement on the Free Authorized Use of Intangible Assets”; on October 16 and 23, the company responded to the exchange inquiry letter.

Guoxin social service views:

1) The process of putting Huatu Education's assets into a listed company is divided into 3 steps: In the first step, Yi Dinghong (founder of Huatu) and Wu Jingyu became actual controllers of the listed company through share transfer and offer. In November 2019, Huatu Investment transferred 30% of the shares from the original actual controller at a cash consideration of 750 million yuan (30.05 yuan/share). Huatu Investment became the controlling shareholders of the listed company, with Yi Dinghong and Wu Jingyu as actual controllers; in May 2020, the company abbreviation was changed to “Huatu Mountain Ding”; in October 2021, the controlling shareholder Huatu Investment increased its holding rights to 51% through an open market offer; in the second step, Huatu's executive team took over the company's operations. By the end of 2023, with the exception of the financial director, the company's executive team was replaced with leaders from Huatu Education; in the third step, listed companies gradually took over Huatu Education's assets. On October 10, 2023, Huatu Education Technology, a wholly-owned subsidiary of the listed company, and Huatu Education, an indirect controlling shareholder of the listed company, signed a “Free Authorized Use Agreement for Intangible Assets”. Huatu Education allows the company to carry out non-academic training business through the “Huatu” brand. At the same time, Huatu Education will stop enrolling students for similar businesses in relevant regions, deliver existing courses, and gradually withdraw from related fields. In the future, the strategic focus of listed companies is also expected to gradually shift from the main construction engineering design business to the recruitment examination and training business.

2) Huatu Education: The company is a traditional leader in the public examination industry. The failure to impact the capital market many times in history has led to certain business and personnel fluctuations, but the overall business style has always been steady (2015-2017/2020-2022 revenue was 13.2/18.9/22.4/17.4/14.9/210 million, respectively).

The company has accumulated extensive offline written tests and interviews. In the context of aggressive business stagnation by peers, the company achieved revenue of 2.11 billion yuan in the first three quarters of 2023, and annual revenue is expected to reach a record high; gross margin for the same period was 59.1%/60.8%/54.6%/46.9%/53.1%/55.1%, respectively, gross profit margin of 59.0% in the first three quarters of 2023, and significant improvement in profitability (Note: there is a slight difference between the gross margin caliber in 2020-2023 and the previous period); in 2015-2017, respectively, it achieved net return to mother Profit of 2.1/3.4/3.7 billion. As of the end of June 2018, the number of training centers was 394.

3) Recruitment and training industry: The 2024 national examination plans to recruit 39,960,000/ +7%. The contrarian expansion of jobs led to a 7% increase in the number of references (1,526 million), and the recruitment market space is expected to continue to expand. Based on the 2022 revenue scale, China Public Education (14.00% /year over year - 8.5pct) > chalk (6.86% /- 2.0pct) > Huatu Education (5.37% /+1.1pct). Considering the different short-term business conditions of each institution, Huatu is expected to catch up.

Industry competition has also returned to rationality, and course products focus on actual revenue share. Looking ahead to future development, small and medium-sized institutions may be able to fill the market gap in stages during the adjustment period, but test questions in the public examination industry are rapidly iterating, and it is expected that market share will still be concentrated on leading institutions under normal operation.

Investment suggestions: In the future, listed companies will use the “Huatu Education” brand to promote their layout in the recruitment and training industry in an orderly manner. Based on judging the prospects of the recruitment and training industry and Huatu Education's brand perception, we analyze that the company's current strategic transformation is expected to continue to enhance its own business performance. Since Huatu Education can refer to very little operating data (the announcement only discloses revenue and operating costs for the first three quarters of 2020-2023), and there is still some uncertainty about the transition of education assets to listed companies, we only predict that the net profit of the original design business in 2023-2025 will be 0.00/0.03/0.05 billion yuan, respectively. The first coverage will not be rated yet, and the progress of the company's undertaking education assets is closely followed.

4) Risk warning: failure to implement pro bono licensing agreements; stricter industry policies; increased industry competition; new growth curves fall short of expectations, etc.

Investment advice

In the future, listed companies will use the “Huatu Education” brand to promote their layout in the recruitment and training industry in an orderly manner. Based on judging the prospects of the recruitment and training industry and Huatu Education's brand perception, we analyze that the company's current strategic transformation is expected to continue to enhance its own business performance. Since Huatu Education can refer to very little operating data (the announcement only discloses revenue and operating costs for the first three quarters of 2020-2023), and there is still some uncertainty about the transition of education assets to listed companies, we only predict that the net profit of the original design business in 2023-2025 will be 0.00/0.03/0.05 billion yuan, respectively. The first coverage will not be rated yet, and the progress of the company's undertaking education assets is closely followed.

Risk warning

Risks such as failure to implement free licensing agreements as scheduled; industry policy risks; increased industry competition; new growth curves falling short of expectations