4Q23 results fell short of our expectations
The company's revenue in 2023 fell 5% to 1.72 billion yuan; net profit to mother fell 8% to 116 million yuan; net profit after deducting non-net profit also fell 48% to 61.88 million yuan, of which there was a one-time positive impact of 41.38 million yuan due to tax and other adjustments in non-current items. 4Q23 revenue of 431 million yuan, slightly lower than our forecast of 445 million yuan; realized net loss to mother of 9.92 million yuan, lower than our expected profit of 29.5 million yuan; deducted non-net loss of 56.86 million yuan. We believe that the main reasons are: 1) sales expenses were higher than expected; 2) long-term equity investment losses and asset impairment losses were greater than expected. The company plans to pay a dividend of 0.31 yuan/share (tax included), with a dividend ratio of 51%, and basically maintaining a steady dividend (40%/53% cash dividend ratio for 21/22).
Development trends
The main book publishing industry was pressured by weak consumption and discounts throughout the year, and the profit model of the knowledge service business gradually matured. The company said the revenue side pressure in 2023 was mainly affected by a weak consumer market and a further reduction in discounts due to structural changes in book channels. Looking at the fourth quarter alone, there was a slight recovery from month to month: revenue reached 430 million yuan, down 9% from the same period, which is narrower than the 14% year-on-year decline in 3Q23, and a 4% increase. Specifically: 1) The book publishing and distribution business fell 5% in 2023. At an industry-wide level, according to unpublished information, the year-on-year growth rate of the book retail market was positive in 2023, mainly due to the positive increase in online sales channels, driven by e-commerce promotions in the fourth quarter; however, due to the further increase in retail discounts (from 6.6 percent off in '22 to 6.1 percent off in '23), the scale of Shiyang continued to decline year-on-year throughout the year. 2) The performance of the cultural consumption business has been relatively stable after undergoing adjustments in recent years, with a decrease of 2% in 2023. 3) The knowledge service business is impressive, achieving a 15% increase under a low base. The business mainly includes supplying digital content to audio and video platforms, operating the CITIC Academy app, and providing general knowledge services such as audiobooks.
It is expected that the 4Q23 promotion will increase marketing investment, and asset impairment losses and investment losses will affect profits. The company's 4Q23 sales rate reached 29%, up 10ppt year on year, and the absolute amount increased 38% year on year to 125 million yuan. We believe that mainly due to increased investment in major promotion nodes such as Double Eleven in the fourth quarter, competition for superimposed channels is still relatively intense, causing the cost investment to exceed expectations. We determine that asset impairment losses are mainly due to the company sorting out long-term copyright reserves and carefully considering impairment of some copyrights. 4Q23 Investment losses reached 16.18 million yuan. We judge that the short-term valuation of some long-term equity investment targets was under pressure mainly due to the external environment.
AI and new technology are invested to accelerate industrial transformation, with the goal of improving the quality and efficiency of the entire industry chain. The company indicated in its annual report that its R&D investment projects include an AI tool integration platform (completed the first phase of the goal), a publishing collaboration platform (built to the middle and late stages), and a supply chain collaboration platform (already online and normal operation), etc., to improve internal operation efficiency and promote the accumulation of digital content assets through new technologies such as AI. We believe that this type of R&D investment will help the company integrate content production efficiency and achieve business collaboration throughout the publishing process.
Profit forecasting and valuation
Maintain profit forecasts. The current share price corresponds to 38/35 times 2024/25 P/E. Maintaining an outperforming industry rating and target price of 31.1 yuan, corresponding to 39 times the 2024 target P/E, with an upward margin of 2%.
risks
The recovery in demand for books has fallen short of expectations, increased channel competition, the impact of new media, poor intellectual property protection, changes in preferential tax policies, the risk of rising paper prices, and the process of exploring new technologies has been slow.