Profitability rebounded steadily after the transformation of compliance strategies. The company has been deeply involved in K12 education and training for nearly 30 years, leading the development of education and training services in South China. Net profit not attributable to mother was 0.55/ 136/130 million yuan respectively in 2018-2020. Under external influence, the company lost a lot in 2021, after deducting net profit not attributable to mother - 325 million yuan. Starting in 2022, the company divested K9 subject training services and actively promoted business strategy transformation. 2022H1 turned losses into profits, and achieved net profit of 56 million yuan after deducting non-return to mother. The company achieved development driven by both full-time education and quality education. At the same time, the cost-side savings effect was remarkable. The operation gradually became steady, and the profit of 2023 increased significantly over the same period last year.

Changes in the K12 industry under the influence of the policy: 1) Policy: The trend of compliance in out-of-school training has not changed, supervision of K9 subject training has been steadily tightened, high school/non-subject business policies have been relaxed, and management boundaries have become more clear; college entrance examination reform is in full swing, and subject selection has become the focus of attention. 2) Industry size: The size of the K12 education and training market has declined sharply due to policy shocks. Demand for subject/interest training is still strong, and the potential of the non-subject market is gradually showing. 3) Competition pattern: Clear supply of subject education and training, transformation of institutional business, reduction of offline outlets, and a significant share of regional institutions in the local market.

Full-time education is combined with quality training, and we look forward to a strong recovery in business. The company has a good reputation in South China, and has accumulated brand, teaching and research, and channel advantages. In recent years, it has shifted its business focus to “full-time review+quality education+vocational education” to promote the rapid development of full-time schools, lay out quality education in all aspects, and actively cooperate with vocational colleges and universities. The company's talent training system is perfect, and the teacher retention rate far exceeds the industry average; during the pandemic, it quickly switched to online teaching, showing efficient operation capabilities. Currently, the company is speeding up the promotion of the full-time, quality education sector, developing new campuses in Guangdong Province, and is optimistic about future development potential.

Profit forecasting and investment advice: The company's operations tend to be steady, business strategies are being adjusted rapidly, industry policies relax high school/non-subject business requirements, and demand for training is strong. The company's full-time education and quality training are expected to benefit. We expect the company's net profit from 2024-2026 to be 130 million yuan/180 million yuan/230 million yuan. The current stock price corresponds to PE of 17/13/10X, respectively, giving it a “recommended” rating.

Risk warning: industry policy risk, market risk, management risk, etc.