Incident: Shandong Publishing released its 2023 annual report. The company's total revenue in 2023 was 12.15 billion yuan, up 8.2% year on year; net profit to mother was 2.38 billion yuan, up 41.1% year on year; net profit after deducting non-return to mother was 1.57 billion yuan, up 6.5% year on year. 2023Q4's revenue was 4.10 billion yuan, up 5.8% year on year; profit side net profit to mother was 1.12 billion yuan, up 105.7% year on year; net profit after deducting non-return to mother was 40 billion yuan, a decrease of 10.3% year on year.

Comment: Dividends have greatly exceeded expectations, the main business is rising steadily, and innovative businesses are expected to be implemented at an accelerated pace

1) The dividend greatly exceeded expectations. The company plans to distribute a cash dividend of 1.17 billion yuan in 2023, an increase of 43.6% over the previous year. The proposed dividend ratio reached 49.2%, an increase of 0.8 pct over the previous year, and the dividend amount and ratio will reach another record high.

2) The main business is rising steadily. Without excluding internal offsets, in 2023, the company's publishing business achieved revenue of 3.69 billion yuan, a year-on-year increase of 11.4%, gross profit margin of 26.6%, a year-on-year decrease of 1.0 pct; revenue from the distribution business was 8.89 billion yuan, up 4.9% year on year, and gross profit margin of 34.2%, up 0.4 pct year on year. The company continues to expand the textbook teaching aid categories, adding 42 new varieties (series) such as “Interdisciplinary Reading”; boosting the middle vocational textbook teaching aid market. In 2023, the middle vocational textbook teaching aid subscription fee was 185 million yuan, an increase of 96.1% over the previous year. In addition, the company focused on quality publishing. Seven projects including “Kites Are Flying Fish” won the 8th China Outstanding Publications Award, ranking fourth among local publishing groups in the number of awards.

3) Smart education products have achieved breakthroughs, and accelerated promotion can be expected. The company implemented a smart campus construction project, developed and built the “Homework+Academic Diagnosis Big Data Feedback” project integrating teaching aids and big data technology. The project was listed as a major commissioned project for basic education teaching reform in Shandong Province, and has been approved as a pilot project for the “Personalized Assignment Reform for Primary and Secondary Schools Based on Academic Condition Diagnosis” project in one city in the province. Nearly 10,000 students are testing it, and accelerated promotion can be expected.

4) Actively expand after-school services with outstanding research performance. Xinhua Education Company, a subsidiary of the company, initiated the establishment of the “Lu Chou Book Club” reading agency. Its products are dedicated to comprehensively improving children's core competencies. By the end of 2023, it had completed the first phase of course content research and development, online supporting course recording, and commissioned development of supporting mini-programs, and is preparing for full operation in the province. At the same time, the company continued to improve its research layout. In 2023, the research and cultural tourism business achieved more than 6,000 missions, 700,000 visitors, and revenue of more than 300 million yuan, an increase of more than 4 times over the previous year. In February 2024, the Xinhua Bookstore Group, which belongs to the company, took the lead in establishing the China Xinhua Bookstore Association Research and Education Professional Working Committee and the National Xinhua Research Cooperation Community, which is expected to further consolidate and enhance the company's advantages and influence in the field of national research and cultural tourism.

5) Increase the layout of the cultural industry for the elderly. In 2023, the company acquired “Home for Veterans” magazine; Xinhua Cultural Tourism Group, which belongs to the company, acquired Shandong Hongye Travel Service, which is positioned in the middle and high-end travel and cultural tourism business for the elderly. At the same time, the company is exploring the formation of new business models such as the “Xinhua Branch of the University for the Aged” to create a new cultural service scenario.

6) Stable control of the cost rate, and the cost rate is stable. The company's sales, management and R&D expenses rates in 2023 were 10.9%, 12.5%, and 0.2%, respectively, an increase of +0.12/+0.03/+0.02pct year-on-year, respectively.

Profit forecast and valuation: Considering that the company's 2023 performance is in line with expectations and that changes in tax policy will have an impact on the company's net profit for 2024-2026, we have adjusted the company's performance expectations appropriately. Shandong Publishing's 2024-2026 operating revenue is expected to be 133.48/148.26/16.491 billion yuan, respectively (the pre-revenue value for 2024-2025 was 138.75/15.182 billion yuan, respectively), up 9.82%, 11.08%, and 11.23%, respectively; net profit to mother 1,847/20.55/ 2.301 billion yuan (2024-2025 pre-profit values were 21.13/2,342 billion yuan, respectively), with year-on-year increases of -22.26%, 11.27%, and 11.94%, respectively. The current market value corresponds to the company's valuation of 12.1x, 10.9x, and 9.7x, respectively, maintaining a “buy” rating.

Risk warning events: policy risks on the cultural supervisory side; changes in preferential policies for state-owned media companies; increased discounts on e-commerce books for live video broadcasts; risk of untimely updates to information data used in research reports.