Event: The company released its 2023 annual report and 2024Q1 quarterly report. Revenue in 2023 increased 3.4% year over year to 9.37 billion yuan, net profit to mother increased 34.4% year over year to 1.28 billion yuan, net profit after deducting non-return to mother increased 0.3% year over year to 890 million yuan; non-recurring profit and loss was 390 million yuan, mainly including tax-related one-time adjustments of 140 million yuan, financial asset investment income of 150 million yuan, and government subsidy income of 90 million yuan. 2024Q1 revenue fell 4.9% year on year to 2.09 billion yuan, net profit attributable to mother fell 34.0% year on year to 150 million yuan; net profit after deducting non-return to mother fell 9.3% year on year to 170 million yuan; non-recurring profit and loss was -0.2 billion yuan (23Q1 was 0.4 billion yuan), mainly due to changes in fair value of equity and fund product investments of -0.27 billion yuan.

Revenue from textbooks and teaching aids increased steadily, and revenue from general books decreased slightly: by business, revenue from textbooks increased 5.9% year on year to 8.30 billion yuan in 2023, and gross margin increased 0.3 pct year on year; general book revenue fell 5.2% year on year to 1.97 billion yuan, gross margin decreased 1 pct year on year; revenue from cultural and sports supplies increased 32.1% year on year to 220 million yuan. According to operating data, the company's general book sales code increased sharply year over year, and revenue declined slightly, which may be due to increased discounts. By region, revenue within Guangdong Province increased 1.0% year on year to 8.14 billion yuan in 2023, revenue from outside the province increased 20.8% year on year to 990 million yuan, and expansion outside the province progressed well.

After-school education services are progressing smoothly, and smart education is being commercialized: the company is actively seizing the “double reduction” policy opportunity, promoting the construction of the “Southern Education Media After-School Service Platform” and the “Greater Bay Area Research Service Platform”. Xinhua bookstores around the world explore all fields of education services, with revenue of nearly 200 million yuan in 2023. The service capabilities of the “Guangdong Education Xiangyun Digital Textbook Application Platform” platform have been steadily improving. In 2023, the number of active users exceeded 43 million, an increase of 95.8% over the previous year. Various market-based projects such as the “Southern Intelligent Operating System”, “Language Music Platform” and “Guangdong High School Learning Platform” have been launched to achieve commercial operation.

Profits are under pressure due to the expiration of income tax benefits, and cash dividends have increased dramatically: Starting 2024/1/1, companies and subsidiaries that have been converted for 5 years will no longer enjoy the preferential corporate income tax policy. The company's income tax expenses in 2024Q1 were 57.27 million yuan, and the actual tax rate was 25.1%, which is a significant increase from 3.4% in 2023Q1. The company plans to distribute a cash dividend of 5.40 yuan (tax included) to all shareholders for every 10 shares, for a total of 480 million yuan (tax included), a significant increase of 16.7% over the previous year. The dynamic dividend rate based on the company's closing price of 2024/4/26 is 3.9%.

Profit forecast and investment rating: Since the income tax benefits for cultural transformation enterprises expire at the end of 2023, we lowered the company's net profit from 2024-2025 to 9.6/1.01 billion yuan, and estimated it to be 1.08 billion yuan in 2026. The current stock price corresponding to 2024-2026 PE is 13/12/12 times, respectively. We are optimistic about the stability of the company's main business and the growth of new businesses, and maintain a “buy” rating.

Risk warning: New business development falls short of expectations, risk of transformation and upgrading, risk of fluctuating raw material prices.