The 2023 and 1Q24 results were largely in line with our expectations

New Classic announced its 2023 results: operating income of 901 million yuan, down 3.9% year on year, net profit to mother 160 million yuan, up 16.5% year on year. The company also announced 1Q24 results: operating income of 225 million yuan, up 10.0% year on year, and net profit to mother of 48.54 million yuan, up 7.8% year on year. The 2023 and 1Q24 results were largely in line with our expectations. The 2023 profit distribution and plan is a cash dividend of 0.90 yuan (tax included) per share, totaling about 139 million yuan, accounting for 86.8% of net profit to mother in 2023, and a dividend rate of 5.3% based on the 4/26 closing price.

Development trends

Domestic business revenue declined slightly, actively adapting to channel changes. In 2023, domestic book planning and distribution revenue was 734 million yuan, down 8.8% year on year. The company listed 146 new books throughout the year, a year-on-year decrease of 59. The significant reduction in new book publishing was mainly due to the company's continuous adjustments in the industry, adopting strategies to reduce the volume and improve the quality and expand the influence of individual products. While continuing to launch new works by representative writers such as Keigo Higashino and Wang Shuo, the company closely followed the iterative trend of book promotion and sales channels, combined with the characteristics of platforms such as Douyin and Weibo to expand differentiated marketing and delivery cooperation The popularity of the work also promoted sales conversion. Domestic digital content revenue in 2023 was 27.18 million yuan, down 20.8% year on year. We believe it was mainly affected by Amazon Kindle's withdrawal from the Chinese market in the middle of the year, but the company responded positively and expanded cooperation with platforms such as WeChat Reading, Tomato Novel, and Palm Reading.

Overseas business is progressing positively, and loss reduction is progressing steadily. In 2023, the company's overseas business achieved revenue of 135 million yuan, an increase of 53.8% over the previous year, and revenue from books/digital content/copyright operations all achieved relatively rapid growth. In terms of the book business, the new sci-fi work “The NarrowRoad Between Desire (The NarrowRoad Between Desire)” launched by the company in 2023 was well received by readers as soon as it went on sale, and new works such as other literature/children's books also had good sales performance. At the same time, progress was made in restructuring the team's internal resources and personnel structure. The gross margin of the overseas business increased by 3.4ppt to 47.0% year on year, and the net loss due to mother for the whole year was 14.26 million yuan, narrowing by more than 25 million yuan year on year, driving the company's overall net profit to grow well.

Revenue grew steadily in the first quarter, and reserves of key new books were abundant in 2024. 1Q24's paper book revenue was 190 million yuan, an increase of 10% over the previous year. Key new products such as Higashino Keigo's “Mask Game” were launched during the quarter, and works such as Yu Hua's “We Live in a Huge Gap” were also driven by short video content operations, etc. The company has previously announced the 2024 fiction/non-fiction/comic book preview. The categories are rich and the subject matter is diverse. We believe that the company's content team has been deeply involved in the industry over the years, maintained a keen reading preferences of leading readers, and laid a solid foundation for the book business.

Profit forecasting and valuation

The 2024/2025 profit forecast is basically maintained, and the current stock price corresponds to 15/14 times 2024/2025 P/E.

Maintaining a neutral rating and target price of 19 yuan, corresponding to 17 times the 2024 P/E, there is room for a 13% increase in the target price compared to the current price.

risks

Book retail sales continue to be under pressure, channel discount pressure, overseas business expansion falls short of expectations, liquidity risks, loss of core editors, and increased piracy and infringement.