The performance fell slightly below our expectations

The company announced 1Q24 results: revenue of 402 million yuan, down 5.8% year on year; net profit to mother of 37.88 million yuan, down 9.9% year on year; deducted non-net profit of 35.79 million yuan, down 9.6% year on year. The results were slightly lower than our expectations, mainly due to the fact that revenue performance was still relatively weak.

Development trends

Demand is still relatively weak, and the quarterly revenue decline is in the same trend as the retail market as a whole, maintaining the lead in real ocean.

The company's 1Q24 revenue fell 5.8%. According to the opening information, the national book retail market in the first quarter of 2024 fell 5.85% year-on-year, and the company maintained a relatively consistent trend with the market. We believe that the recovery in demand is still progressing gradually, mainly due to reading demand. From a market share perspective, the company's share of Shiyang in the national book retail market from January to January was 2.88%, and it still remains the top in the industry.

Price control was effective in reducing costs, impairment losses were relatively reduced, and pre-tax profit increased by double digits. Gross margin increased 2.55ppt to 38.3% year-on-year in 1Q24, the highest level in a single quarter since 2022. We think the main thing is that the company is making good progress in various cost savings, channel reforms, etc. Asset impairment losses also decreased by 3.72 million yuan year-on-year in 1Q24. The company said it was mainly a reduction in inventory impairment losses. We believe there is a clear improvement in losses compared to the previous period, which also contributed to the release of profits. The pre-tax profit caliber, which did not take into account the impact of income tax, increased 24% year over year to 51.32 million yuan in 1Q24.

Pay attention to the expansion of key bibliography in economic management and social science and literature and animation. Key bibliography areas include “The Biography of Maotai” (Wu Xiaobo, March 28), “Context” (Wu Jun, first live broadcast sold 30,000 copies on April 22, 2024), and “This Is China 3” (within the year). In terms of literature, art, and animation, the company previously proposed that it will further deepen its animation cultural and creative strategy and launch a number of classic Japanese comics and national style works during the year. We recommend paying attention to the introduction, publication, and sales of key IPs such as “Yu Yu Yu Hakusho: Detective in the Spiritual Realm” (published in March 2024, the first officially authorized simplified Chinese version in mainland China).

Profit forecasting and valuation

Maintain the net profit forecast to mother unchanged. The current stock price corresponds to 35.5/32.5 times the 2024/25 price-earnings ratio.

Maintaining an outperforming industry rating and target price of 31.1 yuan, corresponding to 39 times the 2024 target price-earnings ratio, with an upward margin of 8%.

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.