Incident: City Media released its 2023 annual report and 2024 quarterly report. The company's total revenue in 2023 was 2.69 billion yuan, up 5.4%; net profit to mother was 410 million yuan, up 21.4%; net profit after deducting non-return to mother was 230 million yuan, a decrease of 12.0%. 2024Q1's revenue was 670 million yuan, up 4.4%; profit-side operating profit was 130 million yuan, up 30.2%; net profit to mother was 90 million yuan, down 9.7%; net profit from non-return to mother was 50 million yuan, down 46.3%.

Comment: Dividends have reached a record high, operations have remained stable, the main business has been resilient, and new breakthroughs have been made in the new education business format? 1) The dividend reached a record high. The company plans to distribute a cash dividend of 180 million yuan in 2023, an increase of 35.0% over the previous year. The proposed dividend ratio reached 43.8%, an increase of 4.4 pcts over the previous year. The total dividend amount, dividend ratio, and dividend ratio all hit new highs since listing.

2) The operation remains stable, and the revenue side is growing steadily. The company's revenue and net profit to mother maintained steady growth in 2023.

The large change in 2024Q1 net profit and net profit not attributable to mother is mainly due to changes in tax policies, increased income tax expenses, and the increase in other income due to confirmed losses from production stoppage by subsidiaries. Excluding the impact of income tax, the company's net profit grew steadily year on year.

3) The main business is moving forward with resilience, and there are many highlights. Without excluding internal offsets, in 2023, the company's publishing business achieved revenue of 960 million yuan, with a gross profit margin of 43.4%, a year-on-year decrease of 0.3 pct; revenue from the distribution business was 2.12 billion yuan, an increase of 9.0% over the previous year, and a gross profit margin of 18.1%, a year-on-year decrease of 0.3 pct. The company continues to consolidate the foundation of textbooks and teaching aids. The number of editions of the upgraded “New Classroom Learning and Exploration” has grown rapidly, market share such as “Bonus Points” has increased dramatically, and new breakthroughs have been made in online customized teaching aids projects. In addition, the company has comprehensively enhanced its ability to create best-selling products. Twenty key projects, including the “Teenage Readers” traditional culture series, have shipped a total of 500 million yuan. The film and television book “Crazy Rush” of the same name is popular and “out of the market”, ranking first in the sales volume of new fictional books in the country.

4) Deepen the integration of technology and achieve new breakthroughs in new forms of education. The company thoroughly implemented the national cultural digitization strategy, appointed a chief technology officer, implemented the interim measures for R&D project management, and reached a strategic cooperation with iFLYTEK to establish the AI Publishing and Communication Innovation Research Institute. In terms of AI+ education, the company relied on the “All-Scene Smart Reading Project” developed with high-quality copyright resources from the “Excellent Traditional Chinese Culture Children's Picture Book Series” to create a full-environment reading scene linked by families, schools, and society through AI modules such as accompanying reading, reading guidance, and reading evaluation. In terms of VR+ education, the research brand “Scientific Brain - I Love the Motherland's Haijiang” added 3 new scenario-based experience spaces in Shanghai, Wuhan and other places, entered more than 20 schools, served more than 30,000 students, and was selected as a key theme research project recommended by the Central Committee of the Chinese Communist Party.

5) Effective control of the cost rate, and the cost rate is stable. The company's sales, management and R&D expenses rates in 2023 were 11.2%, 9.0%, and 0.3%, respectively, with a year-on-year increase of +0.37/ -0.42/-0.02pct, respectively. The company's 2024Q1 sales, management and R&D expenses rates were 11.1%, 6.7%, and 0.2%, respectively, an increase of +0.92/-1.09/+0.04pct 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 in 2024-2026, we have adjusted the company's performance expectations appropriately. City Media's revenue for 2024-2026 is estimated to be RMB 29.69/32.81/3.634 billion yuan, respectively (the pre-revenue value for 2024-2025 was RMB 31.21/3.446 billion, respectively), up 10.29%, 10.50%, and 10.76% year-on-year respectively; net profit to mother was 3.26/ $376/423 million (pre-profit value for 2024-2025 was 422/482 million yuan, respectively), up -20.09%, 15.37%, and 12.53% year-on-year respectively. The company's valuation corresponding to the current market value is 15.1x, 13.1x, and 11.6x, respectively, maintaining the “gain” 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.