Profit grew steadily in '23, and the dividend ratio increased dramatically. In '23, the company achieved total operating income of 11.244 billion yuan (YoY -3.79%); net profit attributable to mother of 936 million yuan (YoY +32.21%); deducted non-net profit of 754 million yuan (YoY +9.66%). In 24Q1, revenue was approximately RMB 2,929 million (YoY -5.44%); net profit attributable to mother was approximately RMB 293 million (YoY -13.28%); non-net profit withheld from mother was RMB 315 million, up 17.13% year on year. As of 24Q1, the company's monetary capital was nearly 11 billion yuan. In terms of profit distribution for 23 years, it is proposed to distribute cash dividends of RMB 3.05 (tax included) to all shareholders for every 10 shares, for a total cash dividend of 597 million yuan (tax included); the total amount of cash dividends (including the amount of shares repurchased) is 645 million yuan, accounting for about 68.90% of net profit attributable to mother.

In terms of traditional business, the general book and textbook business is growing steadily, while the low gross profit business is gradually shrinking. In 24Q1, the general book and audio-visual products business achieved revenue of 1.33 billion yuan, an increase of 23.4% over the previous year; gross profit margin of 37.80% (+0.75 pct). The textbook business achieved revenue of 710 million yuan, an increase of 8.79% over the previous year; gross profit margin of 27.47% (+2.33 pct). Referring to '23, the main growth drivers for traditional businesses include: 1) Continued deepening of online channels. The book e-commerce business achieved sales of 580 million yuan; the “Anhui Xinyun Bookstore” new retail platform had 420,000 users (YoY +203%), with an average monthly visits of 140,600 (YoY +120%); developed the “Anhui New Enterprise Purchase” applet, and the contract amount exceeded 100 million yuan in 23 years. 2) Make both horizontal and vertical efforts to expand the education business. Vocational school textbooks were expanded horizontally, and textbooks compiled by the Higher Education Society were approved for distribution in Anhui Province. In 23, sales of middle vocational textbooks increased 26% year-on-year. The research and education business was promoted vertically, and sales revenue of 37.63 million yuan was achieved in '23, an increase of 607.33% over the previous year. In addition, the volume of low-margin businesses declined in '23, including education equipment and multimedia businesses (YoY 46.46% revenue in '23, gross profit margin of 5.91%), and supply chain and logistics services businesses (revenue YoY -3.54%, gross profit margin 3.56% in '23). We believe that the gradual reduction of low-margin businesses is expected to reduce the “burden” and further improve the company's profit margin level.

“AI+ Education” content and channels have been upgraded, and it is expected that it will gradually expand into the commercialization model. 1) Smart campus: completed 54 smart classroom projects and organized more than 100 smart school training sessions. 2) Smart Reading: Enrich the campus reading product matrix with 240 varieties, and developed a total of 659 digital content courses for the micro-class client; build a reading evaluation system, combined with AI technology research and application such as big models and digital people to enhance the new reading experience. 3) Robots: Develop new Zhuzi educational robots in Anhui to improve integrated childcare solutions. 4) Teacher training: Optimize “one real classroom” teacher training, upgrade the “live streaming training+workshop training+post-training tracking” online and offline three-dimensional training model, serving 150,000 teachers. 5) Beauty Science: It has been applied in 173,000 schools across the country, serving more than 30 million teachers and students.

Profit forecast and investment advice: It is estimated that in 2024-2026, the company's revenue will be 116.76/120.36/12.516 billion yuan, 3.8%/3.1%/4.0% YoY; net profit to mother of 8.56/10.14/1,192 billion yuan, -8.5%/17.5% YoY. We believe that in terms of performance, the company's profit margin is expected to continue to grow as the burden on the main business is reduced; “AI+ Education” is expected to further contribute to performance flexibility after gradually implementing the commercialization model. The income tax issue is expected to suppress the 24-year increase in net profit to a certain extent, but the impact on actual operations is limited. Furthermore, the company attaches importance to shareholder returns, and the cash dividend ratio including share repurchases was nearly 70% in '23. Maintain a “buy” rating.

Risk warning: risk of a reduction in the number of future students due to lower fertility; increased risk by industry competition; risk of falling short of expectations in the development of smart education products, etc.