An important publishing base for national textbooks to promote the country's cultural digitization strategy. The company was founded in December 2009 as one of the important publishing bases for national textbooks. The scope of use of the new Cantonese textbook with independent intellectual property rights covers the whole country. The quantity and overall level rank among the highest in the country, and has a high market share in Guangdong and the whole country. The company's main business is book publishing and distribution, printing and material supply, newspapers and new media. The main products include textbooks, textbooks, general books, audio-visual products, cultural supplies, and newspapers.

In 2023, the company's revenue & net profit increased steadily year on year, and operating data continued to be repaired.

In terms of performance, in 2023, the company achieved operating income of 9.365 billion yuan, +3.35%; net profit to mother of 1,284 million yuan, +34.39% year over year; net profit of 891 million yuan after deduction, +0.31% year over year. ① On a quarterly basis, Q1-Q4 achieved revenue of 22.03/18.55/ 23.89/2,918 billion yuan, respectively, of +18.39%/-8.19%/-0.02%/+4.83%, respectively, and net profit to mother of 223/1.88/2.69/ 603 million yuan, respectively, +71.51%/-13.030%/+36.03/ +51.1%. ② By industry, the company's distribution/publishing/materials/printing/media business achieved revenue of 73.35/33.85/10.45/5.80/207 million yuan (internal offset of 3.625 billion yuan) respectively, +3.80%/+7.38%/2.04%/+6.26%/+0.08%, respectively. Apart from a slight decline in the materials industry business, all other businesses achieved steady growth.

In terms of profitability, in terms of gross margin, the company's gross sales margin was +0.44pct to 31.83% year-on-year in 2023, mainly due to a slight increase in the gross margins of the company's three main businesses of distribution, publishing, and materials. ② In terms of rates, the overall cost ratio was +1.67pct to 20.3%, of which the sales expenses rate was +0.90pct to 10.49%, mainly due to the increase in labor costs and promotion expenses brought about by market development and business growth. The management/R&D/finance expense ratios were 10.410%/0.700%, respectively, +1.00pct/+0.02pct/-0.25pct. ③ In terms of net interest rate, net interest rate was 15.39%, +3.66pct year-on-year, increasing profitability.

24Q1 revenue was under pressure, and gross margin improved significantly. 24Q1 achieved revenue of 2,088 billion yuan, -4.86% year-on-year, net profit of 152 million yuan, -33.96% year-on-year, gross profit margin of 34.05%, +4.29pct, month-on-month +3.29pct, overall expense ratio 19.61%, year-on-year +1.51 pct, net profit margin 8.17%, year-on-year -3.29pct, and -14.82 pct month-on-month.

There is still room for the natural endowment dividend ratio for building a populous province in Guangdong. ① Natural endowment: On the one hand, Guangdong, as a province with a large population, continues to rank first in the country in terms of the number of residents, and is now showing a positive growth trend. The number of people enrolled in school is expected to maintain steady growth in the next few years, and Guangdong's total investment in education, financial education expenditure, and budget education expenses rank first in the country; on the other hand, only state-owned publishing units can apply to the State Press and Publication Administration for publication. Private enterprises can only cooperate with state-owned publishing units to create competitive barriers for companies. ② Channel advantage: The company is deeply involved in the education publishing business in Guangdong Province, and the channel advantage is obvious. As of 2023, the distribution group has 200 central stores, 95 campus bookstores, and 118 rural bookstores. The chain management network covers 94 cities, counties, towns and villages throughout the province. It is expected to develop markets outside the province and expand the national market share in the future. ④ High percentage dividends: Relying on the steady improvement in operating quality brought about by the advantages of the main business, in 2023, the company plans to distribute cash dividends of 5.40 yuan (tax included) to all shareholders, totaling 484 million yuan (tax included), accounting for 37.69% 6 of net profit to mother, accounting for 54% of net profit excluding non-recurring profit and loss, and the total amount of dividends reached a record high. We believe that by relying on the advantages of population resources and sales channels in Guangdong Province, the company is expected to continue to maintain the steady development of the main education publishing business, and the company's dividend amount has been rising steadily in recent years. Despite changes in income tax policies or compression of the company's profits, there is still room for improvement in the company's dividend ratio against the backdrop of abundant cash flow and good business conditions.

The intensive management of educational publishing has achieved remarkable results, and after-school services verify the logic of education and training. ① Education Publishing: In 2023, 1,077 types of textbooks and 2,847 teaching aids were published. The publication of textbooks and teaching aids achieved annual revenue of 2,821 billion yuan, an increase of 7.3% over the previous year. The profits of its education cooperatives grew steadily, reaching 286 million yuan throughout the year, ranking among the top local education presses. The company is steadily promoting the submission of Guangdong's national standard textbooks for review. The Guangdong version of teaching aids has progressed steadily, and the comprehensive revision of the catalogue of teaching aids has been completed. The distribution code has increased significantly over the same period last year, and the results of intensive management reforms have been outstanding, which is expected to accelerate the steady development of educational publishing. ② After-school services: The company actively lays out after-school services inside and outside of school, develops the county and school markets, transforms into a “multi-product development+customized service plan” supplier, promotes the construction of a “Southern Education Media After-School Service Platform” and a “Greater Bay Area Research Service Platform”. After school services implement “one county, one policy” and “one school, one case”, with a total revenue of nearly 200 million yuan. As the education policy enters a stable period, the company's layout within the province is expected to be further improved, and markets outside the province will be gradually developed, and the education and training logic will be further verified.

With the “AI+ Education” product in hand and the revenue realized, the business logic has been verified. The company's Guangdong Education Xiangyun digital textbook platform has launched more than 13 million users in the province, an increase of 95.77% over the previous year, an increase of 95.77% over the previous year. 16,000 schools used it. A total of 345 digital textbooks were launched, covering 21 subjects in elementary schools and middle schools. The company has launched Guangdong Education AI Listening, Huacheng Art Test, Guangdong E-learning Machine, AI Go, etc., and some product features and versions have been iteratively upgraded. The company's product capabilities have continued to improve, and it has already generated revenue. We believe that the company's layout in the direction of “AI+ education” is clear, and it is expected to rely on the company's main business resources (sales team/educational institutions/school channels/maximum student flow/brand effect) to accelerate product promotion and performance delivery and contribute to the increase in performance.

Investment advice: As a state-owned education publishing enterprise in a province with a developed population and economy, although income tax will reduce the company's profits in the short term, the company's fundamentals are stable and there is still room for improvement in dividend ratios. Combined with the company's efforts to lay out the “AI+” and education and training industries, it is expected to boost performance and valuation. It is estimated that in 2024 to 2026, the company's net profit to mother will be 801/9.59/1,121 million yuan, respectively, and EPS will be 0.89/1.07/1.25 yuan, respectively. Corresponding to the current PE of 16/14/12 times, respectively, coverage for the first time, giving a “buy” rating.

Risk warning: the risk of changes in education policies, the risk of changes in the macroeconomic environment at home and abroad, progress in new business falls short of expectations, technological development falls short of expectations, changes in the number of students enrolled.