Incidents:

(1) On May 7, 2024, the company announced the progress of share repurchase. As of April 30, 2024, the company had repurchased a total of 31.27 million shares, accounting for 1.57% of the total share capital, for a total amount of 204 million yuan.

(2) On April 27, 2024, the company announced its 2024 quarterly report. 2024Q1 achieved operating income of 2,929 million yuan, yoy -5.44%, net profit to mother of 293 million yuan, yoy -13.28%, net profit of 315 million yuan after deducting non-return to mother net profit of 315 million yuan, yoy +17.13%.

(3) On April 18, 2024, the company announced its 2023 annual report. In 2023, it achieved revenue of 11.244 billion yuan, yoy -3.79%, net profit to mother of 936 million yuan, yoy +32.21%, net profit after deducting non-return to mother of 754 million yuan, yoy +9.66%. The company plans to distribute a discovery dividend of 3.05 yuan for every 10 shares, for a total dividend of 645 million yuan (including the 2023 repurchase amount of 0.48 million yuan).

Investment highlights:

The scale of the low gross margin business was reduced, and net profit after deduction grew steadily in 2023 (1) Book sales continued to grow in 2023, and the revenue scale of the supply chain and logistics business was reduced. In 2023, it achieved revenue of 11.244 billion yuan, yoy -3.79%. Among them, 2023Q4 revenue was 1,464 million yuan, YOY -40.33%, and QoQ -60.92%. By product, revenue from textbooks and general books in 2023 was 1,754/519 million yuan, yoy +2.43%/+6.57%, accounting for 55.76% of the total revenue; game business revenue was 162 million yuan, yoy +75.65%; supply chain and logistics, multimedia, and sports goods business revenue was 37.98/519./180 million yuan, respectively, and YOY was -3.54%/-46.46%/-64.94%, respectively. 2023 gross profit of 2,407 billion yuan, yoy +5.38%, gross profit margin 21.41%, up 1.86pct year on year. The increase in gross margin is mainly due to the reduction in the scale of logistics, multimedia business, sports goods, and other businesses in the low gross margin supply chain.

(2) Net profit not attributable to mother in 2023 increased steadily year over year. In 2023, the company achieved net profit of 936 million yuan, yoy +32.21%. The increase in net profit to mother was mainly affected by income tax policy adjustments, which calculated deferred income tax expenses of 137 million yuan. Net profit after deducting non-return to mother in 2023 was 754 million yuan, yoy +9.66%.

According to Fiscal Tax [2019] No. 16, operating cultural institutions are converted into enterprises and are exempt from corporate income tax for 5 years from the date of registration of the conversion system. According to Fiscal Tax [2023] No. 71, companies will no longer enjoy the cultural transformation corporate income tax exemption policy from January 1, 2024, so we will adjust the company's future applicable income tax rate to 25%.

(3) The 2023 cash dividend rate increased to 68.9%. In 2023, the company plans to pay a dividend of 3.05 yuan for every 10 shares, with a total dividend of 645 million yuan (including the 2023 repurchase amount of 0.48 million yuan), with a dividend rate of 68.9%, an increase of 17 pcts over 2022. At the closing price on May 8, 2024, the dividend rate is 4.2%.

(4) Stock buybacks and cancellations demonstrate confidence in development. Since December 2023, the company has repurchased shares at no more than 8.5 yuan/share to cancel and reduce the registered capital. The repurchase amount is 200 to 400 million yuan. As of April 30, 2024, the company has repurchased a total of 31.27 million shares, accounting for 1.57% of the total share capital, and a total repurchase amount of 204 million yuan.

(5) We have plenty of cash on hand and sufficient balance of funds raised. As of December 31, 2023, the company had a cash balance of 10.677 billion yuan. The company announced on November 18, 2023 that it plans to change the unused capital and cumulative revenue of the fund-raising project totaling 2,429 billion yuan to invest in new projects such as smart supply chain logistics parks, digital bookstore construction, and smart gaming platforms.

(6) 2024Q1 gross margin increased significantly, with net profit not attributable to mother growing at a rate of 17.13%. The company achieved revenue of 2,929 billion yuan in 2024Q1, YOY -5.44%, gross profit margin of 27.48%, +7.14pct year over year, and +1.54 pct year-on-year expense ratio for the period. Net profit from 2024Q1 was 293 million yuan, YOY -13.28%. The year-on-year decline was mainly due to changes in income tax policies, and the company's 2024Q1 income tax expenses increased. ETR was 22.2%, up 19.62 pcts year on year.

Net profit of 2024Q1 after deducting non-return to mother was 315 million yuan, yoy +17.13%, mainly benefiting from the increase in gross margin. As of 2024Q1, the company had cash of 10.948 billion yuan, YOY +7.94%, and QoQ +2.54%.

The main business foundation is strong, diversified layout and collaborative development

(1) The company uses channel advantages to enhance cultural service capabilities: actively layout a new online and offline cultural service matrix, and has 804 physical stores in Anhui, Jiangsu, Beijing and other places.

(2) Improve the education service business system and promote the transformation and upgrading of smart education: The company has a four-level marketing network system covering provinces, cities, counties and townships and nearly 3,000 education service specialists. It has formed four major business systems: preschool education, K12 education, vocational and higher education, and smart education, focusing on business scenarios such as schools and campus bookstores. Using the “Reading Partner” learning machine as a breakthrough, the company pioneered a new digital intelligence education circuit, developed the new Zhuzi Education AI robot in Anhui, supports fully automated classes, can spontaneously interact with students during class, and cultivate various abilities of young children in a diverse manner.

(3) Actively embrace technological innovation: The company and HUAWEI CLOUD Computing Technology Co., Ltd. jointly implemented the “Digital Anhui New” planning project, focusing on leading the development of the three new business formats of new retail, smart education, and smart supply chain, building a “beautiful science” integrated media platform, and developing products such as new learning machines in Anhui, the new Anhui Reading Model, and Zhu Zi robots.

Profit forecast and investment rating: Due to changes in income tax rates, the company's performance growth is under pressure, but the company has a solid foundation in textbook distribution and sales business, actively embraces technological innovation, and creates a smart new business format. Based on this, we forecast that the company's revenue for 2024-2026 will be 122/133/148 billion yuan, respectively, and net profit to the mother will be 8.25/957/1.78 billion yuan, respectively. The corresponding PE is 18/15/14x, respectively. Covered for the first time, it gave a “buy” rating.

Risk warning: Market competition increases risk, risk of investment targets falling short of expectations, risk of student growth falling short of expectations, risk of falling short of expectations in scientific and technological innovation progress, risk of tax policy changes, etc.