Incidents:

(1) On April 25, 2024, the company announced its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 9.365 billion yuan, yoy +3.35%; net profit to mother of 1,284 million yuan, yoy +34.39%; net profit without return to mother of 890 million yuan, yoy +0.31%. 2024Q1 revenue was 2,088 billion yuan, yoy -4.86%, net profit to mother 152 million yuan, yoy -33.96%, net profit after deducting non-return to mother of 169 million yuan, yoy -9.34%.

(2) In 2023, the company plans to distribute cash dividends of 5.4 yuan for every 10 shares, with a total dividend of 484 million yuan, yoy +14.89%, accounting for 37.69% of net profit attributable to mother.

Investment highlights:

The main business grew steadily, and the 2024Q1 performance was affected by income tax. The company achieved operating income of 9.365 billion yuan in 2023, yoy +3.35%, and gross profit margin of 31.83%, +0.44pct year-on-year. Revenue growth was mainly driven by growth in the textbooks and teaching aids sector. Textbook revenue was 8.303 billion yuan, yoy +5.89%, accounting for 90.97% of revenue, +3.14pct year-on-year.

The cost rate for the 2023 period was 20.29%, +1.66pct, mainly due to the increase in the number of employees by 153 and the increase in wages and remuneration, which led to an increase in sales expenses and management expenses.

Net profit due to mother in 2023 was 1,284 million yuan, yoy +34.39%; net profit after deducting non-return to mother was 890 million yuan, yoy +0.31%. Non-recurring profits and losses mainly include: ① Affected by income tax policy adjustments, deferred income tax expenses of 140 million yuan; ② financial asset investment income of 153 million yuan, of which income from changes in fair value of stocks was 147 million yuan, mainly from Longban Media's shareholding income; ③ government subsidies of 90 million yuan (yoy -8.41%).

2024Q1's revenue was 2,088 billion yuan, YOY -4.86%. The decline in revenue was mainly due to the fact that textbooks and teaching aids that were originally scheduled to be recovered in the first quarter have not yet been recovered. 2024Q1 net profit attributable to mother was 152 million yuan, yoy -33.96%, after deducting non-attributable net profit of 169 million yuan, yoy -9.34%. The decline in net profit was mainly due to: ① Affected by changes in the applicable income tax rate, 2024Q1 income tax expenses of 57 million yuan, yoy +524.89%, ETR 25.14%, yoy+21.63pct; ② loss of 27 million yuan in financial asset investment. After deducting income tax and profit and loss from changes in fair value, the company's 2024Q1 net profit was 236 million yuan, yoy +11.74%.

At the end of the 2024Q1 period, the company had a cash balance of 3.167 billion yuan (monetary funds+transactional financial assets), with plenty of cash on hand.

Stabilize the core advantages of textbooks and teaching aids, promote the expansion of after-school service business, and continue to build a digital education platform

The company consolidated the core advantage of textbooks and teaching aids. Its education club had a net profit of 300 million yuan in 2023, yoy +16.87%, published 1,077 textbooks and 2,847 teaching aids in 2023. By promoting distribution channel integration and active market expansion, the company promoted revenue growth in market-based textbooks and teaching aids products, which became the main driver for the growth of its main business. In 2023, general book sales amounted to 2,801 billion yuan, yoy +35.48%.

The company seized the opportunity of the “double reduction” policy, promoted the construction of the “Southern Education Media After-School Service Platform” and the “Greater Bay Area Research Service Platform”, implemented “one county, one policy” and “one school, one case” for after-school services, and promoted various Xinhua bookstores to implement a grid reform of education services. The total revenue of the after-school service sector in 2023 was nearly 200 million yuan.

The company has implemented the “Digital Knowledge Journey” strategy, actively promoted the implementation of education informatization and digitalization. The “Guangdong Education Xiangyun Digital Textbook Application Platform” had nearly 43 million active users throughout the year, yoy +95.77%, and promoted the implementation of various market-based projects such as the “Southern Smart Operating System”, “Language Music Platform” and “Guangdong High School Learning Platform” to achieve commercial operation.

The company is actively exploring a new children's programming circuit through the establishment of a joint venture. Through the subsidiary Nanchuan Investment, Nanchuan Technology was established as a joint venture with Programming Cat (Shenzhen Dianmao Technology Co., Ltd.). The company invested 5.1 million yuan, held 51% of the shares, and held 40% of the shares.

Profit forecast and investment rating: We are optimistic that the company relies on its location advantage in Guangdong Province, and actively embraces AI and new business formats. However, due to changes in income tax rates, the company's performance will grow or be pressured in 2024. Based on this, we predict that the company's revenue for 2024-2026 will be 102.56/111.94/12.424 billion yuan, respectively, and net profit to the mother will be 10.11/10.83/1,185 billion yuan, respectively. The corresponding PE is 13/12/11x, covered for the first time, giving it a “buy” rating.

Risk warning: Market competition increases the risk, the risk that the number of students does not grow as much as expected, the risk that the progress of scientific and technological innovation falls short of expectations, the risk of changes in tax policies, the risk of changes in industry policies, etc.