Incident: The official Chalk account announced that an “AI smart teacher” function has been added to the system class product, and that the national/provincial examination written test system course has been fully upgraded, and a series of courses have been added. The price has been adjusted from 980 yuan to 1,280 yuan. The price has been adjusted from 980 yuan to 1,280 yuan. It will be officially fully implemented from August 1.

Comment:

To C side AI products are launched to help improve user experience. The company independently developed the first vertical model focusing on the public examination industry. Based on the big language model (LLM) and long-term accumulation in teaching and research, the company introduced an “AI intelligent teacher”, integrating RAG (enhanced search generation), intent recognition, and vector database technology, and pioneered the application of national/provincial examination written test system class products. AI intelligent teachers have 7 major functions: personalized learning planning and guidance, testing and tutoring of learning achievements, question answering and other questions, exam question-answering and application guidance, supervisory reminders and stress relief guidance, providing guidance and 7*24 hours of companionship throughout the learning process.

Courses and services have been completely upgraded for public examination system classes, and prices have been raised by 31%. The national/provincial examination written examination system course has been fully upgraded. Members can enjoy up to 12 months of AI service benefits, and a series of courses have been added, including live streaming lessons on common knowledge subjects, live Q&A with famous chalk teachers, micro-courses on public security theory, live streaming courses on advanced topics, 5 advanced live courses on experimental breakthroughs and questions, etc., and the total length of content has exceeded 150 hours. After the upgrade, the price of the system course was adjusted from 980 yuan to 1,280 yuan, increasing the price by 31%. We believe that users are not very sensitive to the price of education products, and if they choose the wrong one, it will cost a lot of time (if they don't pass the exam in the first year, they will probably have to take the exam for the second year), so users are willing to pay for high-quality education products. While increasing prices, the company provides users with more courses and services. We estimate that the price increase will not interfere too much with users' consumption decisions. At the same time, it is expected to increase the company's system class revenue and increase profitability.

Scholarships can be obtained for the 25-year national/provincial entrance exam, which is expected to attract more high-quality students to enroll. After the system course is fully upgraded, students in the 2025 national/provincial examination system class will receive special incentives, and can receive 300-500 yuan scholarships and 500-800 yuan interview course purchase vouchers for entering the interview. We believe that the natural pass rate of the written examination for the national/provincial examination is low, so issuing scholarships will not significantly affect the customer unit price of the system course. Instead, it can attract more high-quality students to sign up for the system course, enhance the brand power and reputation of the company's system course, and is expected to increase the conversion rate from written test to interview.

Investment advice: The company took the lead in launching a To-C AI product, which is expected to improve the user experience. The comprehensive upgrade of the courses and services of the system class has come to fruition, with a 31% price increase. We believe that while increasing revenue, we can further enhance the brand power and reputation of the system course and promote the transformation from written tests to interviews. We expect adjusted net profit for 24/25/26 to be $608/806/1,003 million yuan. The current stock price corresponds to a valuation of 15x/11x/9x. The valuation is cost-effective and maintains a “buy” rating.

Risk factors: the risk of enrollment growth and tuition fee increases falling short of expectations; risk of increased refund rates; policy risks in the education industry.