Investment highlights:

The exploration of a new marketing model was successful. Long-selling books ranked among the highest in sales, outstanding performance in the launch of new books, and abundant reserves for follow-up

(1) The company successfully explored new marketing methods such as short videos. At the end of 2023, Yu Hua's essay collection “We Live in a Huge Gap” published by the company sparked widespread discussion, creating a history where the company's single book sales exceeded one million copies in the shortest time. According to Xindiu data, as of March 8, the book had sold more than 1 million copies at the company's official Douyin flagship store, with a conversion rate of over 30%. The peak sales volume was on February 8, 2024, with an estimated sales volume of 0.25-0.5 million copies. According to the Beijing Open Book (same below), “We Live in a Huge Difference” ranked 2/1/1/3 in sales of non-fiction books in physical stores from February to May 2024, respectively, and ranked third in the non-fiction book sales list in the 25th week of 2024. As of July 4, 2024, the book had a cumulative sales volume of 1.362 million copies in the company's Douyin official flagship store.

(2) The company's sales volume is stable and ranks high all year round. In the May 2024 physical store fictional book sales list, “Being Alive (2021 Edition)” and “One Hundred Years of Solitude (50th Anniversary Edition)” ranked 1/6th, and in the physical store children's book sales list, “Red Doudou by the Window (2018 edition)” ranked 2nd.

(3) The 2024 new book performed well, and the reserve products were diverse. ① Marquez's posthumous work “We'll See You in August” was released simultaneously worldwide in March. In that month, it ranked 2/3/2 in the fictional new book sales shelf sales list, interest e-commerce list, and total sales list, respectively. ② Maijia's “Letter to the World” was launched in March. In that month, it ranked first in the list of interested e-commerce and total sales volume, and ranked 4th in the e-commerce list in April. As of July 4, the book had sold 0.105 million copies at the official flagship store of the new classic Douyin. ③ Li Juan's “Altay's Corner (2024 Edition)” entered the top 30 shelf sales list in May. ④ Kuroyanagi Tetsuko's “Red Peas by the Window” sequel “Red Peas by the Window” ranked 3rd in the children's shelf sales list in May. ⑤ The company plans to launch more than 200 new books in 2024. In addition to the above new books, products to be launched include the sequel to Wang Shuo's long-form “The Beginning” and the revised edition of “Xu San Guan's Blood Chronicle”.

The dividend amount per share was raised for two consecutive years. The dividend rate for 2023 was 5.4%. The company's dividend for 2021-2023 was 6/8/9 yuan for every 10 shares, and the total distributed cash dividend was 0.095/0.127/0.139 billion yuan, respectively. The dividend rate was 72.76%/92.55%/87%, respectively. Based on the 2023 dividend per share and the closing price on July 4, the dividend rate was 5.4%.

The overall 2024H1 book market is under pressure. Only the culture and education sector has maintained positive growth, and the revenue and share of short video channels has maintained a growing trend

According to CICC Yiyun, China's book sales market code is 51.812 billion yuan, yoy -14.8%; the number of products sold is 1.0532 million, yoy -8.44%. The average price is 45.55 yuan, yoy +1.58%, and the number of new books sold is YOY 5.41%. 2024H1

Looking at the 2024H1 segment, only the culture and education category achieved positive growth, yoy +9.18%, and the children's and management motivational category dropped by more than 20%. By channel, the short video e-commerce code was +18.63%. All other channels showed a downward trend year over year. The short video e-commerce code accounted for 33.89%, +9.38pct year on year.

Profit forecast and investment rating: The company is rich in copyright resources, strong revenue resilience, rapid overseas business development, and steady profit growth. We expect revenue from 2024 to 2026 to be 0.994/1.076/1.165 billion yuan, respectively, and net profit to mother 0.18/0.197/0.21 billion yuan respectively. The corresponding PE is 15/14/13x, respectively. The corresponding PE is 15/14/13x, respectively, covered for the first time, giving a “buy” rating.

Risk warning: Market demand recovery falls short of expectations, short video channel growth falls short of expectations, industry competition intensifies, book sales fall short of expectations, overseas business expansion falls short of expectations, etc.