Incident Overview

The company's revenue/net profit to mother in the first half of 2024 was 0.317/0.055/0.054 billion yuan, up 68.1%/160.7%/168.9% year on year, exceeding market expectations. The increase in net profit to mother was higher than revenue due mainly to increased gross margin and the impact of fair value changes in profit and loss. After excluding profit and loss from changes in fair value, net profit to mother increased 33% year on year, net profit after excluding the impact of net profit and loss, 16.2%, down 4.3 PCT year on year.

2024H1's contract debt was 0.458 billion yuan, up 183.8% year on year and 116.5% month on month.

Analytical judgment:

Quality education has increased rapidly, and the number of employees has doubled since the beginning of the year. (1) By business, the full-time review/quality education/tutoring programs were 0.124/0.118/0.076 billion yuan respectively, up 19.7%/320.9% year-on-year. Among them, quality education grew rapidly, mainly due to the company's products completing the transformation of quality education and strong demand in the quality education market. The company continues to optimize quality education product services, focusing on cultivating core competencies such as literature and scientific literacy. It has launched 9 quality education products, including Tick Tick Literature, Thinking Planet, Funny Little Reporter, and excellent programming, and passed the first batch of non-subject assessments in Guangdong Province. The company's education and training business underwent a total of 65 inspections at the provincial, municipal and district levels during the reporting period, achieving a zero-penalty warning record, and was highly recognized. Furthermore, in the first half of 2024, the company actively promoted the pace of obtaining a non-disciplinary for-profit school license in Guangzhou to ensure the sustainable growth of the company's business through licensed compliance management. As of the reporting period, the company had a total of 1,785 employees. Compared with the number of 846 employees at the end of 23, the number of teachers provided the impetus for the rapid growth of the company's quality education business.

The increase in net interest rate of 2024H1 was lower than gross margin mainly due to an increase in sales expenses and an increase in the share of income tax. Net interest rate declined after excluding the impact of changes in fair value. (1) 2024H1's gross margin/net profit margin/OPM were 44.96%/17.2%/23.4% respectively, up 8.0/6.1/11.1PCT year-on-year. Looking at the cost ratio, the 24-year sales/management/R&D/finance expense ratio was 7.16%/12.90%/0.75%/1.63%, respectively, up 3.46/ -2.27/ -0.33/ -0.78PCT over the previous year. The decline in management expenses was mainly due to the company's continued cost reduction and efficiency. The change in fair value changed from a loss of 0.018 billion yuan to a profit of 0.003 billion yuan. Excluding this effect, the net interest rate was 16.2%, a year-on-year decrease of 4.3 PCT; the share of income tax increased by 4.6 PCT.

Advance payments for training have increased dramatically, providing a guarantee for the education business in the second half of the year. As of 2024H1, the company's contract debt was 0.458 billion yuan, up 183.8% year on year and 116.5% month on month. Our analysis mainly focused on the increase in advance payments for the quality education business, which provided a certain certainty guarantee for the operation of the education business in the second half of 2024.

Investment advice

According to our analysis, (1) in the short term, contract debt exceeds expectations, providing a guarantee for high quality education; however, company expansion will also have a certain impact on profit margins; (2) in the long run, apart from Guangzhou further increasing its share, there is still plenty of room for Shenzhen and Foshan. Based on the sharp increase in the company's contract debt, we raised the company's profit forecast by 0.646/0.842/1.09 billion yuan to 1.12/1.985/2.502 billion yuan, increasing the year-on-year increase from 32%/30%/29% to 129/ 77%/26%; and raised the 24-26 net profit forecast of 0.116/0.161/0.22 billion yuan to 0.185/0.331/0.423 billion yuan. The year-on-year increase increased from 27%/39%/37% to 102%/79%/28%, corresponding to a 24-26 EPS increase of $0.14/0.19/0.26 to $0.22/0.39/0.50, and the closing price of HK$2.75 on 2024/8/15 corresponds to 12/6/5X PE in 24-26, maintaining the “buy” rating and maintaining the target price of HK$6.18.

Risk warning

Market competition risk; risk of network expansion falling short of expectations; risk of tuition fee increases and student enrollment falling short of expectations; risk of loss of management team and teaching staff; systemic risk.