Core views:

Performance Overview. The company announced its 2024 interim results announcement. 24H1 achieved revenue of 0.32 billion yuan, +68.1% year on year, net profit of 54.415 million yuan, up 170.0% year on year, and adjusted net profit of 54.415 million yuan, up 168.9% year on year, exceeding previous market expectations.

Literacy education is growing rapidly, and the level of profit is at a record high. The 24H1 full-time review/quality education/tutoring program earned 0.12/0.12/0.08 billion yuan, yoy +19.7%/+320.9%/+31.9%. Quality education achieved impressive growth in line with policy guidance. 24H1's gross profit margin was 45.0%, yoy+8.0 pct, mainly benefiting from improved operating efficiency; the sales/management expense ratio was 7.2%/12.9%, +3.5pct/-2.3pct year over year. The slight increase in sales expenses ratio was mainly due to the slow recovery of 23H1 market demand and a low base, while 24H1 increased investment accordingly as market business resumed. 24H1's adjusted net profit margin was 17.1%, +6.4pct year on year, a new high since listing.

High growth in contract debt lays the foundation for performance in the second half of the year, and market expansion in Shenzhen and Foshan is expected to open up room for incremental flexibility. As of the end of the 24H1 contract, the company's debt was 0.46 billion yuan, a sharp increase of 116.5% over the previous year. By market, Guangzhou is expected to achieve good growth as an advantageous city. At the same time, the Shenzhen and Foshan markets are expected to achieve impressive revenue collection and enrollment growth, which is expected to open up a second growth engine in the medium to long term.

Profit forecasting and investment advice. We believe that the company, as the leading compliance brand in the education and training industry, has fully benefited from the optimization of the competitive landscape. At the same time, it is located in a market with a net population growth advantage in the Greater Bay Area. The future growth elasticity of cities other than Guangzhou is considerable. Based on the company's 24H1 performance, we raised our annual profit forecast. The adjusted net profit for 24-26 is 0.17/0.27/0.34 billion yuan, respectively. Referring to comparable companies, we gave the company a 24-year 22xPE valuation, corresponding to a reasonable value of HK$4.85 per share (taking HKD 0.92 to RMB 0.92) ), maintaining a “buy” rating.

Risk warning. Risks such as fluctuations in industry policies, falling short of expectations in new enrollment, and a decline in the birth population.