In the first half of 2024, Thinking Music Education actively promoted the transformation of non-disciplinary literacy products, and its performance increased dramatically. 2024H1 achieved revenue of 0.399 billion yuan, a year-on-year increase of 58.8%; realized net profit to mother of 0.083 billion yuan, an increase of 92.5% year-on-year; and achieved adjusted net profit of 0.094 billion yuan (employee equity incentive fee 0.011 billion yuan), an increase of 101.1% year-on-year. By business, quality education courses contributed 0.367 billion yuan in revenue in the first half of the year, up 57.8% year on year; tutoring courses contributed 0.033 billion yuan, up 70.6% year on year.

Non-subject literacy courses are gaining momentum, branch sizes are expanding, and contract liabilities are rising. The company actively responds to changes in education policies and continues to transform non-disciplinary literacy products and services. As of 2024H1, the company opened 35 new branches compared to the end of 2023, with a total of 145 actual branches, and continued to expand the teaching scale; in the first half of the year, the company's contract debt was 0.249 billion yuan, an increase of 93.2% over the previous year. We believe that throughout the year, contract debt is expected to continue to grow at a high rate and gradually be converted into revenue to guarantee annual results.

The results of reducing costs and increasing efficiency have been remarkable, and management costs have been greatly optimized. The 2024H1 company's sales/management/ R&D expenses rate was 1.6%/14.1%/2.6%, respectively, a year-on-year decrease of 0.4/6.0/0.9 percentage points. While the company is actively expanding its stores, the headquarters has adopted refined management. There has been no significant increase in administrative staff, which has led to a drastic reduction in management rates, and the company's profit center is expected to rise significantly.

2024H1's net interest rate to mother was 20.8%, an increase of 3.7 percentage points over the previous year.

Build new businesses for educational tourism and international courses, and promote the diversified development of the company. The company will launch educational tourism business and international courses in July 2023. Since this year, Think Le Miaowei International has opened a number of international research camps including Singapore, the United Kingdom, and New Zealand.

Furthermore, Miaowei International reached a strategic cooperation with New Zealand's Long Bay Middle School in June this year. The company is actively expanding its overseas business, and diversified development is expected to bring new performance growth points.

Profit forecasting and valuation: We selected New Oriental, Excellent Education Group, and Xueda Education as comparable companies. Considering the remarkable results of the company's quality education transformation, the number of branch schools set up increased dramatically, and contract debt increased year-on-year in the first half of the year, and the annual performance is expected to continue to grow at a high rate. We expect revenue for 2024-2026 to be 0.843, 1.15, and 1.538 billion yuan, respectively, and adjusted net profit of 0.174, 0.238, and 0.324 billion yuan, respectively. The corresponding PE is 19X, 13X, and 10X, respectively, which is lower than the average of comparable companies, and for the first time coverage is given an “gain” rating.

Risk warning: Quality education business demand falls short of expectations; competition in the quality education industry intensifies; risk of regulatory policy changes.