Incident: 24H1, the company achieved revenue of 1.63 billion yuan, a decrease of 3.1%, net profit of 0.278 billion yuan, an increase of 240.9%, and adjusted net profit of 0.349 billion yuan, an increase of 21.2%.

Comment:

The wrong exam schedule for public institutions affects income. 24H1's revenue declined slightly, mainly due to the wrong examination schedule in public institutions. The written examination period for the joint examination of public institutions was brought forward from May of previous years to March 30. According to our statistics, a total of 20 provinces/regions participated; however, the schedule for this year's joint examination for the provincial civil service examination was from March 16 to 17. A total of 24 provinces participated. The two examinations were relatively close in time for 18 provinces/regions, which affected the recruitment and training revenue of public institutions. We estimate a slight increase in revenue if the impact of the wrong period is removed.

Small class training drives growth. In 24H1, small class training revenue was 1.03 billion yuan, accounting for 62.9% of revenue; large class training revenue was 0.27 billion yuan, accounting for 16.3% of revenue.

The power benefits of technology are gradually showing, and gross margin continues to rise. In 24H1, the comprehensive gross margin also increased by 3.3 pct to 54.2%, of which the gross margin of training services also increased by 4.0 pct to 57.9%. Empowered by technology and AI, the company continues to improve teacher utilization efficiency and average teacher income, leading to increased profitability. As of the end of June '24, there were 3145 full-time instructors, 80 fewer than at the end of 23 and 391 fewer than at the end of June '23. The average income of teachers in the semi-year (semi-annual income/number of full-time lecturers at the end of the half year) reached 0.518 million yuan, an increase of 9.0% over the same period.

Management fee rates have declined significantly. In 24H1, the management expense ratio also decreased by 6.9 pct to 12.1%. We estimate that it is mainly due to a decrease in managers' share payment expenses; the sales expense ratio also increased by 1.6 pct to 19.6%; and the R&D expense ratio also decreased by 1.9 pct to 6.6%.

The adjusted net profit increased steadily, and the adjusted net interest rate increased significantly. Although revenue declined slightly due to the wrong exam schedule, net profit performance was still impressive. 24H1 adjusted net profit increased by 21.2%, adjusted net interest rate also increased by 4.3 pct to 21.4%, and profitability increased significantly.

Investment advice: Under the objective circumstances of public institutions when examinations are wrong, adjusted net profit still delivered an increase of more than 20%, which is not easy. Furthermore, through technology and AI, the company's operating efficiency and average revenue per division are continuously improving, leading to an increase in profitability. Looking ahead to the second half of the year, we expect demand to be strong, and supply-side small and medium-sized institutions may be slower than our expectations in the short term, but quality and reputation are still the biggest competitive barriers in the education industry, and future share is expected to be concentrated at the top. While adhering to quality, the company is also providing better services to students by adding C-side AI products.

Maintain the 2024-26 adjusted net profit forecast of 0.558/0.684/0.822 billion yuan. The current stock price corresponds to a valuation of 11x/9x/8x, maintaining a “buy” rating.

Risk warning: macroeconomic risk; risk of changes in the competitive pattern of the industry; risk of changes in exam time.