Incident Overview

2024H1's revenue/net profit/adjusted net profit/net operating cash flow was 16.30/0.278/0.349/0.235 billion yuan, respectively, up -3.10%/240.90%/21.20%/-37.46% year-on-year. According to our analysis, the decline in revenue was mainly due to a conflict with the public examination schedule for public institutions in March this year, which affected the number of applicants, but the year-on-year increase in net profit due to higher gross margin, lower administrative expenses, and other increases in earnings. The adjustments mainly involved payment of 0.071 billion yuan for shares. The lower net operating cash flow than net profit is mainly due to an increase in other accounts receivable.

Analytical judgment:

Earnings declined slightly in the first half of the year, which was mainly affected by the adjustment of the recruitment schedule. 1) By business, 2024H1 training service/book sales revenue was 1.379/0.252 billion yuan respectively, down 3%/3% from the previous year. We analyzed that the decline in sales revenue from training services and books in 24 was mainly due to the collision period between the written examination of public institution personnel recruitment and the written examination of provincial civil service joint examinations in the first half of 2024, which led to a decline in sales of training courses and textbooks for personnel recruitment examinations in public institutions.

2) By product, 2024H1 online learning products/ large class training (all online)/small class training (OMO)/other training revenue was 0.65/0.266/1.026/0.023 billion yuan respectively. Large/small classes increased by -19%/8% year-on-year, and the share of small class training increased from 55% to 74% at the end of 23. 3) Online, the average number of monthly active users on the 2024H1 platform was 9.2 million, the same as the previous year, with an increase of 0.1 million over the previous month.

The increase in contract debt+reduction in refund debt provided a guarantee for the education business in the second half of the year. 2024H1's contract debt was $0.212 billion, up 12.7% year over year, mainly due to an increase in prepaid course fees charged by the company. The 2024H1 company's refund debt was 0.189 billion yuan, a year-on-year decrease of 14.8%, mainly due to the company's business development strategy adjustments, which led to a reduction in the proportion of course fees for agreed courses that were withdrawn due to failure to pass.

AI empowerment has led to an increase in gross margin. The increase in adjusted net interest rate was higher than gross margin mainly due to lower management expenses, lower R&D expenses, and other income losses due to reduced dividend payments. (1) 2024H1's gross margin was 54.2%, up 3.3 PCT year on year, and gross margin of training services/book sales was 57.9%/33.6%, up 4.0/0.8 PCT year on year. The increase in gross margin of training services was mainly due to: 1) the company deepened the OMO teaching model and increased the full class rate; 2) artificial intelligence technology and other online technologies enabled enhanced teaching efficiency and improved operational efficiency. The number of 2024H1 teachers decreased 11% year over year to 3145, corresponding per capita income of 0.518 million yuan. +9% YoY. (2) The adjusted net interest rate for 2024H1 was 21.4%, up 4.3PCT year on year. The increase in adjusted net interest rate was mainly due to: 1) Sales Expenses/ Management Expenses/ R&D Expenses/ Finance Expenses Ratio were 19.6%/6.6%/-1.0%, respectively, up 1.6/-6.9/-0.4PCT. The increase in sales expenses was mainly due to a strategic increase in marketing expenses to meet the long-term development strategy; the decrease in the management expense ratio was mainly due to a decrease in dividend payments and a decrease in share payments 7.6PCT to 4.4%; the decrease in the financial expense ratio was mainly due to increased interest income and reduced foreign exchange losses. 3) Other income turned a loss into a profit, and its share of revenue changed from -1.6% to 0.1%, mainly due to a year-on-year decrease of 95% to 0.002 billion yuan in foreign exchange losses and an increase of 199% to 0.005 billion yuan in fair value returns on financial assets. 4) Income tax/revenue increased by 0.24PCT to 0.59%.

Investment advice

According to our analysis, the company's future space lies in: (1) seizing competitors' share space; (2) future large classes still have room to raise prices; (3) small classes still have room to increase penetration; (4) as AI-enabled technology becomes more mature and perfect, it is expected that teachers' teaching efficiency and after-school service efficiency will be further improved, and there is still plenty of room for cost reduction and efficiency. The revenue forecast for the first half of the year was reduced by 3.662/4.391/5.213 billion yuan to 3.034/3.323/3.646 billion yuan; the 24-26 adjusted net profit forecast of 0.613/0.8/1 billion yuan was lowered to 0.552/0.646/0.74 billion yuan, corresponding to a 24-26 EPS reduction of 0.27/0.35/0.44 yuan to 0.25/ $0.29/0.33, the stock price was HK$3.00 on August 23, 2024, and the corresponding PE was 11/10/8X (1 HKD = RMB 0.92), maintaining a “buy” rating.

Risk warning

Potential risks of policy changes, fierce competition risks for large classes, risk of customer acquisition for small classes, and systemic risks.