Specific incident: 2024H1's revenue decreased by 3.08% to 1.63 billion yuan, and adjusted net profit increased 21.20% year over year to 0.349 billion yuan. The company released the 2024 semi-annual report. 2024H1 achieved revenue of 1.63 billion yuan, up 3.08% year on year; net profit to mother of 0.278 billion yuan, up 240.88% year on year; adjusted net profit of 0.349 billion yuan, up 21.20% year on year. The revenue side declined slightly due to incorrect testing dates by public institutions and industry competition.

Demand in the industry remains high, and a sharp rise in volume and price is expected to drive performance growth. Under the pressure of employment in the macro environment, demand for recruitment examinations continues to grow. According to data from the Beijing News, the number of people who passed the national examination in 2024 reached 3.033 million, an increase of 16.8% over the previous year, and the recruitment ratio reached 77:1 (70:1 for the same period last year). According to Chinese public education data, the number of people taking joint examinations in 2024 exceeded 0.155 million, an increase of 2.11% over the previous year. The increase in the number of people and increased competition is driving demand for examinations. In addition, in the short to medium term, the company expects demand for financial examinations to increase. Looking at the breakdown: The 2024H1 training business achieved revenue of 1.379 billion yuan, yoy -3.11%, of which online learning products/online large classes/small classes (online+OMO) /special courses & promotion courses achieved revenue of 0.65/0.266/1.026/0.023 billion yuan respectively. Among them, OMO small classes are expected to maintain considerable growth; book sales achieved revenue of 0.252 billion yuan, yoy -2.96%. Currently, there are 202 offline operation centers, and the average monthly active users of online apps reached 9.2 million. After the launch of the C-side AI product in August, the price of the system class increased by 31% to 1,280 yuan. The sharp rise in volume and price is expected to drive a steady increase in the company's revenue.

C-end AI products have been launched to enhance the quality and efficiency of teaching. With years of online experience, the company continues to be deeply involved in digital teaching. 24H1 invests 0.11 billion yuan in R&D. The AI intelligent correction system developed by the company continues to lead the industry. The AI interview review, questions, and analysis functions have all been launched. The average usage rate has reached about 90%, the average response time of teachers has been reduced by 75%, teachers' efficiency has increased by 275% compared to 2021, and the average teacher's income contribution continues to increase. In August, the company launched an AI assistant for the C-side and installed it in the Fist Product System Course, which can provide functions such as exam analysis, score prediction, real-time supervisor reminders, and personalized guidance for applying for the exam. The company's self-developed chalk vertical model performs better than mainstream general model products in terms of language, data, common sense, judgment, and quantity. It integrates advanced technology and high-quality teaching and research service resources to help teachers reduce costs and increase efficiency and student user experience.

Profitability continues to improve thanks to technology. Under strategies such as AI to reduce costs and increase efficiency, FY24H1's operating efficiency continued to be optimized. Overall gross margin increased by 3.3 pcts to 54.2% year on year. By business, gross margin of training services increased 4.0 pcts year on year to 57.9%, and gross margin of book sales decreased slightly by 0.8 pcts to 33.6% year on year. The management/ sales/R&D expense ratio changed year-on-year during the reporting period - 8.8/+1.6/-1.9 pcTs to 18.8%/19.7%/6.6%, and the management/R&D expense ratio declined. The sales expense ratio mainly increased due to the company's strategic increase in marketing expenses. The operating profit margin increased to 16.6% year-on-year (YOY+12.4pcts), mainly driven by improved gross margin. The adjusted net interest rate, excluding equity incentive expenses, increased 4.3pcTs to 21.4%. It shows that there is still considerable room for improvement in profit levels.

Online+offline synergy effects continue to be reflected, and medium- to long-term growth is sustainable. The company's core advantage is that multi-level online high-quality products cover the needs of students. The advantages of teaching, research and teaching have established an excellent reputation. The channel-side layout of Douyin and the like provides live video courses to further increase user stickiness and expand the number of new customers. The online trend can support the growth of online training in the medium to long term. At the same time, online and offline are fully linked to empower each other from various angles such as enrollment and teaching. It is expected that the OMO teaching model will gradually establish a differentiated competitive advantage with peers and offline training. As of 2024H1, the company's contract debt was about 0.212 billion yuan (up 41.9% from the beginning of the period). The company's prepaid course sales increased near the exam season, fully verifying the company's core competitiveness. Against the backdrop of continued growth in demand for recruitment and training+skills testing, the company is expected to fully benefit as a high-quality leader with a comprehensive online+offline layout, and medium- to long-term growth is sustainable.

Investment advice: Looking at the company's performance in the short term, the company's performance is affected by the wrong test period and the intensification of industry competition and the decline in concentration. In the medium to long term, industry demand remains strong and favorable, and the company's operating efficiency is expected to continue to improve under AI. According to the 2024 semi-annual report, we adjusted the profit forecast, and the company is expected to achieve an adjusted net profit of 0.56/0.0.8 billion yuan in 2024-2026, an increase of 24.8%/20.7%/19.8%, maintaining the “buy” rating.

Risk warning: Increased competition in the industry, irregular changes in recruitment examination times, poor performance as expected, etc.