Incident: The company released its 2024 interim report. During the reporting period, the company achieved operating income of 4.025 billion yuan, -0.83% year on year; net profit to mother 0.299 billion yuan, -27.22% year over year; net profit after deduction of 0.33 billion yuan to mother, -5.95% year on year. Gross profit margin: 34.21%, YoY +2.73pct, net profit margin 8.84%, YoY -2.97pct.

Looking at a single quarter, in 24Q2, the company achieved revenue of 1.937 billion yuan, +4.39% year over year; net profit to mother of 0.147 billion yuan, -21.82% year on year; gross profit margin of 34.39%, +0.88pct year on month, +0.34pct month on month; net profit margin 9.56%, -2.67 pct year on year, +1.39 pct month on month.

The operating conditions of the business are steady, and the gross margin of the publishing business continues to improve.

24H1's revenue was -0.83% year-on-year to 4.025 billion yuan, mainly due to the year-on-year increase in revenue from the teaching aid business, digital textbooks, wood pulp, etc., and the year-on-year decline in general books, cultural and sports goods businesses. On a quarterly basis, 24Q1/Q2 achieved revenue of 2.088/1.937 billion yuan, respectively, and 24Q2 had a positive year-on-year growth rate; by business, distribution/publishing/material trading/printing business achieved revenue of 31.93/1.391/0.487/0.26 billion yuan, respectively, -4.37%/-1.69%/+27.72%/-3.84%, respectively.

In terms of profitability: 1) In terms of gross margin, 24H1's gross sales margin was 34.21% /year over year, mainly due to the increase in gross margin of the top two main businesses (distribution business: 23.60% /year over year +0.75pct; publishing business: 30.90%/year over year +4.22pct). 2) In terms of rates, the sales expense ratio was 10.34% /-0.21pct, due to the rapid development of digital publishing, which gradually increased the share of online sales and reduced labor costs and issuance fees; the management fee rate was 10.97% /year over year +0.38pct, mainly due to the increase in labor costs, depreciation of usage assets, travel expenses and conference expenses; the R&D/finance rate was 0.10%/-0.82%, which remained stable. 3) In terms of net interest rate, net interest rate was 8.84%, -2.97pct year on year. Accelerate the construction of a new format for the education publishing industry, and gradually implement marketing channel construction. ① In terms of the distribution and supply of textbooks, the total supply of textbooks for primary and secondary schools in the spring of 2024 exceeded 0.223 billion books, 1.637 billion yuan of foreign textbooks. The spring catalogue of teaching aids achieved a distribution code of 0.645 billion yuan/ +4%, and there was a steady increase in the promotion and distribution of textbooks. ② In terms of submitting textbooks for review, all 96 volumes of compulsory education textbooks in 16 subjects under the New Era Cantonese version of the High Quality Textbook System have been approved by the Ministry of Education's Textbook Bureau. ③ In terms of textbook research and development, the development and promotion of vocational education and preschool education products has been increased, and various textbooks have been approved by the Ministry of Human Resources and Social Affairs and Guangdong Province. ④ In terms of marketing channels, the expansion and decline of public reading services has been promoted, 54 “Xinhua Reading Spaces” have been built, Jieyang Lingnan Academy has been built, and the construction of 8 New Era Civilization Practice Centers including Chenghai, Lingnan Academy Phase II, and Yunfu Lingnan Academy is being promoted in an orderly manner. The company's main business continues to operate steadily. It still maintains the industry's leading competitiveness in various aspects such as publishing and distribution, textbook research and development, etc., and marketing channel innovation further drives the main business to unleash its potential.

A number of “AI+ education” products were launched and versions were updated, and the business logic was gradually implemented. The company's Guangdong Education Xiangyun digital textbook platform covers 99.3% of schools, 93.5% of teachers and 79.7% of students in the province. The platform has already connected with the “National Smart Education Platform for Primary and Secondary Schools”. The company has launched a variety of AI products, such as the Joy AI Listening and Reading Intelligent Essay Platform, and the “Yue Teach Intelligence” smart teaching aid platform, and some product features and versions have been iteratively upgraded. The company's product capabilities have continued to improve, and revenue has already been generated. We believe that with policy support, the company's layout in the direction of “AI+ education” is clear, and it is expected that it will rely on the company's main business resources (sales team/educational institutions/school channels/student traffic/brand effect) to accelerate product promotion and performance delivery.

Investment advice: The company has stable fundamentals, continues to make efforts to lay out the “AI+ education” industry, and has both offense and defense, which is expected to boost performance and valuation. The company's net profit for 2024-2026 is expected to be 0.801/0.959/1.121 billion yuan, respectively, and EPS is 0.89/1.07/1.25 yuan, respectively, corresponding to current PE 13/11/10 times, respectively, maintaining a “buy” rating.

Risk warning: the risk of changes in education policies, the risk of changes in the macroeconomic environment at home and abroad, the development of new businesses falling short of expectations, technological development falling short of expectations, and changes in the number of students enrolled.