Key points of investment:

Accelerate innovation around the main business. The company is a subsidiary of Zhongyuan Publishing and Media Group. It is under the management of 11 publishing houses including Henan People's Publishing House and Elephant Press, and many subsidiary (branch) companies such as Henan Xinhua Bookstore Distribution Group. In recent years, the company has solidly built the four major industrial cornerstones of “content construction,” “all-media communication,” “capital operation,” and “technological empowerment,” and has made every effort to promote the seven major business lines of “integrated publishing,” “copyright think tanks,” “modern education,” “composite bookstores,” “e-commerce retail,” “research, culture and creativity,” and “reading services,” and focus on enhancing the company's competitiveness.

The main business continues to grow, and high dividends give back to investors. The company achieved operating income of 9.833 billion yuan in 2023, up 2.12% year on year; net profit to mother was 1.389 billion yuan, up 34.55% year on year. 2024H1 achieved operating income of 4.529 billion yuan, up 4.77% year on year; total profit of 0.528 billion yuan, up 6.81% year on year; net profit to mother 0.354 billion yuan, down 25.04% year on year, mainly affected by income tax policies.

The company's main business developed steadily. The distribution/publishing business achieved revenue of 8/3.163 billion yuan in 2023, up 2.85%/10.39% year on year; 2024H1 achieved revenue of 3.685/1.571 billion yuan, up 7.31%/2.82% year on year. In terms of dividends, the company paid a cash dividend of RMB 4.20 (tax included) for every 10 shares to all shareholders in 2023, for a total dividend of 0.43 billion yuan. Based on the closing price on September 11, the dividend rate was 3.87%.

Based on the main publishing business, the textbook teaching aid business has a stable competitive advantage. In the first half of the year, the company received more than 30 important national awards and honors. Among them, 8 projects were selected to be funded by the National Publishing Fund in 2024; 8 new “Chinese Context” books met readers through integrated media publishing and network-wide distribution, and the third original red book drama “The Song of Jiao Yulu” was successfully staged, integrating the published product lineup to develop new products.

In terms of educational textbooks, the company is an exclusive agent in Henan Province for mainstream textbook publishing units such as People's Education Press, People's Music Press, and Beijing Normal University Press, and continues to be a “single source procurement” supplier of free textbooks for compulsory education in Henan Province 2024 fall 2027 spring. We believe that by consolidating its main business and consolidating its competitive advantage, it is expected to provide strong support for improving performance.

The innovative business continues to advance, creating the company's second growth curve. The company is actively preparing for “Yu Version Chain” and “Yu Jiao Chain”, and cooperates with AIGC vendors such as Tencent and Mitsu and leading technology enterprises such as rice husks and digital boxes to implement digital content; the “Literature China” resource library project completed back-office development and front-end framework function settings. The data center project built a cloud-based platform, started engine testing, and the “Shijing” famous image intelligence platform and other projects applying AIGC technology officially started. In terms of education, the company carried out “Screenplay Entertainment Research” with “Finding Immortals in Luoshui” and “Fengya Dreamhua”, “Themed Publishing Research” with “Open Road Pioneer Shield Machine Exploration Trip” as a breakthrough, and “Bookstore Store Research” represented by the “Xinhua Youth Research Camp”. It held nearly 2,000 related events in half a year; refined and launched 7 quality research routes and 11 subject integration courses, and opened up 7 counties and districts to achieve after-school service and course selection. We believe that the introduction of new technologies such as AIGC is expected to reduce costs and increase efficiency, while the development of new business formats such as research will provide additional volume for the company's performance growth.

Cultural services are diverse and integrated. The company accelerated the transformation process from “traditional stores” to “composite IP”. Five old stores completed themed, characteristic, and intelligent renewal. Deeply explore the brand power, service power, and influence of “The Most Beautiful Reading Voice”, plan and launch the “January 1 Theme” reading event, and host 6208 cultural experience events such as the Writers' Forum, Book Fair, and Huimin Book Fair. “2024 Zhongyuan Shuxiang Festival” became a hit on social media such as Weibo, leading to live monetization of online traffic. In terms of the media distribution matrix, Shuxiang Henan Public Culture Platform added 0.035 million users, with a total number of views reaching 17.95 million. People's Culture Cloud launched 3,338 video resources, an increase of 4.2% over the previous year. The number of orders placed by Yunshu Network and e-commerce live streaming in the province exceeded one million, an increase of 8.21% over the previous year. In terms of education services, the company has carried out more than 7,000 activities in schools across the province, focusing on themes such as “Green Health”, research, and comprehensive practice, and cooperated in building 18 municipal “Green Health” expert service teams across the province to continuously improve the level of school admissions services.

Profit forecasting and valuation. We expect the company's 2024-2026 EPS to be 0.95 yuan/share, 1.02 yuan/share, and 1.11 yuan/share, respectively. Referring to comparable companies, we believe that the company's main business has maintained steady growth, and its competitive advantage in educational textbooks is stable. With the rapid development of new business formats such as research business, superposition and intelligent transformation can improve the company's overall profitability, giving the company a 13-15 times PE valuation in 2024, corresponding to a reasonable value range of 12.35-14.25 yuan/share. For the first time, coverage gave the company an “superior to the market” rating.

Profitability forecasting assumptions. 1) The company continues to consolidate its position in the industry and become a “single source procurement” supplier of free textbooks for compulsory education in the fall of 2024 and 2027 in Henan Province. At the same time, the company is promoting digital transformation and strengthening the construction of online and offline channels, which is expected to drive the distribution business revenue to grow 4.11%/4.18%/4.26% in 2024-2026, and the publishing business revenue to grow 9.66%/9.69%/9.72%. 2) Relying on the advantages of original cultural resources, the company actively carries out new business formats such as research projects. It is expected to build a second growth curve and drive total revenue growth of 5.59%/5.50%/5.42% in 2024-2026.

Risk warning: Risk of changes in industry policies, publishing and distribution business falling short of expectations, digital business development falling short of expectations.