Revenue was basically in line with our expectations, and net profit to be weaker than our expected 3Q24 results: revenue of 2.47 billion yuan, up 1.5% year on year (basically in line with our expectations of 2.6 billion yuan); net profit to mother was 0.183 billion yuan, down 31% year on year, lower than our forecast of 0.23 billion yuan. We think it was mainly due to: 1) sales expenses were slightly higher than expected; 2) gross margin declined slightly due to: 1) sales expenses were slightly higher than expected; 2) gross margin declined slightly due to revenue restructuring.

Development trends

Revenue performance is steady, and education/popular books are expected to grow positively; actively promote “going global” and expand international influence. In terms of educational publishing and distribution, the company continued to complete “books before class” in the fall, and textbooks and teaching aids continued to be steady. In addition, the company also maintained a good growth rate in educational products (such as four-dimensional reading), supporting revenue growth. In terms of popular books, “Chang'an's Lychee”, “Southern Foodies”, “There's a Small Shop in the Clouds”, and “Too Baffling White Star” continued to rank at the top of the bestseller list, laying the foundation for the company's mass book growth. According to the operating data announcement disclosed by the company, the general book publishing business revenue in 3Q24 increased 23% year-on-year to 0.179 billion yuan (accounting for 7% of total revenue, including some educational products). We believe that the company has achieved positive revenue growth despite business adjustments such as materials, etc., reflecting the resilience of the company's main publishing and distribution business. Since the fourth quarter, the company has also actively promoted “going global”, participated in the Frankfurt Book Fair, strengthened copyright exchanges and cooperation between its publishing houses and international publishing organizations such as Penguin Landon, and launched the Chinese-Italian bilingual edition of “China's Intangible Heritage” overseas, etc., continuing to expand the company's international influence.

There was a slight increase in issue-side sales expenses. Gross margin fell by 1.3ppt to 42.8% in 3Q24. We think it is partly related to the impact of revenue restructuring. 3Q24 sales expenses also increased by 9% to 0.44 billion yuan, and the sales expense ratio increased by 1.2ppt. We think it may be related to the distribution side's current or pre-marketing expenses and overall expenses related to summer, some book clubs/reading markets, etc. At the net interest rate level, 3Q24 fell by 3.5ppt to 7.4%. We believe it is mainly due to changes in tax policies and a sharp increase in income tax expenses over the same period last year, all of which are within market expectations.

Stable cash flow and stable dividend returns. The company has plenty of cash, with monetary capital of 13.1 billion yuan as of the end of 3Q24. In terms of cash flow, net cash flow from operating activities increased sharply year-on-year from the beginning of 2024 to the end of the third quarter. The company said it was mainly due to changes in the scale of financial assets purchased and resold by finance companies and changes in the amount of deposits absorbed by the holding group; excluding this part of the accounting level, the actual operating cash situation is still healthy. We believe that the company's dividend policy continues. From 2020 to 2023, cash dividends were 0.63/0.65/0.60/0.55 yuan/share and 1H24 dividends were 0.1 yuan/share, respectively. The frequency of dividends increased, dividend returns were stable, and continued to give back to shareholders.

Profit forecasting and valuation

Keep the 24-25 profit forecast unchanged. The current stock price corresponds to 16 times the 2024 price-earnings ratio and 15 times the 2025 price-earnings ratio. Maintaining an industry rating and target price of 15.6 yuan, corresponding to 18 times the 2025 price-earnings ratio, there is 22% room for an increase of 22% compared to the current stock price.

risks

Industry/income tax policies have changed, paper prices have risen, and population growth has slowed.