Performance falls short of our expectations and that of the market

The company announced 3Q24 results: revenue of 1.86 billion yuan, a year-on-year decrease of 18%; net loss to mother was 72.92 million yuan, which turned into a year-on-year loss. The company's performance was lower than our and market expectations, mainly due to: 1) a large decline in revenue; 2) losses in a single quarter due to relatively rigid costs and expenses and the impact of income tax rates.

Development trends

Revenue also fell by 18%, mainly due to relatively weak demand for general books and increased discount pressure, and some compounded effects of the off-season for educational books.

In terms of books in general: 1) Overall market demand is weak. According to the opening data, in the domestic book retail market without textbooks and teaching aids, Shieyang fell 6.7% /Yaoyang fell 4.8% from the 1st to 3Q24. 2) Channel discount pressure is relatively high. According to the company's operating data disclosure announcement, the 3Q24 general book publishing business (accounting for 15% of total revenue) sales increased 2% year over year, but revenue also fell 20% to 0.285 billion yuan, and revenue code fell 4.83ppt to 18% over the same period, indicating that the discount pressure during the quarter was still relatively strong. 3) The general best-selling book categories and sales during the year were relatively limited compared to the previous 22-23 years.

In terms of educational books, we believe that the company's overall performance is relatively steady, which supports the basic performance of the performance, but since the third quarter is often a textbook subscription period (that is, the low season for revenue recognition, textbook and teaching aid revenue is generally in the second and fourth quarters), a combination of factors made the company's overall revenue performance weak.

The relatively rigid impact of costs and expenses led to losses in a single quarter. In terms of costs, the company's gross margin decreased by 3.5ppt to 18.7% in 3Q24, and related costs and expenses were relatively fixed. There was also a relatively limited year-on-year change in the absolute amount of the company's expenses. Among them, sales expenses fell 2% to 0.33 billion yuan in 3Q24, and management expenses also decreased 11% to 0.187 billion yuan (absolute amount decreased by 22.02 million yuan). Due to the relative rigidity of costs and expenses, 3Q24 had an operating loss of 60.49 million yuan.

Fourth-quarter results are expected to recover at the pace of revenue confirmation, and the outlook for the full year is stable. We believe that in 4Q24, with the gradual implementation of revenue recognition related to the company's textbooks and teaching aids, the overall revenue is expected to return to normal. As of 3Q24, the company's total cash assets (monetary funds and transactional financial assets) reached 11.2 billion yuan, with plenty of cash on hand, laying the foundation for steady dividends. In terms of dividends, the company's total cash dividends from 2021 to 23 increased year by year, with dividend payment rates of 54%/55%/57% respectively. We believe that the company will give back to shareholders with a steady level of dividends.

Profit forecasting and valuation

Net profit due to pressure on the company's revenue, was reduced by 11%/11% to 1/1.1 billion yuan in 24/25. The current stock price corresponds to 18/17 times the 24/25 price-earnings ratio. Maintaining an outperforming industry rating, the target price was lowered by 9% to 9.12 yuan (18 times the price-earnings ratio of 2025) due to adjustments in profit forecasts, and there was a 9% upside.

risks

Due to changes in industry policies, the number of K12 people in Zhejiang Province has fallen short of expectations. The general book market continues to be under pressure, digital transformation is progressing slowly, and there is a risk that paper prices will rise.