The net profit loss for the first three quarters was 0.041 billion yuan, and losses in a single quarter narrowed month-on-month. In the first three quarters of 2024, the company achieved revenue of 0.181 billion yuan/ -59.5%, and net profit to mother turned loss to -0.041 billion yuan (base period 0.102 billion yuan); net profit after deducting non-return to mother turned loss to -0.06 billion yuan (base period 0.073 billion yuan). The margin was due to the early cancellation of some campuses to generate asset disposal income. The loss was due to poor demand for short training under the influence of the external environment, and revenue pressure was on some costs. Revenue for the third quarter of a single quarter was 0.069 billion yuan/ -45.5%, net profit to mother - 0.007 billion yuan (base period 0.025 billion yuan), net profit after deduction - 0.013 billion yuan (base period 0.012 billion yuan), and month-on-month losses narrowed (2024Q1 and Q2 -0.026/ -0.021 billion yuan respectively), which meant that the company's revenue decline was controlled (2024Q1 and Q2 were -63.6%, respectively) /- (66.1%) Combined to strengthen cost control.

Contract liabilities at the end of the term increased month-on-month, and demand for short training was slightly boosted. The company's contract debt at the end of the period was 0.091 billion yuan, +28.2% month-on-month, and -15.2% year-on-year narrowing (-63.1%/-48.7% for 2024Q1 and Q2, respectively). On the other hand, the company achieved sales revenue of 0.092 billion yuan/ -4.9% in the third quarter. The analysis showed that “Hongmeng Application Development 2.0” launched by the company in the second half of the year had the effect of stimulating demand in the short term, but whether demand can pick up in the long run, we still need to observe the recovery in employment demand in the digital industry.

Strengthen cost control in the face of operating pressure. In the third quarter of 2024, the company's gross margin was 38.7% /-10pct, +5pct month-on-month. After taking into account the company's active optimization of personnel space, floor efficiency and personnel efficiency rebounded. The cost rate for the period was 62.6% /+21pct, of which sales/management/R&D expenses were 28.4%/20.1%/14.1%, respectively, +13pct/+7pct/+2pct, and -5pct/-8pct month-on-month, respectively. The sales and management expenses rate decreased significantly from month to month, benefiting from the reduction in employee remuneration. The reduction in R&D rates means that the company faces operating pressure to appropriately reduce R&D expenditure.

Improving the layout of the education business is expected to improve resilience to risks. Since the beginning of the year, the company has actively promoted the construction of the Datong Data Technology Vocational College (planned). According to the school's official website, it is expected to recruit the first students in 2025, and the number of students enrolled is estimated to be 5,000. During the reporting period, Singapore Weixue, a wholly-owned subsidiary of the company, acquired 51% of Fu Jen Holdings and indirectly controlled Fu Jen International School (a private school in Singapore that provides international Cambridge courses). Considering that the company's revenue has historically been concentrated on the short training business, and the demand for this business is flexible, the diversified education business is expected to reduce the impact of fluctuations in demand in a single business.

Risk warning: Demand for IT talent weakens; macroeconomic downturn; industry competition intensifies; and policies are getting stricter.

Investment advice: There was no significant improvement in employment demand in the digital industry in the third quarter, and the company's revenue continued to be pressured and losses continued. Based on this reduced profit forecast, net profit due to mother in 2024-2025 was -0.053/-0.016 billion yuan (-142%/-111%, from profit to loss), and the 2026 net profit to mother was 0.033 billion yuan. The corresponding EPS was -0.13/-0.04/0.08 yuan. However, we are also concerned that the company's quarterly payments improved month-on-month during the reporting period, and that losses were narrowed month-on-month through cost control. Over the long term, the layout of vocational colleges and universities is progressing steadily, and it is also expected to improve resilience to risks. Maintain an “better than market” rating and wait for demand to improve.