Due to early provincial examinations and reduced recruitment of public institutions and teachers, the company's revenue declined significantly. 3Q21 revenue fell 43% from 3Q19. At the same time, 3Q21 had a net loss of 790 million yuan due to increased cost per student and company investment. Looking at the recruitment and training circuit boom in the long run, the company has growth potential as an industry leader, but there is still great pressure on its performance in the short term, and the company's rating was downgraded to a “neutral” rating.

Revenue: Earnings declined significantly due to early provincial examinations and reduced recruitment of public institutions and teachers. The company's 1-3Q21 revenue reached 6.301 billion yuan/ -15.3%, up 2% from 1-3Q19. Among them, 3Q21 was -68.79% year-on-year to 1,445 million yuan, down 43% from 3Q19. 1) The civil service ranking saw a significant decline in income due to early provincial examinations and reduced enrollment. The income of the 1-3Q21 civil service ranking reached 3.142 million yuan/ -21.3%, down 11.0% from 1-3Q19. Among them, 3Q21 revenue was 827 million yuan/ -70.2%, down 43.8% from 3Q19. The decline in revenue is mainly due to the fact that the 2021 provincial exam was brought forward to March, which caused some students to abandon the exam due to lack of time to prepare for the exam. The company estimates that the amount collected was reduced by 25-35 billion yuan. Looking at the number of trainees, the number of 1-3Q21 trainers was 918,600 persons/ -42.3%, down 16.3% from 1-3Q19, and 61% of 3Q21 trainees reached 6052 million/ -61%, down 29% from 3Q19. 2) There has been a steady increase in the number of students enrolled in public institutions, or the decline may be due to a higher refund rate. The serial revenue of public institutions in 1-3Q21 reached 846 million yuan/ -15%, an increase of 20% over 1-3Q19. We think this is due to a decline in revenue or an increase in the refund rate. The number of 1-3Q21 trainees reached 653,600 persons/ +23%, an increase of 74% over 1-3Q19. 3) The teacher hierarchy was affected by the decline in recruitment, and income declined significantly. The income of the 1-3Q21 teacher ranking reached 689 million yuan/ -37%, a decrease of 24% from 1-3Q19. The decline was mainly due to the increase in recruitment conditions in 2021, which led to a 37% year-on-year decrease in the number of applicants. The number of people trained by the company decreased 16% year on year to 923,900, which is still a 38% increase from 1-3Q19. 4) The comprehensive sequence continues to grow rapidly. With the rapid growth in demand for postgraduate studies, IT, etc., and the gradual maturity of the company's related business system, 1-3Q21's comprehensive serial revenue was +19% year on year to 1.59 billion yuan, up 62% from 1-3Q19, and the number of trainees increased 17% year over year to 9011,000.

Profitability: Increased cost of living & fixed expenses puts pressure on profits. 1) Gross profit margin: The gross margin of the 1-3Q21 company was 43.05% /-15.66 pcts, down 14.56 pcts from 1-3Q19. Among them, 3Q21 gross margin fell 27.56 pcts to 37.47% year on year and 20.27 pcts from 3Q19. The sharp decline in gross margin was mainly due to the increase in the refund rate, the decline in the average income of students and the increase in the average cost of students (the average cost of students was +43% compared to the same period last year to 1,493 yuan/person). In the cost of a student, the average starting fee/teacher's remuneration cost increased by 14%/70%, respectively. 2) Expense rate:

The company's sales/management/R&D/finance expenses for 1-3Q21 were 14.8/10.4/84/380 million yuan respectively, +15%/15%/27%/11%; the expense ratio was 23.4%/16.4%/13.3%/6.1%, compared with +6.2% +4.3/+4.5/+1.4pcts. The sharp increase in expenses is mainly due to the company increasing its store layout and personnel expansion in the past two years, promoting digital transformation and building a new base, which has led to an increase in expenses. Overall, the company had a net loss of 890 million yuan in the 1st to 3Q21, of which 790 million yuan was 3Q21.

Outlook: Short-term performance may still be under pressure, and long-term industry sentiment remains the same. 1) In the short term, the company's enrollment is still gradually recovering. As of 3Q21, contract debt was 2,312 million yuan/ -69%, down 41% from 3Q19. It is expected that the revenue side of 21Q4 will not improve. At the same time, considering the company's base & digital investment and fixed expenses, it is expected that there will still be pressure on the profit side. Furthermore, as of 3Q21, short-term loans increased by 960 million yuan to 4.84 billion yuan compared to 1H21, the balance ratio (excluding accounts received in advance) increased by 9.7 pcts to 53.4%, and the company's monetary capital plus transactional financial assets were 2.33 billion yuan. 2) Looking at the long term, recruitment training is still one of the most popular segments in the vocational training circuit. Under the trend of increasing number of college graduates and increasing employment pressure, demand for recruitment examinations is expected to continue to increase. The number of applicants for the 2022 national examination will increase by 540,000 to 2.12 million over the same period last year. As a leader in the industry, Chinese public education still has potential for growth over a long period of time.

Risk factors: Risks such as falling short of expectations in enrollment, loss of teachers and R&D personnel, increased industry competition, changes in industry policies, and fluctuations in industry demand for training.

Investment advice: Considering the reduction in the company's short-term enrollment and the increase in costs and investment, the company's 2021-23 EPS forecast was lowered to -0.14/0.15/0.27 yuan (the original forecast was 0.46/0.59/0.72 yuan). Considering that the recruitment circuit still has a high level of prosperity over the long term, the company has growth potential as an absolute leader in the industry, but short-term performance pressure is high. Combining the company's historical valuation center (47 times PE) and the valuation level of comparable companies (Chuanzhi Education), the company was given 40 times PE in 2023, corresponding to a target price of 11 yuan, and the rating was downgraded to “neutral”.