Performance review

The 1H22 performance is in line with our expectations

China Public Education announced 1H22 results: revenue of 2,227 million yuan, a decrease of 54.15% over the previous year; Guimu's net profit was 891 million yuan, an increase of 794 million yuan over the previous year. The 1H22 performance was basically in line with our expectations.

Development trends

Revenue declined due to the impact of the pandemic and postponement of recruitment examinations. In the first half of the year, the revenue corresponding to the company's four business categories of civil service recruitment and training, public institution recruitment and training, teacher recruitment and teacher qualification training, and comprehensive training was 718 million yuan/435 million yuan/387 million yuan/677 million yuan respectively, compared with -68.99%/-29.64%/-26.67% and -50.26%, respectively. We believe it is mainly due to the impact of the epidemic on company enrollment and teaching, the reduction in the number of in-person classes offered by companies, and the adjustment of recruitment examination times affecting business receipts and confirmations.

Actively control costs and expenses. 1) The company's 1H22 gross margin was 27.7%, a year-on-year decrease of 17ppt, mainly due to revenue pressure. 2) The company actively controlled costs and expenses: in the first half of the year, the company's operating costs were 1,610 billion yuan, -40.0% year on year; sales expenses, management expenses, and R&D expenses were -28.1%/-22.3%/-39.7%, respectively; the cost in the second quarter was -51.7% compared with the same period, and sales expenses, management expenses, and R&D expenses were -43.4%/-43.2%/-63.3%, respectively. We believe that this was mainly due to the company adjusting its operating activities in the first half of the year and reducing the number of directly managed branches and employees. 3) In the first half of the year, Guimu's net loss was 881 million yuan, an increase of 794 million yuan over the same period last year. 4) The company's net cash flow from 1H22 operating activities was 1,033 million yuan, and the net cash flow from operating activities in the same period last year was 939 million yuan, mainly due to a reduction in face-to-face classes and reduced staff salaries.

Pay attention to the impact of the resumption of recruitment examinations in the second half of the year on the company's revenue side recovery and cost control. 1) In the first half of the year, the adjustment of the recruitment examination schedule mainly included: the postponement of the national examination interview; the postponement of the civil service written examination originally scheduled for late March in many provinces until early July; the postponement of examinations for teachers and institutions. 2) The company's contract debt at the end of the second quarter was 4.773 billion yuan, an increase of 53.37% over the previous year, and an increase of 1,719 billion yuan over the end of 2021, mainly due to the postponement of the provincial joint examination and the delay in confirming revenue. 3) The company plans to improve operational management efficiency through measures such as reducing costs and increasing efficiency, adjusting structured products, and speeding up the development of new businesses. We believe that the company's business receipts peak before the recruitment examination begins. At the same time, revenue for some of the company's products needs to be confirmed when the examination results are announced. It is expected that when recruitment examinations resume, part of the contract debt may be concentrated on revenue recognition in the third quarter. 4) At the end of the first half of 2022, the number of company branches decreased by 4.51% compared to the end of 2021; the number of employees decreased by 19.79% compared to the end of 2021. We believe that if costs and expenses are well controlled, there is an opportunity for the company to recover profits in the second half of the year.

Profit forecasting and valuation

Keep earnings forecasts unchanged for 2022 and 2023. The current stock price corresponds to a price-earnings ratio of 40.7 times in 2023. Maintaining a neutral rating and a target price of 5.00 yuan corresponds to 44.6 times the price-earnings ratio in 2023, with room for an increase of 9.4% compared to the current stock price.

risks

The impact of the pandemic has exceeded expectations; costs and expenses have not been controlled as expected.