Actively explore K12 transformation and diversify the business layout. Established in 1997, the company is the largest K12 extracurricular education service provider in South China and the fifth largest in the country. It mainly provides education-related products and services including full-time review services, quality education, independent study programs, vocational education and after-school tutoring programs, and has rich teaching and research experience. After the double reduction, it responded to policy calls and actively transformed, with building a “full-time review+quality education+vocational education” education strategy as the core, promoting multi-field layout, giving full play to the advantages of “strong language”, and developing quality products for non-subject training.

Quality education is developing rapidly, and profitability is gradually recovering. 23H1's revenue was 190 million yuan, a year-on-year decrease of 30.5%. The main reason was the decline in revenue from counseling projects due to group business adjustments. The total revenue for education excellence in 2018-2022 was $14.8, 18.3, 16.9, 1.90 million and 51 billion yuan respectively. Revenue growth in 2019 was mainly due to an increase in the overall number of students enrolled in the main business, tutoring hours and hourly fees. The main reason for the decline in revenue in 2020 was a decrease in the number of students enrolled and tutoring hours due to the impact of the pandemic.

23H1's net profit to mother was 0.17 million yuan, up 4730.7% year on year, and net profit was 121 million yuan, up 300% year on year. 23H1 net sales margin was 10.55%, and gross sales margin was 36.95%. Net sales margin increased from 5.01% in 2018 to 10.54% in 2022. The gross sales margin range in 2018-2022 was 35%-42%, and profitability remained stable.

The development trend of quality education is good, and the revenue share of the 2019-2023H1 quality education program in the main business revenue increased steadily from 3.06% to 14.84%. Quality education revenue in 2019-2022 was 56 million yuan, 52 million yuan, 74 million yuan, and 82 million yuan respectively. CAGR was 13.6%, and 23H1 revenue was 0.28 billion yuan, a year-on-year decrease of 43.8%.

Personalized education has broad room for growth, and future demand is strong.

China's education market is expanding steadily, and the education and training industry has good prospects for future development. K12 accounts for a high market size in the education and training industry. As an immediate demand market, it is less affected by the economic cycle. Investment in family education is on the rise. Large-base groups are steadily releasing consumer demand. Influenced by educational concepts and policy environments, quality education has become one of the major directions in the education industry. In 2015-2019, the quality education market grew from 264.2 billion yuan to 528.6 billion yuan, with a CAGR of 19%. Affected by the epidemic in 2020, the market size declined to 452.3 billion yuan in the short term. According to estimates by the Duowhale Education Research Institute, the potential domestic market for quality education will exceed 478.7 billion yuan in 2023. In the context of strong supervision of subject education and favorable quality education policies, demand for quality education and supply-side growth momentum are strong.

With the decline in land, a large number of small and medium-sized institutions with poor qualifications and mainly training in K9 subjects have withdrawn from the market, freeing up space in the education and training market. Leading institutions have significant advantages in various aspects such as entry thresholds, license approval, content supervision, fund control, brand trust endorsement, and resource support, which is conducive to speeding up layout when supply is cleared, gaining higher market share, increasing industry concentration, and good development prospects.

Technology empowers education, and the new track opens up a second growth curve. The company is deeply involved in the South China market. The advantages of the “Strong Language” brand are deeply rooted in the hearts of the people, and the customer trust is high. Strictly control the quality of teaching, increase teacher training efforts, and build a team of star teachers. The company uses cloud computing, big data, artificial intelligence and other technologies to increase education research and development, continuously optimize accurate teaching systems, digitally enable high-quality development of full-time businesses, and flexibly apply diverse teaching scenarios. Improve the industrial layout, actively explore business sectors such as full-time business, vocational education, quality education, etc., strengthen cooperation among all parties, make full use of resources and advantages to explore new tracks, and make every effort to develop the second growth curve.

First coverage, giving a “buy” rating. As a leading extracurricular education service enterprise in South China, the company responds positively to policy calls and comprehensively promotes quality education courses. As the business gradually adjusts and matures operations, the network gradually expands, and its market share is expected to increase. We expect the company's revenue for 23-25 to be 472/684/992 million yuan, net profit to mother of 0.5/1.2/230 million, EPS of 0.06/0.14/0.27 yuan/share, respectively, and PE of 41/17/9x, respectively. Referring to the comparable average, the company was given a reasonable 15-20xPE for 24 years, corresponding to a target price of HK$2.29-3.05.

Risk warning: policy risk, new business risk, management risk, risk of rising operating costs, risk of the company's low market value in circulation, estimation is subjective risk, etc.