Net profit after deducting non-return to mother in 2023 and 1Q24 was lower than our expectations for the company to release the 2023 annual report: operating income of 11.7 billion yuan, which was basically the same; net profit to mother was 15.01 billion yuan, up 6.8% year on year; net profit after deducting non-return to mother was 1.12 billion yuan, down 9.1% year on year.
The company also announced 1Q24 results: operating income of 2.70 billion yuan, which was basically the same as the previous year. Net profit to mother was 110 million yuan, down 24% year on year, and net profit without return to mother was 108 million yuan, down 12% year on year. Revenue and non-profit deductions for 2023 and 1Q24 were slightly lower than our expectations. We judge that the general book business was mainly affected by the market and base, which dragged down growth performance. The 2023 profit distribution plan is to distribute cash dividends of 3.9 yuan (tax included) for every 10 shares, totaling approximately $867 million, accounting for 57.4% of net profit to the mother in 2023, and a dividend rate of 4.6% based on the 4/24 closing price.
Development trends
Textbooks and teaching aids have been growing steadily, and general book revenue has declined slightly over the same period last year. In 2023, the textbook teaching aid business revenue was 4.94 billion yuan, up 4.4% year on year, accounting for 36.4% of the company's internal revenue before offsetting, contributing to the basic revenue growth market. Benefiting from the full implementation of the two-child policy in 2016, many parts of Zhejiang Province ushered in a peak in primary school enrollment in 2023, driving the development of the textbook teaching aid business. The general book business revenue in 2023 was 6.74 billion yuan, down 3.3% year on year, accounting for 49.7% of the company's internal revenue before offsetting. We judge that business performance was affected by the high year-on-year base of theme publishing and the slow recovery in market demand; however, the company continued to make efforts to build a dual cycle of online and offline channels, actively laying out channels such as short video platforms, Pinduoduo, and Tmall supermarkets. Online sales revenue in 2023 was 3.49 billion yuan, up 10.6% year on year.
Sales expenses have increased, and tax policy adjustments have affected profit performance. In 2023, the company's gross profit margin was 27.0%, which was basically the same; among the main operating expenses, sales expenses increased significantly year on year. In 2023/1Q24, sales expenses increased 7.6%/7.7% year on year, respectively. We judge that this is mainly due to the company's increased book promotion efforts.
Furthermore, since the corporate income tax exemption policy previously enjoyed by the company expired at the end of 2023, the 1Q24 reporting side implemented a 25% income tax rate, which led to a significant year-on-year decline in the profit side; however, we judge that the company is expected to maintain a stable dividend amount, and the dividend ratio may continue to increase.
Dig deeper into the potential of the main business and continue to develop digital education, integrated publishing, etc. Looking ahead to 2024, we believe that the company is expected to continue to take advantage of distribution channels and establish a new distribution system around the five major warehousing and logistics bases to help increase sales; in terms of digital education, the Education Group Electronics News Agency and Qingyun Online's “dual platform” operation continues to gain strength. In 2023, Electronic Music has achieved revenue of 110 million yuan/profit of 20 million yuan, and Qingyun Online has achieved revenue of 60 million yuan/profit of 3 million yuan. In terms of integrated publishing, the Children's Club and the People's Society continue to launch high-quality audio programs, audiobooks, etc., and digital media companies are also expanding cooperation related to the filing of skits.
Profit forecasting and valuation
Considering the effects of gentle restoration of the general book market combined with tax policy adjustments, we lowered our 2024/2025 net profit forecast of 14.9%/15.1% to 11.4/1.23 billion yuan. The current stock price is trading 16/15 times 2024/2025 P/E. Maintaining an outperforming industry rating, and considering a steady dividend value, maintaining a target price of 9.0 yuan, corresponding to 17/16 times the 2024/2025 P/E. The target price has 7% room to rise compared to the current stock price.
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.