Key points of investment

Event: The company released its 2023 annual report and 2024Q1 quarterly report. Revenue for 2023 decreased 36.0% year over year to $3.09 billion, net profit attributable to mother was -210 million yuan (-1.10 billion yuan in 2022), and net profit after deduction was -210 million yuan (-1.11 billion yuan in 2022). Both revenue and profit fell short of our expectations.

By product, revenue for the civil servant/comprehensive rank/teacher rank/public institution ranking in 2023 was 11.4/11.0/4.2/40 billion yuan, respectively, with year-on-year changes of -40.9%/-17.0%/-38.5%/-54.8%, respectively. 2024Q1 revenue decreased -14.1% year on year to 760 million yuan, net profit to mother increased 240.7% year on year to 82.93 million yuan, net profit after deducting non-return year on year increased 259.1% year on year to 82.176 million yuan, with a significant increase in net profit.

Losses narrowed in 2023 due to shutdown and transfer, removing crude oil and refining. In 2023, the company shut down some outlets with low performance output and relatively low human efficiency through shutdown and merger; promoted organizational restructuring, promoted management efficiency, and improved the labor efficiency ratio. In 2023, the number of directly managed branches of the company decreased by 29.7% year on year to 783, the number of employees decreased by 50.9% year on year to 11,000, the number of R&D personnel decreased by 48.0% year on year to 881, and the number of teaching teachers decreased by 39.4% year on year to 4,565. In 2023, the company's total operating costs decreased by 50.8% year on year, sales expenses decreased by 48.5% year on year, management expenses decreased by 47.3% year on year, and expenditure side control achieved remarkable results.

There is a wide demand for talent recruitment and training, and supply-side competition intensifies in the short term, or is concentrated in leading institutions for a long time.

(1) On the demand side, employment pressure still exists, and the demand for related training is extensive and rigid. The number of college graduates in 2023 reached 1.58 million, an increase of 820,000 over last year, and employment among young people continues to be under pressure. The 2023 “Report on the Work of the Government” proposed the expected target of “adding about 12 million new jobs in urban areas.” The 2024 National Civil Service Examination is scheduled to recruit 39,600 people, an increase of 6.74% compared to the previous year's planned recruitment. The number of applicants for the national examination surpassed 3 million, and the ratio of those who passed the qualification examination to the number of recruitment plans was about 77:1. In 2024, more than 150,000 people were recruited for joint examinations in multiple provinces, an increase of more than 2% over last year. (2) On the supply side, there was a brief split in the talent recruitment and training industry. Under the influence of the epidemic and policy changes in recent years, leading educational institutions have optimized personnel, and a large number of individual studios or small training institutions have sprung up. The fragmentation of the industry and increased competition have made it difficult for training institutions to acquire customers. However, in the long run, due to the seasonality of the recruitment and training industry and the geographical dispersion of training demand, leading companies can respond more effectively to market changes based on their advantages of scale, and are expected to gain more market share.

An equity incentive plan was issued to assess revenue for 2024-2025. On 2024/3/11, the company issued the “Notice on Granting Restricted Shares to Incentive Recipients of the 2024 First Restricted Stock Incentive Plan”. The number of restricted shares to be granted is 40 million shares, accounting for about 0.65% of the company's total share capital when the incentive plan was announced. Among them, the 2024 revenue trigger value is 3.2 billion yuan, the target value is 4 billion yuan, the 2025 revenue trigger value is 3.68 billion yuan, and the target value is 4.6 billion yuan. When revenue is between the trigger value and the target value, the company-level sales limit is 80%; when the revenue value is higher than the target value, the company-level sales restriction rate is 100%.

Profit forecast and investment rating: The company adopted shutdown and consolidation measures. We lowered net profit due to mother in 2024-2025 from 73/890 million yuan to 37/400 million yuan, and is expected to be 500 million yuan in 2026. The current stock price corresponding to 2024-2026 PE is 44/37/33 times, respectively. We are optimistic about the company's long-term size advantage and maintain a “buy” rating.

Risk warning: competition worsens, profit improvement slower than expected, consumer market falls short of expectations, etc.