Zhongtong Finance App learned that First Shanghai released a research report stating that it rates Excellent Education (03978) as a "buy", expecting the company's revenue forecast for 2024-2026 to reach 1.091/1.952/2.449 billion yuan, with a year-on-year growth of 123%/79%/25%; the 2024-2026 net profit forecast for the parent company is 0.185/0.33/0.412 billion yuan, with a year-on-year growth of 103%/78%/25%, and a target price of 5.6 Hong Kong dollars. As a leading company in the education industry in the southern region, the company is actively promoting business compliance transformation after the dual reduction, gradually returning to normal operational development track, and continuing to deeply cultivate the business in the southern region.

First Shanghai's main points are as follows:

FY24H1 performance overview:

In FY24H1, the company's total revenue was 0.317 billion yuan, up 68.1% year-on-year; the net profit attributable to the parent company was 0.055 billion yuan, up 160.7% year-on-year; the adjusted net profit attributable to the parent company was 0.054 billion yuan, up 168.9% year-on-year. The company's contract liabilities were 0.458 billion yuan, up 183.8% year-on-year, providing guarantees for the growth of the annual financial performance.

Quality education business as the main growth engine:

By business segment, in FY24H1, the company's full-time intensive review contributed revenue of 0.123 billion yuan, up 19.7% year-on-year; tutoring projects contributed revenue of 0.076 billion yuan, up 31.9% year-on-year; quality education contributed revenue of 0.117 billion yuan, up 320.9% year-on-year. The quality education business is growing rapidly, with business income accounting for 36% of total revenue, becoming the primary engine for the company's business growth. As of the reporting period, the company had a total of 1785 employees, doubling the number of employees from the end of 2023, providing a solid foundation for the company's rapid growth.

Continuously optimize literacy courses and actively obtain educational licenses.

After the policy adjustments, Excellent Education actively responds to the policy, leveraging its original 'strong Chinese language' advantage to transform existing popular products into non-subject areas. While respecting the teaching principles and relying on the foundation accumulated by the 'strong Chinese language,' Excellent Education has launched three non-subject Chinese language products: 'Curious Little Journalist,' 'Tickle Literature,' and 'Literary Aesthetic Education.' In addition, the company continues to optimize diverse thinking, bilingual culture, and excellent programming courses. These products, in terms of teaching methods, content, and all dimensions, meet policy requirements and have been approved by the education authorities, actively obtaining a profit-oriented educational license in the Guangzhou area.

Good cost and expense control, significant increase in profit margin.

1) In the first half of FY2024, the company's gross margin was 44.96%, up 8.0 percentage points year-on-year. Looking at the expense ratios, in FY24H1, the sales/management/other operating/financial expense ratios were 7.16%/12.90%/0.75%/1.63% respectively, with year-on-year increases of 3.46/-2.27/-0.33/-0.78 percentage points. Under the good control of gross margin improvement and various expense ratios, the company's operating margin/net margin increased by 6.1/11.1 percentage points year-on-year to 23.4%/17.2%. In addition, in 2024H1, the profit from fair value accounting was 2.89 million yuan, while in 2023H1, it was a loss of 17.94 million yuan. However, considering the one-time income of 19.75 million yuan brought by the sale of subsidiaries in 2023H1, the total profit was 2.21 million yuan, with little difference compared to 2024H1.

Risk Warning: Policy impact, market competition risk, lower-than-expected network expansion.