Seeking Stronger Margins Rather Than Top-line Growth
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
Despite peak seasonality for its high school division, Digital Daesung’s 3Q22 profits should prove weak owing to rising costs for its elementary & middle school division. Considering a lack of short-term earnings momentum, we cut our TP for the education play from W12,000 to W9,000. But, mid/long-term earnings growth is likely on both subscriber expansion for Hanuri and Jelly Page in 1H23 and the opening of an international school in Vietnam in 2H23.
Seeking stronger margins rather than top-line growth
We revise down our TP for Digital Daesung from W12,000 to W9,000, reflecting: 1) a change in our target P/E from 13x to 10x in line with industry-wide de-ratings; and 2) 26% and 12% cuts to 2022E and 2023F OP. We sharply cut our online sales estimates for the high school division, owing to a reduction in the period of product tie-ins with Galaxy Buds, but considering the reduced COGS-to-sales ratio, margins should not change significantly. We trim back our OP projections for the elementary & middle school division by 32%, given that growth is slower than expected on cost hikes, including higher labor, textbooks, and marketing costs for e-reading platforms Jelly Page and Hanuri.
However, we stick to a Buy rating. While short-term earnings momentum is lacking, the tables could turn, depending on price hikes for next year’s Pass products. We advise taking a long-term approach to the play, noting that mid/long-term earnings growth is likely on a subscriber expansion for Jelly Page and Hanuri at the elementary and middle school division and the opening of an international school in Vietnam in 2H23.
3Q22 preview: Peak seasonality for high school division < Higher costs for elementary and middle school division
Digital Daesung’s 3Q22 consolidated sales are projected at W63bn (+13% y-y) and OP at W15.4bn (+4% y-y), with OP growth to be outpaced by top-line growth.
The high school division should report sales of W52.5bn (+14% y-y) and OP of W14.4bn (+12% y-y). As of end-2Q22, advance payment in the contract liabilities account totaled W35bn (+W9.0bn y-y), which is to be recognized as profits over 3Q22~4Q22. At Yigam, which sells Korean language textbooks and mock test materials, stable earnings are likely in light of an increased level of difficulty for the 2022 KSAT national language segment.
We expect the elementary & middle school division to post 3Q22 sales of W11.8bn (+9% y-y) and OP of W2.2bn (-14% y-y). Given that labor, textbook, and marketing costs for Hanuri and Jelly Page are expected to rise for now, any meaningful OP improvement is unlikely to be made until after a full-fledged subscriber expansion in 1H23.