In the second quarter of fiscal year 2023, Hong En's net profit was 42.1 million yuan, an increase of 93.1% over the same period last year, which has been the sixth consecutive quarter of profit. At the same time, Horn's stock is now down 90% from its peak of $31.58. The main business downturn and compliance risks seem to be Hongen still can not get around the problem. Under such circumstances, will Hong "find another way"? Six consecutive quarters of profit In the second quarter, Hongen's operating data were basically red across the board, and the performance was eye-catching. During the reporting period, Hongen achieved revenue of 241 million yuan, an increase of 4.5% year-on-year, which the company said was mainly due to the expansion of user scale and user engagement. In the second quarter, Hong's average monthly active users (MAUs) were 20.33 million, an increase of 11.7% year over year. In terms of profit, Hongen's net profit in the second quarter was 42.1 million yuan, up 93.1% year-on-year, gross profit was 171 million yuan, up 4.7% year-on-year, and gross profit margin was 70.9%, basically unchanged from the same period last year. This is the sixth consecutive quarter of positive profit, the previous five quarters of the company's net profit of 13.12 million yuan, 21.79 million yuan, 39.48 million yuan, 35.43 million yuan, 53.65 million yuan. At the same time, the company also showed a good control of the capital surface. At the end of the second quarter, Hong En's cash, cash equivalents and time deposits were RMB1.105 billion, an increase from RMB1.05 billion at the end of 2022. At the same time, the company's current ratio was 2.76 times, and the asset-liability ratio was 34.56%, both of which were maintained at a low level, and the short-term debt repayment pressure was small. Steady upward revenue, strong year-over-year profits, healthy cash flow... Hong En can be said to have delivered a good "answer sheet" in terms of management. CEO Dai Peng said in the earnings report that the year-on-year growth in revenue and profit demonstrated the resilience of Hongen's business model and the efficient execution ability of the team, further consolidating the company's position in the industry. CFO Vera Wang also said, "In the second half of the year, we will continue to drive growth through further operational efficiencies and strategic investments in long-term growth opportunities." Oddly, the good performance did not support Hong's share price "back to the peak". The company's IPO price was $12, and in November 2020 it peaked at $31.58 per share, and since then it has fallen all the way and is still in a downturn. As of September 27, 2023, Hong En reported a close of $2.94 / share, which has fallen more than 90% compared with the highest point. What is the concern of the capital market about Hong En? Continue to economize on food and clothing From the financial report, the second quarter Hongen still continued the previous "austerity" strategy. During the reporting period, the company's operating expenses were $130 million, a decrease of 7.6%, and its general and administrative expenses were $26 million, also a decrease compared to $28.8 million in the same period last year. It is worth noting that Hongen's research and development expenses during the period were 63.4 million yuan, down 18.9% year-on-year. The company said it was mainly due to a reduction in employee compensation and outsource-related costs as a result of optimizing operational efficiency. Contrary to it, after the "double reduction", Hong En has been strengthening its positioning as a "science and technology enterprise" and weakening the "education" label. But falling research and development costs make it difficult to support the company's ambitions. Moreover, although the profit has hit a new high, Hongen's revenue growth has not seen a breakthrough, and revenue in the third quarter of the fiscal year 2022 even declined year-on-year, which shows that Hongen's main business development has not improved too much. Comprehensive financial reports of nearly four quarters found that "austerity" supplementary profit has become Hong En's "usual strategy." This may be an important reason for the capital to worry about it, to optimize costs in the short term to maintain profitability, it can also be said that the company's emergency means of transition. However, the continuous compression of expenses, the main business revenue has not seen a breakthrough, so that the outside world of Hongen's future development potential is unclear. Regarding the main business, the second quarter report revealed a not positive signal, the second quarter of 2023 fiscal year, Hongen paid users for 1.31 million, compared with the same period last year 1.51 million decreased by 13%. During the same period, the company's sales and marketing expenses increased 21% year-over-year to $40.6 million, driven by an increase in strategic promotions. Judging from the results, the effect of the promotional measures taken by Hong En to stimulate the market is not obvious. On the other hand, compliance risk is still a hurdle for Hong. The "double reduction" policy stipulates that online training for preschool children is not allowed. Recently, the Ministry of Education issued the Interim Measures for Administrative Penalties for Off-campus Training, which applies to natural persons, legal persons or other organizations that recruit preschool children over the age of 3 and primary and secondary school students for the society and illegally carry out off-campus training. At present, the government's supervision of preschool education is still under high pressure as a whole. Hongen's applications such as Hongen Literacy, Hongen Pinyin, and Hongen ABC involve both preschool and subject content, and the risk of violation that may be involved cannot be ignored. And Hong En also showed "cautious and cautious". In the second quarter report, Hongen's management did not mention "education", but more mentioned "technology" and "products". Previously, the company quietly changed its name in the first half of 2022, from "Hongen Education" to "Hongen", the former Hongen Mathematics and Hongen English were changed to Hongen Thinking and Hongen ABC, and the business statement in the financial report was changed from "learning services" to "online subscription". Continued cost compression in exchange for profit, business compliance risks are difficult to ignore, perhaps the secondary market has not looked good on Hong En. For compliance issues at the policy level, there are not many anti-risk measures taken by Hong Eneng, and the company does not seem to have the mind to cross other tracks. How should Hong's concerns be addressed? Sea +AI, is it the cure? In the first quarter of fiscal year 2022, Hong revealed that it would expand its influence in the international market, and launched the international brand Bekids in the second quarter, including a series of STEAM products such as programming, painting, sports, science and reading. After a year of development, the Bekids brand has made some achievements, for example, in the first quarter of fiscal 2023, Bekids released a new mini world app "Gogo Town", which contains various interactive projects on life themes. And its open fantasy World exploration themed App, "Aha World," jumped into the top 10 most popular children's apps on Apple's App Store and Google's App Store in the United States and Europe. In the second quarterly report, Dai Peng mentioned that in the international market, Hongen continued to introduce enlightening content and innovative feature-rich products to continue to enhance market influence. During the reporting period, Hong En added two new theme plates of "My World" and "City" in "Aha World", providing more customized elements for children and gaining a warm response from the market. However, up to now, Hong En has not disclosed the specific revenue data of overseas business separately, and it is still unknown whether the overseas business that seems to be developing in full swing can have the matching income generation and profitability, and then develop the second income curve. In addition to overseas business, another key force in the second quarter is AI, Dai Peng mentioned in the nearly two quarters of the financial report "strengthen products through cutting-edge technology." In the second quarter, Hong En launched the "Interactive Museum" section in the APP of "Hong En Little Painter", introducing key point identification, image segmentation and evaluation engine based on artificial intelligence. In the first quarter, Hong En launched the "AI Question and Answer" module in "Hongen 100,000 Ask", opening the process of landing the company's AIGC application. Not long ago, Hong En was also selected as a typical scenario case of general artificial intelligence large model industry application in Beijing. The company said that it will further promote the application of "AI+ children's enlightenment" and continue to explore the future application scenarios of "AI+ children's enlightenment". However, similar to overseas business, Hongen did not disclose the specific revenue data of AI business in the financial report, or the traffic changes of "Hongen 100,000 Q" after the launch of AI module, so the specific impact of AI on Hongen products and services is not clear. Hong's research on AIGC is focused on the application level and does not seem to have delved into the underlying technology. Combined with gradually compressed research and development expenditures, the market's attitude toward Hong En's exploration of AI is not positive. In the case of domestic business facing compliance risks, Hong En has the intention to "find a new path" overseas, or use AI to win the future "ticket". However, judging from the specific results, Hong still has a long way to go to get rid of the hat of "education and training".