In FY20, revenue rose 21% year-on-year to 867 million yuan, and core profit increased by 35% year-on-year, which was better than consistent forecasts, mainly due to better-than-expected gross profit margin.
Harbin School and Huaibei School will begin to merge in 21 years, and there is a lot of room for profit margins to rise in the next few years.
Broad growth prospects, renewed buying rating; target price raised to HK $8.9 for FY20 strong performance, rising profit margins as the main driving force
The revenue of Kepei in fiscal year 20 reached 867 million yuan, an increase of 21% over the same period last year. The report's core net profit reached 608 million yuan, up 35 per cent from a year earlier, better than expected, mainly due to a 2.4 per cent rise in gross profit margin driven by prudent cost control to 69.9 per cent and a 10.2 per cent rise in core operating profit margin to 66.6 per cent. Kopei declared a final cash dividend of HK $0.12 per share, with a dividend yield of 35 per cent, corresponding to a dividend yield of 2.2 per cent. In fiscal year 20, the net cash / equity ratio dropped to 29% from 46% in December 2019. Due to the merger and acquisition payments of Harbin School and Huaibei School, Kopei still maintains a net cash level of 927 million yuan. In addition, Kopei also has bank financing channels, which is generally sufficient to support its strategic implementation of one M & An a year.
Further acquisition of Huaibei School brings and thickens
Kopei bought a 45% stake in Huaibei School in September 2019. On March 30th, 2021, Kopei announced that it would buy the remaining 55 per cent stake for a price of 197 million yuan. Kopei's total investment in Huaibei School is 900 million yuan, of which 250 million yuan is used for the purchase of undergraduate licenses, 130 million yuan for the purchase of land, and 520 million yuan for buildings. Huaibei School is an independent college, which will be converted before September 2021 and will be merged after the conversion. Kopei expects the number of students at Huaibei School to increase from 2300 in 2021 to 10000 in 2023. The annual compound growth rate of income is 176%, the compound annual growth rate of net profit is 700%, and the net profit margin will increase from 5% to 40%.
Good news has spread frequently, and a new school will be added this year.
We expect the core profit of Kepei to grow at a compound annual growth rate of 32% in fiscal year 20-22, driven by: 1) Harbin school will be consolidated in April 2021, which will contribute 41% of the incremental income in fiscal year 21; 2) Huaibei school will contribute 28% of the incremental income in fiscal year 22; 3) all universities under Kepei have expansion plans to prepare for the growth of the number of students. Kepei plans to buy a new piece of land for Guangdong Institute of Technology. 4) the profit margins of the two newly acquired schools have improved; 5) Kopi plans to acquire a school this year to complete its plan to acquire a new school in one year.
Strong profit margin and profit growth, maintaining buy rating
We have raised our core profit for fiscal year 22 by 2% and 8%, respectively, to reflect further acquisitions by Huaibei School. We are optimistic about the growth prospects driven by Kopei's endogenous expansion and mergers and acquisitions, raising the target price from HK $8.1 to HK $8.9, based on the same price-to-earnings ratio of 18 times earnings over the next 12 months. Our target price corresponds to 19 times / 16 times 21 times forecast earnings for fiscal 22.