Yuhua Education announced the issuance of 220 million new shares at HK$419 per share, a 12% discount from the closing price of HK$4.76 on October 26, 2021, and raised approximately HK$922 million (RMB 757 million). Following this offering, the total number of issued shares will be expanded by 6.12%.
The funds raised this time will mainly be used to: 1) existing K9 schools need to invest more to transform higher vocational colleges to lay the foundation for subsequent upgrades to vocational undergraduate colleges; 2) open a new campus for the Hunan University of Foreign Economics; 3) increase equipment investment in equipment at the three existing applied undergraduate colleges under the Group and apply for the establishment of vocational undergraduate education.
K9's transition to senior positions has accelerated, and increased investment has laid the foundation for higher costs. Yuhua Education plans to build three colleges in Xingyang City, Jiaozuo City, and Luohe City in Henan Province in June, using the existing school sites of primary schools in Xingyang City, primary and secondary schools in Jiaozuo City, and primary and secondary schools in Luohe City. The total school capacity is about 4,800, 5,000, and 6,000, respectively. According to the plan, after the three schools mature, the average number of students enrolled in the school will reach 12,000. All three colleges have been approved by municipal management departments, and the names of the schools have been determined, namely Zhengzhou Software Vocational and Technical College, Jiaozuo Tourism Vocational College, and Luohe Science and Technology Vocational College. The applications for the operation of the three colleges have now been submitted to the Henan Provincial Department of Education for review. Thanks to strong support for the vocational education sector, vocational undergraduate and applied undergraduate programs in the “Opinions on Supporting the Development of Modern Vocational Education” issued jointly by the Central Office and the State Office on October 12, Yuhua Education will increase its investment in the three colleges to be built, thus laying a solid foundation for the three schools to upgrade their vocational undergraduate level in the future. The company expects the average investment of the schools to reach 600 million yuan, so the total investment required by the three schools will be 1.82 billion yuan.
To increase the proportion of higher vocational education, the return on investment is still impressive. According to the company's plan, as the three higher vocational colleges begin enrolling students, the three primary and secondary schools at the original site will gradually stop running, and the current 3,695 junior and elementary school students will be replaced by about 36,000 senior vocational students. As the number of students enrolled increases, the impact of fixed costs such as depreciation and amortization will decline marginally, thereby increasing profit margins. Furthermore, based on the assumption that the single-school enrollment plan reaches 5,000 students in the fourth year of operation, with a registration rate of 80%, it is estimated that the number of students enrolled in the three higher vocational colleges will reach 11,800 in the fifth year of operation. Corresponding to FY26, the number of students enrolled in higher education in the Group will reach about 175,000, with a compound five-year growth rate of 9.4%. Furthermore, the tuition fees planned by the three higher vocational colleges are 12,000 yuan. I believe that with the gradual liberalization of tuition fee limits in Henan Province, tuition fees are also expected to rise further. We expect that in the fifth year that the three schools start running, the average tuition fee is expected to reach 16,700 yuan. As volume and price continue to increase, we expect the revenue of higher vocational colleges alone to reach 197 million yuan in the fifth year of operation, net profit of about 62.87 million yuan, and a net profit margin of 32%.
Assuming that 70% of the 600 million yuan investment required for a single school will come from bank loans, the payback period for a single school is 5.07 years, and based on a ten-year dimension, we expect the net present value (NPV) of a single higher vocational college after maturity to be 626 million yuan, and the internal rate of return (IRR) will reach 22%. According to the upgrade requirements for higher vocational colleges to train seventh-year graduates, Yuhua Education's three higher vocational colleges will meet the requirements in their 10th year of operation. If the upgrade is approved, tuition fees and enrollment plans are expected to increase further, thereby increasing the return on individual projects.
Maintain the buy rating. We believe that after actively transforming colleges, Yuhua Education will lay the foundation for the company's long-term growth. At the same time, the company's new foreign-related campus in Hunan will also create room for future endogenous growth. Since enrollment in the early stages of the establishment of higher vocational colleges was at a climbing stage, we lowered our adjusted net profit forecast for Yuhua Education's fiscal years 22 and 23 to RMB 1,673 billion and RMB 1,867 million, and as the issuance of new shares increased and diluted earnings per share, we lowered earnings per share for fiscal years 22 and 23 from RMB 0.50 and 0.56 yuan to RMB 0.47 and 0.52 yuan respectively. We lowered our target price to HK$9.50 to maintain our buying rating.
Risk warning: The approval progress of higher vocational colleges falls short of expectations; enrollment in new schools falls short of expectations.